When paper is purchased by the credit department, the purchased-paper clerk (or department) is furnished with informa tion as to the party from whom purchased, maturity, rate of dis count, amount, and whether subject to an option. These items are carefully watched, and if the delivery is in order the corre spondent's account is charged and either a cashier's check is given to the broker, or his account is credited, as he desires. The paper is sent to the correspondent by registered mail.
Occasionally a note is delivered to the department secured by collateral consisting of metal certificates or warehouse receipts. When the bank is requested to hold this collateral for substitu tion purposes, it is turned over to the loan department and the note is sent on to the correspondent, together with a list of the collateral held by the department. But if no instructions are given as to the disposition of the collateral, it is sent to the correspondent.
Paper is sometimes purchased by correspondents under an option, and they sometimes exercise the privilege of returning it. When this is done, the code department makes record accordingly and returns the paper to the brokers, with a statement attached. requesting them to give the bank's messenger their check for the proceeds. The check, when received, is credited to the cor respondent.
Sometimes the instructions are to pay the broker against de livery of a certain amount of paper, and on orders of this kind the department accepts whatever is delivered. On very large orders the delivery may not be completed in one day, and in such cases the order is held open either until it is completed or until the broker advises that he is unable to complete the order; upon such advice the correspondent may be notified and requested to instruct the bank to cancel the order for the balance.
The Law of Collections and Acceptance The managers of the transit, country collection, and city col lection departments must be versed in the law of collections. The law, common and statutory, prescribes many restrictions as to the time and place and method of presentment, delivery of documents, protest and notice of dishonor, method of payment, indorsements, guaranty, and right of lien; and unless the collect ing bank is guided carefully by these rules of law, it involves itself in needless litigation and losses.
Responsibility of Collecting Bank as Agent The statutes do not specifically confer upon banks the power of acting as collection agent, but the courts have consistently held that the banks had that power and that they could charge for the service, directly or indirectly; but that, on the other hand, if a bank undertakes collections for the indirect profits or advan tages which may be expected from the account, it is prevented thereby from availing itself of the plea that its contract is without compensation.
A bank receiving paper for collection becomes generally the agent of the party from whom it is received, but not the agent of the maker of the paper or of the debtor who pays. Some courts are disposed, however, to regard the collecting bank as bailee rather than agent. The nature of the agency contract is vari ously interpreted by the courts; some hold that it is a contract to make the collection, others that it is a contract to have the collection made. This gives rise to, contrariety of opinions as to the responsibilities of subcollecting agents to the depositor. The collecting bank contracts to use due diligence in the business of collection, "due diligence" being interpreted to mean reasonable care and skill and the exercise of discretion, where specific direc tions are not given, always in the depositor's interest. If the collecting bank selects subagents to assist in making the collec tion or notaries to protest for non-acceptance or non-payment, due diligence must be used in the selection of these parties.
The contract covering collections is often varied by express agreement and various devices are used by banks to make known the terms; placards hung in the bank or imprints on the deposit tickets or on the pass-books have been employed to give deposi tors notice that in accepting the items the bank acts as agent only and assumes no responsibility beyond the use of due care and diligence in selecting subcollecting agents and notaries. The bank obligates itself to act in the depositor's best interest and, therefore, to preserve the liability of all parties prior to him on the item; for the bank to fail in this duty and cause loss to the depositor is to incur a liability for the loss.