This is the fourth installment of the five ways lenders make their collection actions more difficult.

RULE #4:       GIVE NO THOUGHT TO POTENTIAL SERVICING-RELATED ISSUES, INCLUDING POTENTIAL CONFLICTS OF INTEREST, WHEN SELLING AND PURCHASING LOAN PARTICIPATIONS

            Although the purchase and sale of participations in loans is a useful tool for managing risk, such transactions can greatly complicate (i.e., add expense and delay to) the servicing of troubled loans.  Some degree of complication is unavoidable when a participated loan goes into default, because the lead lender will oftentimes wish to waive or modify one or more provisions of the original loan agreement as part of its collection strategy, and participants usually reserve the right to approve or disapprove such waivers or modifications.  A well-drafted participation agreement, however, will at least provide clear guidance as to when participants’ consent to a proposed action by the lead lender is required, what level of support is necessary in order for the lead lender to act and a mechanism for resolving stalemates.  Careful thought should also be given, by both the originating and participant banks, as to whether the lead lender is permitted to make additional loans to the same borrower and, if so, under what circumstances.  The potential conflicts of interest faced by a lead lender which services loans with the same borrower both for its own account and for the account of others can make it difficult even for a “well-intentioned” lead bank to be effective in its servicing of both loans. 

This is the fourth installment of the five ways lenders make their collection actions more difficult.

RULE #4:       GIVE NO THOUGHT TO POTENTIAL SERVICING-RELATED ISSUES, INCLUDING POTENTIAL CONFLICTS OF INTEREST, WHEN SELLING AND PURCHASING LOAN PARTICIPATIONS

            Although the purchase and sale of participations in loans is a useful tool for managing risk, such transactions can greatly complicate (i.e., add expense and delay to) the servicing of troubled loans.  Some degree of complication is unavoidable when a participated loan goes into default, because the lead lender will oftentimes wish to waive or modify one or more provisions of the original loan agreement as part of its collection strategy, and participants usually reserve the right to approve or disapprove such waivers or modifications.  A well-drafted participation agreement, however, will at least provide clear guidance as to when participants’ consent to a proposed action by the lead lender is required, what level of support is necessary in order for the lead lender to act and a mechanism for resolving stalemates.  Careful thought should also be given, by both the originating and participant banks, as to whether the lead lender is permitted to make additional loans to the same borrower and, if so, under what circumstances.  The potential conflicts of interest faced by a lead lender which services loans with the same borrower both for its own account and for the account of others can make it difficult even for a “well-intentioned” lead bank to be effective in its servicing of both loans. 

This is the fifth and final installment of the five ways lenders make their collection actions more difficult.

RULE #5:       DON’T BOTHER TO VISUALLY INSPECT THE CONSTRUCTION SITE IMMEDIATELY BEFORE AND AFTER FILING YOUR CONSTRUCTION MORTGAGE

            Although the mortgage of a construction lender is generally entitled to priority over any mechanics lien claimant who starts its work after the mortgage is filed, a construction mortgage will be inferior to the claim of any mechanics lien claimant who starts work prior to the recording of the construction mortgage.  Consequently, the construction lender must take two steps to protect the priority of its mortgage.  First, it must inspect the property to confirm that no work has commenced at the site prior to the recording of the construction mortgage.  Second, in the event the inspection reveals that any work has begun at the site, subordinations must be obtained from every contractor who has provided such labor or materials. 

This is the fifth and final installment of the five ways lenders make their collection actions more difficult.

RULE #5:       DON’T BOTHER TO VISUALLY INSPECT THE CONSTRUCTION SITE IMMEDIATELY BEFORE AND AFTER FILING YOUR CONSTRUCTION MORTGAGE

            Although the mortgage of a construction lender is generally entitled to priority over any mechanics lien claimant who starts its work after the mortgage is filed, a construction mortgage will be inferior to the claim of any mechanics lien claimant who starts work prior to the recording of the construction mortgage.  Consequently, the construction lender must take two steps to protect the priority of its mortgage.  First, it must inspect the property to confirm that no work has commenced at the site prior to the recording of the construction mortgage.  Second, in the event the inspection reveals that any work has begun at the site, subordinations must be obtained from every contractor who has provided such labor or materials. 

On November 1, 2008, the so-called “red flag” rules that implement Sections 114 and 315 of the Fair and Accurate Credit Transaction Act of 2003 (“FACT Act”) become effective.  The rules will require all financial institutions and certain other companies (e.g., retailers that take applications for third party credit cards or their own cards, or automobile dealers that partner with banks to facilitate car loans, utility account issuers, margin account issuers, or others that defer payment for goods and services) to identify and respond to account activities that may indicate identity theft.    The rules also require any user of consumer credit reports to develop policies and procedures to respond to apparent address discrepancies.  Also, issuers of credit or debit cards must also develop policies and procedures to address the validity of an address change request when it is followed within 30 days with a request for an additional or replacement card.  As part of these responsibilities, financial institutions must develop and implement a Board-approved identity theft prevention program before November 1, 2008.

Although financial institutions should already have in place Customer Identification Program policies and procedures that with applicable laws and regulations that may already be helping them detect red flags, these policies and procedures probably should be integrated into the identity theft prevention program for purposes of complying with the FACT Act.   Note, however, that those policies and procedures may need to be supplemented for purposes of the FACT Act because under the CIP rules, which were directed toward facilitating the prevention, detection, and prosecution of money laundering and financing terrorism, certain types of accounts and customers are exempted or treated specially in the CIP rules because the pose a lower risk of money laundering or terrorist financing.  Such special treatment may not be appropriate to accomplish the broader objective of detecting, preventing, and mitigating identity theft.

Covered Entities

The rules apply to any financial institution that offers or maintains a “covered account”. A “covered account” is an account primarily for personal, family or household purposes, that involves or is designed to permit multiple payments or transactions, or any other account for which there is a reasonably foreseeable risk to customers or the safety and soundness of the financial institution from identity theft. Loan accounts, credit card accounts, checking accounts, savings accounts, and other types of accounts are included as examples in the definition of “covered account”.  While the definition of “account” includes business accounts, the risk-based nature of the rules allow the creditor to determine which business accounts will be covered by the program through a risk evaluation process. 

Identity Theft Prevention Program Requirements

The rules define “identity theft” as “a fraud committed or attempted using the identifying information of another person without authority”.  Identifying information means any name or number that may be used, alone or in conjunction with any other information, to identify a specific person including any:

• Name, social security number, date of birth, official State or government issued driver’s license or ID number, alien registration number, employer or taxpayer ID number;
• Unique biometric data, such as fingerprint, voice print, retina, or iris image, or other unique physical representation;
• Unique electronic ID number, address, or routing code; or
• Telecommunication identifying information or access device. 

Accordingly, the creation of a fictitious identity using any single piece of information belonging to a real person falls within the definition of “identity theft”.

The identity theft prevention program requirements require that the program’s policies and procedures be in writing, and be tailored to the size, complexity and nature of the financial institution’s operations.  Each program must have reasonable policies and procedures that contain four essential features:

• Identify:  Relevant patterns, practices, and specific forms of activity that are “red flags” signaling possible identity theft must be incorporated in the program.  This should be guided by any regulatory pronouncements applicable to the creditor and the creditor’s own experiences.
• Detect:  Programs should include policies and procedures aimed at detecting red flags that have been incorporated into the program such as obtaining identifying information about, and verifying the identity of a person opening an account, and, for existing accounts, authenticating customers and monitoring transactions and address change requests.
• Respond:  Programs must include appropriate response procedures if red flags are detected, such as contacting the customer, contacting law enforcement, changing passwords or security devices that allow access, closing accounts and so forth.
• Update:  Programs should be changed as necessary to reflect changing risks to the customer and the creditor.

Financial institutions that issue credit and debit cards must also develop policies and procedures to assess the validity of address change requests, when the requests are followed within 30 days for an additional or replacement card.

Finally, because financial institutions use consumer credit reports, they must also develop policies and procedures to respond to notices from credit reporting agencies regarding address discrepancies.

The rules require that the initial written identity theft prevention program be approved by the Board of Directors or a committee of the Board, appropriate staff be trained, and service provider arrangements be appropriately overseen.

Guidance for Program Development and Compliance

The rules contain guidance that addresses program design, identification of red flags and detection of red flags, prevention and mitigation measures, and other requirements.  While the guidance is helpful, clients should not expect that merely parroting the guidelines in their individual programs will be sufficient for compliance purposes. 

Contact Allyn Dixon at adixon@dickinsonlaw.com or at 515.246.2530 with further questions regarding the FACT Act’s soon-to-be effective rules and regulations. 

On November 1, 2008, the so-called “red flag” rules that implement Sections 114 and 315 of the Fair and Accurate Credit Transaction Act of 2003 (“FACT Act”) become effective.  The rules will require all financial institutions and certain other companies (e.g., retailers that take applications for third party credit cards or their own cards, or automobile dealers that partner with banks to facilitate car loans, utility account issuers, margin account issuers, or others that defer payment for goods and services) to identify and respond to account activities that may indicate identity theft.    The rules also require any user of consumer credit reports to develop policies and procedures to respond to apparent address discrepancies.  Also, issuers of credit or debit cards must also develop policies and procedures to address the validity of an address change request when it is followed within 30 days with a request for an additional or replacement card.  As part of these responsibilities, financial institutions must develop and implement a Board-approved identity theft prevention program before November 1, 2008.

Although financial institutions should already have in place Customer Identification Program policies and procedures that with applicable laws and regulations that may already be helping them detect red flags, these policies and procedures probably should be integrated into the identity theft prevention program for purposes of complying with the FACT Act.   Note, however, that those policies and procedures may need to be supplemented for purposes of the FACT Act because under the CIP rules, which were directed toward facilitating the prevention, detection, and prosecution of money laundering and financing terrorism, certain types of accounts and customers are exempted or treated specially in the CIP rules because the pose a lower risk of money laundering or terrorist financing.  Such special treatment may not be appropriate to accomplish the broader objective of detecting, preventing, and mitigating identity theft.

Covered Entities

The rules apply to any financial institution that offers or maintains a “covered account”. A “covered account” is an account primarily for personal, family or household purposes, that involves or is designed to permit multiple payments or transactions, or any other account for which there is a reasonably foreseeable risk to customers or the safety and soundness of the financial institution from identity theft. Loan accounts, credit card accounts, checking accounts, savings accounts, and other types of accounts are included as examples in the definition of “covered account”.  While the definition of “account” includes business accounts, the risk-based nature of the rules allow the creditor to determine which business accounts will be covered by the program through a risk evaluation process. 

Identity Theft Prevention Program Requirements

The rules define “identity theft” as “a fraud committed or attempted using the identifying information of another person without authority”.  Identifying information means any name or number that may be used, alone or in conjunction with any other information, to identify a specific person including any:

• Name, social security number, date of birth, official State or government issued driver’s license or ID number, alien registration number, employer or taxpayer ID number;
• Unique biometric data, such as fingerprint, voice print, retina, or iris image, or other unique physical representation;
• Unique electronic ID number, address, or routing code; or
• Telecommunication identifying information or access device. 

Accordingly, the creation of a fictitious identity using any single piece of information belonging to a real person falls within the definition of “identity theft”.

The identity theft prevention program requirements require that the program’s policies and procedures be in writing, and be tailored to the size, complexity and nature of the financial institution’s operations.  Each program must have reasonable policies and procedures that contain four essential features:

• Identify:  Relevant patterns, practices, and specific forms of activity that are “red flags” signaling possible identity theft must be incorporated in the program.  This should be guided by any regulatory pronouncements applicable to the creditor and the creditor’s own experiences.
• Detect:  Programs should include policies and procedures aimed at detecting red flags that have been incorporated into the program such as obtaining identifying information about, and verifying the identity of a person opening an account, and, for existing accounts, authenticating customers and monitoring transactions and address change requests.
• Respond:  Programs must include appropriate response procedures if red flags are detected, such as contacting the customer, contacting law enforcement, changing passwords or security devices that allow access, closing accounts and so forth.
• Update:  Programs should be changed as necessary to reflect changing risks to the customer and the creditor.

Financial institutions that issue credit and debit cards must also develop policies and procedures to assess the validity of address change requests, when the requests are followed within 30 days for an additional or replacement card.

Finally, because financial institutions use consumer credit reports, they must also develop policies and procedures to respond to notices from credit reporting agencies regarding address discrepancies.

The rules require that the initial written identity theft prevention program be approved by the Board of Directors or a committee of the Board, appropriate staff be trained, and service provider arrangements be appropriately overseen.

Guidance for Program Development and Compliance

The rules contain guidance that addresses program design, identification of red flags and detection of red flags, prevention and mitigation measures, and other requirements.  While the guidance is helpful, clients should not expect that merely parroting the guidelines in their individual programs will be sufficient for compliance purposes. 

Contact Allyn Dixon at adixon@dickinsonlaw.com or at 515.246.2530 with further questions regarding the FACT Act’s soon-to-be effective rules and regulations. 

This is the third installment of the five ways lenders make their collection actions more difficult.

RULE #3:       MAKE SHORT-CUTS IN LOAN DOCUMENTATION TO ACCOMMODATE  YOUR BEST OR MOST SOUGHT-AFTER CUSTOMERS

            Although the temptation is great when times are good for a lender to accommodate its best customers by not insisting on quite the same level of detail and formality when documenting their loans, lenders should never forget that large credits are in many cases no more immune from a bad economy than are the smaller ones.  In the event of bankruptcy by the borrower, the lender with a duly perfected lien in collateral is always in far better shape than the holder of an unsecured claim, regardless of how good the borrower’s balance sheet looked at one time.  If an appraisal, a formal title opinion and lawyer-reviewed or prepared documentation are desirable in the case of a routine loan, the same is no less true in the case of a loan to a favored customer of the bank.  In that regard, a “title report” or “lien search” is no substitute for a final title opinion or title policy.  A “preliminary” title opinion is what the name implies – only a final title opinion can confirm the perfection and priority of the mortgage lien.

          As our heartland ancestors have in the past, we view the eastern financial centers with great consternation.  Their rules seem to be both special and readily malleable.  Fixed rules of law regarding failure become fluid rules of adjustment for some to fit the exigent circumstances at hand and investors both here and abroad.  For one group of (investment and indirectly the money center) banks, we observe one set of criteria for Schumpeter’s creative destruction, the great cleanser of capitalism.  For the community banks, we have another set of rules. For investment banks, there appears to be no amount of liquidity that currently cannot be provided to save the American day and their collective money center brethren.  On the other hand, the community banks are now beginning to experience financial regulators dutifully following orders from the nation’s capital.  In many cases, the regulators are rightfully, if not zealously, restricting certain bank’s conduct with various administrative orders in order to avoid even worse consequences down the road.

            As a frequent consequence of many of these detailed administrative orders, a community bank’s capital is impacted and the once well capitalized community bank is then deemed to be only adequately capitalized due to past or anticipated losses.  Suddenly, the community bank’s access to sources of liquidity becomes constricted by regulation.  The very continuation or even utilization of brokered deposits become subject to regulatory approval even though no questions were raised previously regarding those sources of funding.  Additionally, the Federal Home Loan Bank’s advances, which have become the mother’s milk of funding community banks, become more stringent.  In these cases, the community bank regulators are required to do just the opposite of the regulators of the investment banks.  In effect, the regulatory rules of the road for community banks may escalate a liquidity crisis just when the smaller community bank needs time and liquidity to resolve the issues it faces and raise capital.

            How is this different treatment fair or equitable?  Investment banks and indirectly money center banks are flooded with liquidity while smaller community banks face a liquidity crisis brought on not by the markets but by the well intentioned regulators hoping to protect the system. Ironically, the community banks with more direct regulatory oversight have their liquidity options diminished by such regulation, and the investment banks and G.S.E.s which are not subject to such regulation, receive additional liquidity from regulatory or governmental agencies. Admittedly, consistency is indeed the hobgoblin of small minds in the heartland, but without some equitable reconciliation of these disparate treatments, the uneven moral hazards of today will become political and institutional hazards destabilizing tomorrow.

-Howard Hagen

Senators Orrin Hatch and Blanche Lincoln have introduced legislation that would allow state-chartered banks operating as LLCs to be taxed as an LLC by the IRS.  Currently, banks organized as LLCs are taxed as a corporation by the IRS. 

Many states, including Iowa, allow banks to be organized as LLCs.  These states allow LLC banks to be taxed as a partnership, avoiding the double taxation for corporations.   

Both the American Bankers Association and the Independent Community Bankers of America support the bill. 

A copy of the bill can be found here.

The Small Business Administration (SBA) is restructuring its Community Express program, effective October 1, to increase the number of eligible borrowers and funnel more lending to low-income areas.  The restructuring extends this 9 year old “pilot program with a deadline” to December 31, 2009.  The SBA Community Express loan program is designed for small businesses in disadvantaged communities to help them succeed.

            Some important changes to the Community Express program include:

• After October 1^st, anyone is eligible for the loan, while before that date only minorities, women, veterans, and those in low income areas are eligible.
• Small businesses with a principal office in a low-income HUBzone, or an area covered by the Community Reinvestment Act, will be eligible for the loans, as will any small firm seeking a loan of ,000 or less.
• The SBA reduced the maximum interest rate lenders may charge for Community Express loans, bringing it in line with the SBA’s 7(a) program.  The new maximum rate will be prime plus 2.25% for loans with maturities of less than 7 years.  For loans with maturities of 7 years or more, the maximum rate will be prime plus 2.75%. 
• Lenders are allowed to charge an additional 2 percentage points for loans under ,000, and an additional 1 percentage point for loans between ,000 and ,000.
• Lenders using the Community Express program, who are required to arrange technical assistance for borrowers, will be able to use the SBA’s online Small Business Training Network to satisfy this requirement.
• The SBA guarantees 75% – 85% of Community Express loans, and up to 0,000 can be borrowed through the Community Express Program.

This is the second installment of the five ways lenders make their collection actions more difficult.

RULE #2:      STICK YOUR CUSTOMER’S UNCONDITIONAL AND UNLIMITED  GUARANTY IN THE FILE AND DON’T WORRY ABOUT IT AGAIN UNTIL IT’S TIME TO SUE

The Iowa Supreme Court complicated the lives of Iowa lenders in 2003 when it declared that it was the “custom and practice” of the banking industry to provide a guarantor with written notice of the terms of any new loan that the lender considers to be covered by a prior guaranty.   Beal Bank v. Siems, 670 N.W.2d 119 (Iowa 2003).  In that case, the Supreme Court found that a lender had “abandoned” a written guaranty due in part to its failure to give such written notice to the guarantor.  Any lender who fails to give such notice to its guarantors now has the pleasure of explaining to a judge (or jury) why it is not following industry custom and practice.

The Beal Bank case also illustrates the importance of Rule #1.  In Beal, the Bank’s form of guaranty did not include the notice language of 535.17.  There was some language in the guaranty which generally provided that “no alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the [parties].”  However, because that language was not in boldface ten-point type, the Court found it was not sufficiently conspicuous to make 535.17 applicable. 

For more information contact Jon P. Sullivan of Dickinson Mackaman Tyler & Hagen, P.C.

Wade Rousse and Cindy Ivanac-Lillig at the Federal Reserve Bank of Chicago have started an economics blog entitled "Marginal Thoughts."  So far, the blog has defined and discussed various economic terms and concepts that are being bandied about these days.  Marginal Thoughts has very short, engaging posts; its informative, but not dense, you should be able to read it and understand it even before you have your morning coffee.  It hasn’t been up long, here’s to hoping they continue it.

I suggest you subscribe to Marginal Thoughts.  It appears that there is a post about once a week, so your inbox won’t be inundated. 

Jeff Andersen

This is from Ward on Iowa Limited Liability Company Law.

Granting an LLC manager the power to "execute" instruments (for example, a promissory note) does not mean the manager has discretionary authority to borrow money on behalf of the LLC, so says the Kansas Court of Appeals in Sunflower Bank v. Airport Red Coach Inn of Wichita LLC, 175 P 3d 883 (Kan. App. 2008).

The court also concluded that the bank had "knowledge" of the fact that the operating agreement did not grant the manager such authority because it had a copy of the operating agreement in its possession.

The bank bungled this one in two ways.  It didn’t require the manager to provide evidence of his authority (by resolution or written consent) and apparently didn’t read the operating agreement or at least the loan officer did not understand what he or she read.

-Marc Ward

The following is one lawyer’s attempt to briefly identify some of those mistakes made by lenders which, in his recent experience collecting loans, tend to cost lenders the most in terms of lost time and money.   These are lessons which are much better learned in the abstract than “first hand.”  The following rules will not tell a lender what mistakes to avoid in underwriting a loan.  They do, however, suggest some common mistakes to avoid in the manner in which a lender structures, documents and administers loans, so as to minimize the lender’s risk and expense when it becomes necessary to enforce the lender’s legal remedies against the borrower and/or the bank’s collateral.

This will be posted in five installments.

RULE #1:       DON’T BOTHER TO INCORPORATE THE SAFE-HARBOR LANGUAGE OF IOWA CODE SECTION 535.17 IN EVERY CREDIT DOCUMENT IN YOUR FILE

Iowa Code Section 535.17 is unquestionably the strongest weapon that the Iowa Legislature has provided to lenders to assist them in avoiding frivolous and costly litigation over credit agreements of any kind.  The key to obtaining the full protection afforded by Iowa Code Section 535.17 is to include certain statutorily-prescribed language in the credit agreement.  That language should be very familiar to any Iowa lender:

            IMPORTANT:  READ BEFORE SIGNING.  THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE.  NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.  YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.

When this language appears in the credit document, it means that the credit document must be enforced the way it is written.  With extremely few exceptions, it prevents the borrower from arguing that the credit document is unenforceable due to events, actions or circumstances that would otherwise be fertile ground for litigation.  It cuts off such common law “equitable” defenses as fraud, promissory estoppel, undue influence and economic duress.  In short, it is the best possible thing the lender has going for it when the borrower starts looking for ways to prevent or slow the enforcement of the lender’s legal rights through the use of judicial process.

In light of its obvious benefits, it is puzzling how often lenders do not incorporate the language in their credit agreements that is necessary in order to make Code Section 535.17 fully applicable to the agreement.  There are no doubt a number of reasons this language does not find its way into every credit agreement written in the State of Iowa.  For example, some lenders use pre-printed forms that, due to the fact they are out-dated or were prepared by out-of-state venders unfamiliar with Iowa law, do not include the required language.  Some lenders (or their attorneys) may not appreciate the broad variety of documents that qualify as “written credit documents” that should routinely include this language. 

Some things to keep in mind regarding 535.17:

(a)        The “safe harbor” language must appear in boldface type at least ten points in size;

(b)        As an alternative to including this language in every credit document, it can be included in a separate form given to the borrower;

(c)        If the notice language was overlooked at a closing, the statute even permits the notice to be given after the closing (“[t]his notification can be included among the terms of a credit agreement, can be included on a separate form . . . with other disclosures that are provided when the agreement is made, or can be given wholly apart from the agreement and at any time after the agreement has been made.”);

(d)        “Credit Agreement” is defined very broadly to include any contract made or acquired by a lender to loan money, finance any transaction, or otherwise extend credit for any purpose (e.g., would include a guaranty or a modification or forbearance agreement);

(e)        Transactions to which 535.17 does not apply include consumer loans (for ,000 or less, made primarily for personal family or household purpose), credit card debt or home equity line of credit. 

Stay tuned for Rule #2. 

If you have any questions contact Jon P. Sullivan of Dickinson, Mackaman, Tyler & Hagen,

P.C.

Reports in the wake of last week’s failure of IndyMac indicated that some 10,000 customers had deposits in excess of the 0,000 FDIC insurance limits.  The FDIC, in an act of restrained benevolence, has indicated that it will voluntarily pay depositors an "advance dividend" of 50% of uninsured amounts they may have had on deposit at IndyMac.  But, it is important to keep in mind, the offer really is a strictly voluntary one, because the FDIC has no obligation to pay customers anything above the insured amount.

Followers of FDIC receivership actions have undoubtedly noted the careful language the FDIC has used in all of its statements arising out of recent failures.  With a great degree of precision, the FDIC has boasted that no insured deposits have been lost.  In other words, provided a depositor had less than 0,000 (or 0,000 for certain other types of funds held by the failed entity like an IRA), the depositor was paid for 100% of the depositor’s claim.  But other than in the case of IndyMac, the deposit limit has been the limit in recent failures.

Businesses that deposit large payroll account sums should be aware that those deposits, notwithstanding that they may be designated as a separate account, will be combined with other accounts of the business at any one bank.  Thus, if a business had ,000 on deposit in an operating account, ,000 on deposit in a marketing account, and then just before payday made a ,000 deposit to a payroll account and the bank failed, the business stands to lose ,000, which represents the portion on deposit at the failed bank over and above the 0,000 limit.

"Pass through coverage", which is available for accounts held for others who are specifically identified, would not apply to a payroll deposit because the deposit is not owned by the employees.

One possible solution to avoid possible loss of deposited payroll funds?  Bearing in mind that the preferred day of the week for shutting down banks is Friday, move paydays to any day other than Friday.