(5) All house property should be insured against fire, and the customer should produce for the banker's inspection the receipt for each annual premium as it falls due.

(6) Second mortgages of all kinds should be avoided. The holder of a second mortgage is practically powerless without the co-operation of the first mortgagee, and, what is worse, he may find that by the process called "tacking," the holder of a third mortgage may join his charge to that of the first mortgagee, and both may take precedence of the second mortgage.

Another form of security sometimes offered to a banker is a life insurance policy. The amount a banker can safely lend on a life policy will not exceed its "surrender value." This is the amount, fixed by the company issuing the policy, which they are willing to pay for its surrender, and is a proportion of the actual amount of the premiums already paid. There is a general opinion that a banker can acquire no right to retain a life policy unless it has been deposited under a memorandum, but this opinion is apparently unwarranted, and if the policy has been left with the banker for the purpose of securing an advance, the banker probably has a lien upon it, although no memorandum of deposit may exist.

The next form of security which we have to notice is the guarantee of a third party, which may be either under hand or seal, though the former is the method more usually adopted.

The weak point of a guarantee is that the banker is not always in a position to judge whether the guarantor is thoroughly reliable. In most cases he will have to rely upon the confidential opinion of another banker, and in giving such opinions all bankers are naturally prone to take the most favourable view of their own customer's position.

Most banks have their own form of guarantee drawn up by an expert solicitor, but it may be mentioned that a guarantee should be expressed to be a "continuing" guarantee, covering not only existing debts due from the person guaranteed, but all future debts incurred by him until the guarantee is terminated, either by notice or by the death or bankruptcy of the guarantor.

If a guarantor dies or gives notice that he wishes the guarantee to cease, the banker upon hearing of the death, or at the expiration of the notice, should at once stop the account of his customer and refuse all further transactions on it. This is imperative. If the account is continued after the expiration of the notice or the death of the guarantor, every amount paid to the credit of the account reduces the debt, but every cheque paid creates a fresh debt. This principle is called the general rule of the appropriation of payments, or "the rule in Clayton's case."

An illustration will perhaps explain the meaning of this more clearly. Suppose John Smith has an overdrawn balance of £'100 on his account. He calls in at the bank, pays in a cheque for £100, and draws out £100 to pay his week's wages. From a legal point of view he has extinguished his original debt and created a new one.

Now let us suppose that the overdraft is secured by a continuing guarantee of John Brown for £100. John Brown gives notice that he wishes to terminate the guarantee, and at the expiration of the notice Smith's overdraft is £95. Smith's banker neglects to stop the account, and Smith comes to the bank next day, pays in £50 to his credit and draws out £25, leaving his balance £70. Brown's liability is, however, reduced to £45. The cheque for £25 constituted a new advance from the banker to Smith, and was not therefore covered by Brown's guarantee, although the £50 paid in is deemed to have paid off part of the old debt.

One of the chief advantages of a guarantee is experienced in the case of the bankruptcy of the customer whose account is guaranteed. If the account is secured by the deposit of bonds, title deeds or similar securities belonging to the customer, the banker will have to realise them before proving against the estate in bankruptcy. But with a properly drawn guarantee, he can, if he think proper, prove against the estate for the full amount of his debt, and then require the guarantor to pay the balance, or so much of the balance as the full amount of the guarantee will cover.

In many cases there will be an important difference between these two methods of realising the securities. Suppose the overdraft of the bankrupt is £150, secured by the deposit of bonds worth £100 in the one case, and a guarantee for £100 in the other. In the first case the banker will be able to prove for £50 only, and if the dividend is 10s. in the pound, he loses £25. In the second case he proves for £150, which, with the same dividend, will leave a debt of £75, and he can then claim the repayment of the whole of this balance by the guarantor.

One other form of security may be mentioned - that is, documents of title to goods. The most important of these is a bill of lading, which is in effect a certificate given by the master of a ship that certain goods have been entrusted to his possession, and that he undertakes to deliver them at the end of the voyage, subject to certain conditions mentioned in the bill. While the goods are at sea the bill of lading is evidence of ownership, and the right to obtain delivery of the goods can be transferred by the negotiation of the bill of lading.

A bill of lading is almost always drawn in a "sett"; that is, there are two or three identical parts, numbered one, two and three, and care must be taken to gain possession of all the parts. The master of the ship or warehouseman will deliver the goods on the presentation of any one part of the bill, and the law justifies him in this course. If the holder of a bill of lading fraudulently negotiates each part to a separate individual, the man to whom the transfer is made first in point of time has a better title than the later ones, but the man who first presents the part in his possession will probably obtain possession of the goods. The only safe method, therefore, is to obtain possession of all the parts of the bill.

A bill of lading usually states that so many packages, boxes, bales of merchandise, have been shipped, but it does not guarantee the contents of the packages, and the shipowner is not responsible for the genuineness of the goods. A policy of insurance should, however, always be attached to the bill, and an invoice, and these will afford a fair criterion of the value of the goods, though they will not always be a protection against fraud on the part of the shipper.

It must be remembered that a bill of lading confers a right to obtain possession of the goods mentioned in it, but it does not necessarily confer a valid title to the goods. The banker may find, after he has obtained the goods, that the man to whom he lent the money had no right to pledge the goods, and he may, therefore, have to surrender them to the true owner. In this connection the Factors Act, 1889, is a great protection to bankers. It enacts that if goods are entrusted to a mercantile agent, factor or broker in the usual course of his business, and the mercantile agent wrongfully pledges them, yet a man who innocently advances money on the goods or the documents of title to them shall be able to enforce the contract against the true owner, although the latter had not sanctioned the pledge.

Finally, to return to the topic of lending generally, there are two points which a banker should always bear in mind.

First, the mistake of optimism should be avoided. Do not be over sanguine. It is advisable to allow a liberal margin between the value of the securities and the amount of money advanced against them, as provision against possible depreciation. Do not be too ready to accept a customer's valuation of his assets or of his probable profits in the future. Without imputing any fraudulent intention, it is safe to say that such estimates usually prove too sanguine.

Secondly, if a bank manager has a sudden doubt of the position of the customer to whom he has granted an overdraft, he must not therefore dishonour his cheques without reasonable notice. Of course, if a limit has been agreed upon, beyond which the customer must not draw, and cheques are presented which will exceed this limit, they may be returned unpaid without notice and without scruple. But if a banker has been in the habit of allowing his customer to overdraw to an agreed amount, he must act with caution in refusing to pay up to this amount; if he should attempt to dishonour cheques in such circumstances without what the law considers "reasonable notice," he may find himself mulcted in heavy damages.

Another similar point to remember is that a banker should not dishonour his customer's cheque solely for the reason that the debit of his quarterly or half-yearly charges for interest and commission has brought the overdraft up to or beyond the agreed limit, unless the customer has had notice of such charge. It is advisable, if the banker's charges bring the account somewhere near the limit, to send the customer his pass-book with the entries made, which in all probability will constitute notice of such charges.