Sec. 151. Loans And Discounts

To loan money is one of the principal functions of a bank, and it may loan on any sort of security except as forbidden by law, and in any amount except as restricted by statute, and may charge the rate of interest allowed by the law of the state.

The State banking laws regulate loans by state banks. The idea which governs banking loans is that they shall not be made for long periods, and that the securities upon which they are made shall be readily convertible. The collateral usually taken consists of stocks, bonds, first mortgage notes and the like. The National Banking Law forbids National Banks to loan upon real estate. This does not forbid them from loaning on first mortgage notes, or from taking mortgaged property when necessary for protection under a loan already made.

The rate of interest upon loans varies, according to the state laws. The National Banking Law with the intent of making its loaning operations uniform with those permitted by State Laws, provides that National Banks may charge the same rate of interest that the State Law in which the bank is located allows, and charge above that amount is usury.

If interest is deducted in advance this is referred to as discount, and is the customary banking practice.

Sec. 152. Collections

The bank has power to act as agent in the collection of commercial paper.

The bank must use due diligence in the collection of such paper, and protect the rights of the parties by the proper procedure.

A bank doing a general banking business may collect commercial paper sent to it by the holder thereof, for that purpose; such paper may be indorsed generally to the bank, or indorsed restrictively "for collection."

The bank becomes the general agent of the holder of the paper. The bank must use due diligence in collecting said paper, and if on account of this delay loss ensues to the holder, the bank is liable.

If the bank must collect at distant points, through correspondents, one set of cases holds that this duty is discharged when it has used due care in the selection of a reliable correspondent, but the other rule is that the default of the correspondents is the default of the first bank, and unless there is a special contract to the contrary.

The bank must be sure to follow the proper procedure in case the paper is not paid in reference to presenting the instrument for paper giving notice of dishonor of the paper and protest where necessary, unless directed not to take such steps or such steps have been waived.

Sec. 153. The Bank's Negotiable Paper

The bank's negotiable paper consists of bank drafts, certificates of deposit, and bank notes.

The bank draft or check is a draft payable on demand drawn by one bank upon another. These are also sometimes called cashier's checks.

The bank issues certificates of deposit reciting that it has received a certain amount of money from a certain person, and will pay the same to his order upon the return of the certificate properly indorsed. It is a form of promissory note.

A banknote is an instrument issued by a bank to circulate as money and is a form of promissory note, and is negotiable.171 It is payable on demand, and to bearer. The right to issue banknotes is governed by statute. Banknotes can be issued either by National

171. Miller v. Race, 1 Burr. 456.

Banks, or by State Banks, but the United States has power to tax state banknotes and thus virtually accomplish their prohibition. The National banking act provides that a United States bank must secure its issue by deposits with the United States treasury, which issues the National Banks bank bills in various denominations, which are signed by the bank officers after receiving them.

Sec. 154. Savings Banks

A Savings Bank is a bank organized to receive money on deposit not subject to check and subject to a regulation that withdrawals cannot be made as a matter of right until a certain stipulated notice is given.

The depositor in a Savings Bank is governed by the rules and regulations which are usually set forth in the pass book, and such pass book must be presented upon withdrawal, and it is usually provided that the bank may pay out funds to any person who presents a pass book, but this provision will not protect the bank unless it also uses reasonable diligence and care in making the payments. The right to receive a certain notice before a withdrawal will be permitted is not usually insisted upon.

Sec. 154a. Trust Business

State banks are authorized by state laws to carry on the business of acting as trustee under the federal law. A National bark may be likewise accorded this privilege.

It has become an important part of the business of banking to act as trustee of estates under appointment in wills or by the court. The trust business may be carried on by the separate institution or by the bank itself. National banks may now act as trustees when given that privilege under the federal reserve act.172

Sec. 155. Clearing Houses

A Clearing House is the central organization constituted by the various banks for the purpose of simplifying the daily statement of the banks with each other, and of effecting settlements with each other.

Where there are a number of banks in any community, they must of necessity receive from their various depositors, or otherwise for collection, checks drawn upon each other. For the purpose of expediting settlements with each other, clearing houses are established. This is an essential organization organized by the various banks through which all paper upon the members thereof is payable. Each bank sends through the clearing house on the day next after it is received all the paper which it has received on other banks which are members of the clearing house or which by arrangement clear through such house. After this paper has been received from the various banks, each bank is either a creditor or debtor of the association and must settle according to the balance struck.

With reference to the right of priority where a number of checks have been drawn on a deposit which is of insufficient amount to pay all of them, the rule is that they must be paid as presented, the time of presentment governing the priority. If, however, a check upon a certain bank is not presented for payment to that bank, but is sent through the clearing house by its deposit for collection in some other bank, this situation is likely to arise - that when the bank receives from the clearing house the checks drawn upon the same deposit, the deposit will not be sufficient to pay all of the checks; in such a case what check is entitled to priority? They are all presented at once for payment and the rule appears to be that none of them are entitled to priority in such a case, even though some may antedate others, for it is the time of presentment which governs priority, and in such a case the payment of all such checks must be refused on account of insufficient funds

172. Held constitutional in National Bank of Bay City v. Fellows, 37 Sup. Ct Rep. 734.