Restrictive Endorsement

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21 Aug, 2024

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A Restrictive Endorsement refers to a conditional authorization of a financial instrument to confine its usage for a specific purpose, turning off its further negotiation or transfer to a third party. In such an arrangement, the payee is liable to receive the payment if the stated condition is fulfilled.

A check with restricted endorsement bears a condition like 'For Deposit Only,' specifying the desired action. Hence, such a financial instrument provides a degree of security because no one can manipulate it, encash it randomly, or deposit it in some other account. It is suitable when the payee mails the check to the bank.

What Is A Restrictive Endorsement?

A restrictive endorsement is a conditional authorization of a financial instrument whereby its use is limited or restrained to the specified purpose. Hence, the payment or encashment of such a check or instrument relies upon meeting the endorsement condition.
A restrictively endorsed instrument cannot be presented for payment by anyone. Hence, it makes the payment more secure.
It limits the negotiability and transferability of the respective check.
It differs from a blank check, which doesn't mention the payee's name or any condition for payment, making it a more unsecured transaction instrument.

Restrictive Endorsement Explained

A restricted endorsement on a financial instrument specifies the condition or purpose of its use. Thus, unlike a blank endorsement, the payee cannot encash such an instrument unless they meet the condition. Often, they state the condition on the backside of the instrument. Some of these conditions or purposes are:

Void after 60 days: Within 60 days of issuance, it can be encashed.
For deposits only: One can only make deposits in the designated bank account.
Non-negotiable: This cannot be negotiated further.
For collection only: The designated bank named in the endorsement can collect the funds.
Pay to the order of: The designated party is the one to be paid.

Some of the basic rules applicable to the restricted endorsement are as follows:

The endorser must adhere to the specific conditions.
Such an endorsement doesn't wholly make an instrument non-negotiable, and
Restrictive endorsement doesn't eliminate the negotiability of an instrument. However, the intent of the order to pay or conditional promises stated on the front of the instrument is to make it non-negotiable.

However, a restricted endorsement ensures safety in payments through checks and other financial instruments. Such a conditional instrument becomes non-negotiable to a certain extent. Thus, the endorsee cannot transfer it to their creditors or encash it immediately in an emergency.

Moreover, the processing or clearance of such financial instruments at the end may take banks more time than the bearer checks since they require verification for compliance with the stated condition. Due to their little flexibility, circumstances change, and the payee may request that the payer alter the restricted condition. Also, some financial institutions may consider this type of endorsement only.

Examples

A restrictive endorsement is one of the secured forms of authorizing a payment through a financial instrument. Let us discuss some examples to gain a clear insight into the concept:

Example #1

Suppose the owner of ABC Ltd., Mr. Alex, has accounts receivables of $15,000 from last month's credit sale. Emma, the debtor, makes the payment through a bearer check. He wants to deposit this money in the company's current account. Therefore, Alex writes a restrictive endorsement condition on the back of the check and puts the restrictive endorsement stamp For Deposit Only, followed by the company's current account number. Then, he signs the endorsement stamp below and hands over the check to his accountant, who deposits it in the bank, and the bank transfers the payment to ABC Ltd.'s current account.

Example #2

In another example, say Ben has taken a car loan from XYZ Bank, against which he pays a monthly installment of $102. Now, to pay the installment of February 2024, he writes a restrictive endorsement check and states the endorsement condition as For Collection Only at its backside, followed by the bank's name and his signature. When he deposits this check at the bank, the latter collects the respective payment.

Example #3

In 2018, the banks in the United States witnessed a transformation in the restrictive endorsement rules. The Federal Reserve Board published the final revisions to Regulation CC's check collection and return clauses. This amendment guarded against the unintentional or deliberate deposit of the same check twice, safeguarding both clients and depository institutions.

Consequently, the mandate suggested adding - For Mobile Deposit Only - below the endorsement on any mobile check deposit on and from July 1, 2018. If customers forget to do so, they will be prompted to add the endorsement and take a new picture of their mobile check deposit.

Advantages

For the following reasons, a restrictive endorsement is more beneficial than granting a blank endorsement:

Ensures Protection: A specific condition restrains the use of a restrictive endorsement check, making it pretty secure and eliminating the chances of fraud.
Facilitates Greater Control: An endorser can exercise greater control over who uses the financial instrument and for what purpose by imposing such a limitation.
Offers Legal Prevention: The parties can use a restrictive endorsement stamp to prevent disputes or disagreements regarding the use of the financial instrument.
Establishes Accountability: By endorsing a financial instrument with a condition, both parties are responsible for any violations or misuse.
Provides Customization: An endorser can choose different endorsement conditions or purposes based on their requirements or contract with the other party.
Reduces Fraud: Anyone who finds a lost instrument cannot encash it or transfer the payment to an unauthorized account or institution.

Restrictive Endorsement vs Blank Endorsement

Restrictive and blank endorsements are the different ways in which an issuer of a financial instrument can authorize the payment. Let us now throw light on their various dissimilarities:

Basis	Restrictive Endorsement	Blank Endorsement
Definition	It is an authorization of a financial instrument with a condition that restricts its usage to a specific purpose and makes it non-negotiable any further.	It is an authorization whereby the endorser signs a negotiable financial instrument that can be deposited at the bank and encashed by the holder.
Purpose	It restricts the use of a financial instrument for a specific purpose or as per the stated condition.	Making an instrument negotiable and transferable.
Contains	It includes a purpose or condition like for deposit only or non-negotiable, with the payee's account number and the endorser's signature at the designated endorsement area on the instrument's backside.	It is authorized by the endorser or account holder's signature on the instrument's backside.
Payee	A specific payee whose account number or name is written on the instrument's endorsement area.	Anyone who physically holds the instrument can take the payment.
Transferability of Ownership	Cannot be transferred or negotiated any further	Ownership can be easily transferred to a third party
Flexibility	Limited	Highly flexible
Security	High	Low

Frequently Asked Questions (FAQs)

How to write a restrictive endorsement?

A restricted endorsement check is written as follows:
1. Look at the back of the check; there is a specific area for endorsement.
2. Write down a condition, such as For Deposit Only, for the respective account number.
3. Duly sign below the condition within the designated endorsement line or area.

Are restrictive endorsements legally binding?

Yes, restricted endorsements serve as lawful instruments that legally safeguard the interests of the endorsee or payee.

What does missing restrictive endorsement mean?

When the depositor fails to endorse the instrument, i.e., sign or include a restrictive endorsement, the bank will return the check due to a missing restrictive endorsement condition.

What is the difference between a restrictive and a special endorsement?

A restrictive endorsement is a condition stated at the back of a financial instrument that confines its encashment while limiting its further transfer or negotiation. Conversely, a special endorsement authorizes a specific person's name on a financial instrument, like a check, to encash the payment.