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Be sure extended holds on check deposits are in compliance

Jul 19, 2023
By: Dallas Belmontes

Regulation CC, which governs funds availability for deposits, provides a framework for financial institutions to place extended holds on deposited checks under specific circumstances.

One of these circumstances is a reasonable cause to doubt the collectability of a check. Such doubt is a genuine concern held by the financial institution as to the likelihood of successfully receiving payment for a deposited item. It can arise from various situations, such as checks drawn on closed or overdrawn accounts, post-dated checks, or suspected fraud or unauthorized activity.

Evidence collection

To meet the reasonable cause standard, Section 229.13(e) of the regulation, there must be factual evidence that would cause a well-grounded belief in the mind of a reasonable person that the check is uncollectible.

One example provided in the regulation’s commentary pertains to check kiting (Section 229.13(e)(2)(d)). Others include a reasonable belief in the insolvency or imminent insolvency of either the check drawer or drawee financial institution, and the expectation that the checks will not be honored.

In such cases, the financial institution can indicate its invocation of the reasonable cause exception by stating that it possesses confidential information suggesting potential nonpayment of the check. It is essential to emphasize that financial institutions must thoroughly document their reasoning and provide adequate support to ensure the validity of their exception holds, especially when facing scrutiny from examiners. Noncompliance with these documentation expectations is where many institutions fall short.

Exception holds based on doubt of collectability are necessary safeguards that protect financial institutions from potential losses stemming from fraudulent or uncollectible transactions. By temporarily delaying the availability of funds, financial institutions gain crucial time to investigate suspicious transactions and verify the legitimacy of deposited items.

This process helps to uphold the overall integrity and stability of the financial institution system, fostering trust among customers and ensuring the efficient functioning of the banking industry.

Appropriate reason for hold

Institutions must exercise reasonable judgment when assessing the probability of an item being returned or dishonored. To make this determination, various factors should be taken into account, such as the customer's account history, the nature of the deposited item and any relevant information provided by the paying financial institution or depositor.

The goal is to ensure that funds are not released to the customer until any doubts about collectability are resolved.

One scenario where an extended hold reason may be selected is when a teller engages in conversation with the depositor and learns that the check was mailed to them, and they were then asked to deposit the check and send funds back in the form of a wire transfer, check or gift card.

In such instances, an exception hold can be placed on the transaction. To support this exception hold, it is crucial to document the set of facts, including the customer's actions or conversations that led to suspicions of fraud or involvement in a scam.

It is also important to recognize that holds on deposited funds can significantly impact customers who rely on quick access to their funds. Your actions can raise a customer service concern. Financial institutions are obligated by Regulation CC to provide clear and concise information to customers regarding the duration and reasons for exception holds.

This transparency ensures that customers are fully aware of the situation and can make appropriate financial arrangements. While Regulation CC is hardly new, its nuances related to check holds can cause many a banker, experienced or not, to run afoul of the requirements.

How Wipfli can help

Complying with the complexities of Regulation CC is complicated. Wipfli advisors are prepared to help you assess your processes and ensure that your team is meeting all document expectations. Explore our services for financial institutions to see how we can help you.

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Dallas Belmontes