By: Sharon Geiger, Senior Quality Control and Review Specialist
Regulation CC was enacted in 1987 in order to standardize hold periods on deposits made to banks and to regulate a bank’s use of deposit holds. There have been many changes throughout the years, but one in particular is that all checks are considered local and clear on a much timelier basis than in earlier years. One thing that remains unchanged is Regulation CC applies to both personal customers and commercial customers.
As an auditor, I have often referred to Regulation CC as “the less complex” regulation to audit. It is not like it was in the old days: We no longer have to keep track of what is a local check as opposed to a “non-local” check. Therefore, it can be easier to track the availability provided to customers. However, when it comes to Reg CC, there are still areas to watch out for in order to mitigate risk and ensure compliance with your policy and procedures.
What is your hold policy, and are you sticking to it?
Some banks give funds availability directly in line with the regulations – Next day availability for cash, and 2nd business day availability for checks, provided that the first $200 is available the next day after the date of deposit. Then there’s another other category, such as a “new account”, which is based on the customer level and not the account level. For established customers that have had accounts with your bank and are opening a new account, the account would not be considered a new account under Regulation CC. For true new accounts, under the new account rules, the account is considered new for the first 30 calendar days after it is established. New account customers are not subject to the local availability schedule and the $200 rule. Although, for new account deposits by cash and electronic payments, the first $5,000 shall be available the next business day.
Some banks provide for immediate or next day availability for all items deposited. This is an easy way to comply with Regulation CC, as your deposit system would not need to be set to have varying levels of holds (i.e., next day vs. two-day vs. five-day). However, there are certain risks associated with taking on this kind of funds availability. One thing to consider would be “ghost” deposits; providing immediate availability could increase your risk of loss from ghost deposits. Ghost deposits are where the customer deposits a fraudulent check, or deposits an empty envelope in an ATM machine and then proceeds to make an ATM withdrawal for cash.
No matter what your policy is, ensure that your disclosures are in line with your policy. If you make it a practice to give immediate or next day availability to all of your deposits, make sure that your disclosures say the same. There could be instances where the Bank has given a more liberal approach and made funds available next day for everyone, yet their disclosures indicate that funds will be available by the 2nd business day in line with Regulation CC. This is a “no-no”, even though it is more beneficial to the customer.
When is your cut-off time and when do you set the system to release the funds?
This is a big one, believe it or not. When you tell your customer that funds will be available on the 2nd business day after the date of deposit, you are telling them that their funds will be able to be withdrawn on that business date. When does that business date start? 9:00 a.m. or 6:00 a.m.? No; it starts at 12:00 a.m. (midnight). Therefore, you need to determine if your system is set properly. Let me give you an example: A customer walks in on Monday morning and deposits a check. The Bank system puts on a two-day hold and the funds will be available to the customer on Wednesday. The hold should come off at midnight on Tuesday. So, if the customer were to come to the ATM machine at 12:30 a.m. Wednesday morning, the funds would have to be available. I urge you to check your systems to determine if your holds are coming off at the appropriate times.
For large deposits, the rule is still to make the first $200 available the next business day, up to $5,000 the 2nd business day and the remainder on the 5th business day. You must keep in mind that the first $5,000 must be made available by the 2nd business day, and the amount in excess of $5,000 can be held. Therefore, in this case, you would make $200 available the next business day, an additional $4,800 available the second business day, and the remainder of the deposit in excess of $5,000 on the 5th business day. If the deposit is over $5,000, ensure you are not holding the entire amount.
Are you accepting mobile deposits?
If you are accepting mobile deposits, your policy and procedures should address these types of deposits and when they will be available. When will the deposits be considered “received” by the Bank? What is the cut-off time for deposits made on a mobile device? Are there limitations on the checks that can be deposited (e.g., double-endorsed checks, checks dated more than six months prior to date of deposit, etc.) which could result in an extended hold or be rejected altogether?
When do you pay interest on deposits?
Technically, under Reg CC, you do not have to pay interest on deposits until the day the funds are collected. This determination, however, might not sit well with your Board when it comes to customer service. On the other hand, you might save yourself a few bucks paying interest after the funds are collected. In any case, just ensure that your intentions are in line with your procedures.
ATM card limits
Under Regulation CC, a bank may extend by one business day the time that funds deposited in an account by one or more checks are available for withdrawal by cash or similar means, provided that $400 of that deposit is made available for withdrawal by cash or similar means no later than 5:00 p.m. on the business day on which the funds are available. “Similar means” includes electronic payments, such as ATM withdrawals. The $400 is in addition to the $200 subject to next day availability. That being said, if your bank is exercising this option to extend the availability of funds, you need to check your ATM withdrawal limits to ensure that they are set to no less than $600. I have seen banks with limits set at $500, and under Regulation CC, this would need to be raised to $600 to remain in compliance.
Extended Holds - Reasonable cause
In general, the next day availability schedule (except for cash and electronic payments) and the availability schedule do not apply to a check deposited in an account at the bank if the bank has reasonable cause to believe that the check is uncollectible from the paying bank. As per the regulation, “Reasonable cause to believe a check is uncollectible requires the existence of facts that would cause a well-grounded belief in the mind of a reasonable person. The reason for the bank's belief that the check is uncollectible shall be included in the notice required under paragraph (g) of this section.” For example, if you know that a particular customer has been repeatedly overdrawn, this could be reasonable cause for you to be cautious as to whether a check will clear or be returned. Make sure you document the reasonable cause on the customer’s notice where applicable; however, on your own copy of the notice, you can indicate “repeatedly overdrawn” as your reasonable cause, and perhaps attach documentation, such as the overdraft reports for which you are basing your decision on.
The best thing you can do is to review your policy and procedures, ensure that they are in line with your disclosures and practices, and ensure that controls are in place to mitigate the risk that your Board of Directors is willing to take. Ultimately, it’s their responsibility for your funds availability policy and management should be able to explain their views on what they feel the policy should consist of.
Senior Quality Control and Review Specialist
Sharon Geiger has 27 years banking experience, 21 of which have been involved in internal audit. She has extensive knowledge of all aspects of the banking industry, with a particular emphasis on regulatory compliance and identifying risks and controls. As QCR Specialist, she performs Quality Control Reviews to ensure all workpapers and reports are completed in compliance with the firm's standards.