Understanding Check Clearing Laws: Your Rights And The Bank's Limits

Banks are legally allowed to place a hold on deposited funds, including cheques, for a certain period of time. The duration of the hold depends on various factors, such as the type of cheque, the bank, and federal regulations. While Regulation CC provides guidelines for hold periods, banks have some discretion in their policies, and consumers should be aware of potential delays when depositing cheques. Understanding the specific hold policies of your bank is essential to managing your finances effectively.

Regulation CC and the EFAA

In 1987, the US Congress passed the Expedited Funds Availability Act (EFAA) to address concerns about the length of holds banks were placing on cheques deposited by their customers. The EFAA establishes maximum permissible hold periods for cheques and other deposits. The Federal Reserve has implemented the EFAA as Regulation CC, which offers a guideline for banks for holding deposited funds, including cheques. Banks are required to follow this regulation.

Regulation CC (12 CFR Part 229) implements two laws: the EFAA and the Check Clearing for the 21st Century Act (Check 21). The former was enacted in August 1987 and became effective in September 1988, while the latter was enacted in October 2003 and became effective on 28 October 2004. Regulation CC sets forth the requirements that credit unions make funds deposited into transaction accounts available according to specified time schedules and that they disclose their funds availability policies to their members. It also establishes rules designed to speed the collection and return of unpaid cheques.

The four main types of deposit hold types are statutory, large deposit, new account, and exception holds. Statutory holds can be placed on almost any deposit. Under this type of hold, the bank must make the first $200 of the deposit available on the next business day after the deposit is made, the second $600 available on the second business day, and the rest on the third business day. Large deposit holds are placed when the total of deposits made in one business day is more than $5,000. The availability rules for the first and second business day after the deposit are the same as for a statutory hold, but on the third business day, the bank must make $4,800 of the deposit available, with any remaining amount made available on the seventh business day after the deposit. New account holds are placed on deposits made to accounts that are less than 30 days old. These holds are lifted on the ninth business day after the deposit. Exception holds are used for accounts that have been frequently overdrawn or when banks have reason to suspect that a deposit is not legitimate. In rarer cases, they may be used if the bank branch suffers a power outage or a computer system failure.

Regulation CC also allows banks to send cheques electronically (rather than in paper form) to banks with which they have agreements to do so, and to send substitute cheques to banks with which they do not.

Check fraud

The length of time a bank can hold a check varies according to the type of check, the bank itself, and federal regulations. The Federal Reserve requires that a bank hold most checks before crediting the customer's account for no longer than a "reasonable period of time," which is generally accepted to be two business days for a same-bank check and up to six business days for a check drawn from another bank.

• Fake check scams: Scammers send victims a fake check, usually for more than they are owed, and ask them to deposit it. They then instruct the victim to send some of the money back, claiming it was an overpayment. By the time the bank discovers the check is fake, the scammer has disappeared with the money, leaving the victim responsible for paying the bank back.
• Mystery shopping: Scammers pretend to hire victims as mystery shoppers and send them a fake check to evaluate a retailer that sells gift cards or wire transfer services. The victim is asked to evaluate the service and send back the remaining money, but the check bounces, leaving them responsible for the funds.
• Personal assistant jobs: Scammers advertise personal assistant jobs and send the victim a check to buy gift cards and send the PINs. The scammer then uses the PINs, leaving the victim without the money when the bank identifies the check as fake.
• Car wrap advertising: Scammers offer victims the opportunity to advertise on their car and provide a fake check. The victim is instructed to deposit the check and send money to installers, but the installers are not real, and the money is lost.

If you suspect you have received a fraudulent check or have been a victim of check fraud, it is important to take prompt action. Inform your bank about the transaction, dispute any unauthorized charges, and consider closing your account and opening a new one. Report the fraud to the relevant authorities, such as the Internet Crime Complaint Center (IC3), the Federal Trade Commission (FTC), the U.S. Postal Inspection Service (USPIS), or your local law enforcement agency.

Doubtful collectability

Banks are permitted by law to hold funds for a period of time when they accept a check for deposit. The amount of time a bank can legally hold a check depends on several factors, including the type of check, the bank, and federal regulations.

Under Regulation CC, banks must provide customers with a reasonable period to make funds from a customer's account available, which generally ranges from one to five business days. The Check Clearing for the 21st Century Act, passed in 2003, also under Regulation CC, enabled banks to send electronic checks to each other. This has allowed many banks to offer new services to customers.

However, a bank may hold a check for longer if it has reasonable cause to doubt the collectability of the check. This is referred to as "doubtful collectability." Doubtful collectability can occur in several situations, including:

• Postdated checks: These are checks that are dated for a future date and may be held by the bank until that date or until they have reasonable assurance that the funds are available.
• Stale-dated checks: Checks that are dated six months prior or more may be considered stale-dated, and the bank may doubt the validity of the check.
• Non-honored checks: If the paying institution has deemed that it will not honor the check, the bank depositing the check may have reasonable doubt about its collectability.
• Emergency conditions: During natural disasters or communications malfunctions, banks may hold checks to ensure proper processing.
• Overdrawn accounts: If an account is repeatedly overdrawn, a bank may doubt the collectability of a check and place a hold on the funds.

In the case of doubtful collectability, banks must provide notice to customers, including the specific reason for the hold. While this hold is in place, the bank will verify the check to ensure it will clear. This process can take time, and it is important for customers to understand when the money will be available to them.

Bank policies

Regulation CC, which includes the Expedited Funds Availability Act (EFAA) of 1987, offers guidelines for banks holding deposited funds, including checks. The EFAA mandates that local checks may be held for no longer than two business days, and that the first $225 of a non-"next-day" check must be available by the next day. The Federal Reserve has set rules for check deposits, with amounts from $226 to $5,525 available within two business days, and amounts over $5,525 generally available on the seventh business day. The portion of a deposited check that exceeds $5,525 can be held for two to five business days, and the Federal Reserve requires that a bank hold most checks for no longer than a "reasonable period of time," which is generally considered to be two business days for a same-bank check and up to six business days for a check drawn on another bank.

Banks can hold checks for longer in certain circumstances, including when an account is repeatedly overdrawn, when there is reasonable doubt about the collectability of the check, or in cases of emergency such as natural disasters. Additionally, banks may place a longer hold on a check if the account has been open for less than 30 days, or if the customer redeposits checks that were previously returned.

It is important to note that banks may grant faster access to funds through mobile deposits or other means, and that the time it takes for a check to clear can vary depending on the bank and the type of check.

Federal regulations

Banks are allowed to impose longer "reasonable" hold periods on deposits under specific circumstances, such as when the account has been open for fewer than 30 days, the account has been overdrawn six or more times in the last six months for amounts under $5,525, or just twice in the last six months for higher amounts. Additionally, banks can hold checks from accounts that have been repeatedly overdrawn, defined as having a negative balance on six or more banking days in the previous six months or a negative balance of $5,000 or more on two occasions during the same period. Banks must provide notice to customers in such cases, including the specific reason for the hold.

If a bank holds a check for longer than allowed by law or its policies, it may face penalties from regulatory bodies and potential legal action from the customer. Customers may experience financial difficulties due to delayed access to funds, such as bounced checks or an inability to pay bills. To avoid issues, it is recommended to deposit or cash checks as soon as possible, keep records of transactions, and regularly review account statements.

Frequently asked questions