Compliance Blog

Today’s blog is going to discuss the reasonable cause to doubt collectibility exception under Regulation CC. I’ve received quite a few questions on this in the past, so I thought it might be a good idea to go over this particular exception in more depth.

First, just to provide a little background, section 229.13 outlines exceptions to the general availability schedules. These exceptions allow credit unions to extend the hold period for deposits that carry a higher risk to the institution due to their size, collectability, or the member’s deposit history (or lack thereof). Please note, the exceptions do not apply to cash and electronic payments.

However, if the deposits are not made with cash or electronically, section 229.13  of Regulation CC provides six exceptions to the general availability schedules. The six exceptions include:

1. New accounts;
2. Large deposits;
3. Redeposited checks;
4. Repeated overdrafts;
5. Reasonable cause to doubt collectability; and
6. Emergency conditions.

Sometimes we hear from credit unions regarding fraud, and they ask what can possibly be done in those situations. Well, notably, there is an exception if the credit union has reasonable cause to believe the check is uncollectible. Section 229.13(e) provides that:

           “(e) Reasonable cause to doubt collectibility —

(1) In general. Sections 229.10(c) and 229.12 do not apply to a check deposited in an account at a depositary bank if the depositary bank has reasonable cause to believe that the check is uncollectible from the paying bank. 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. Such belief shall not be based on the fact that the check is of a particular class or is deposited by a particular class of persons. 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.

(2) Overdraft and returned check fees. A depositary bank that extends the time when funds will be available for withdrawal as described in paragraph (e)(1) of this section, and does not furnish the depositor with written notice at the time of deposit shall not assess any fees for any subsequent overdrafts (including use of a line of credit) or return of checks of other debits to the account, if—

(i) The overdraft or return of the check would not have occurred except for the fact that the deposited funds were delayed under paragraph (e)(1) of this section; and

(ii) The deposited check was paid by the paying bank.

Notwithstanding the foregoing, the depositary bank may assess an overdraft or returned check fee if it includes a notice concerning overdraft and returned check fees with the notice of exception required in paragraph (g) of this section and, when required, refunds any such fees upon the request of the customer. The notice must state that the customer may be entitled to a refund of overdraft or returned check fees that are assessed if the check subject to the exception is paid and how to obtain a refund.” (Emphasis added).

However, as mentioned above, the belief must be based on a set of facts particular to the check and not on the fact that the check is of a particular class. The commentary provides the following:

“If a depositary bank invokes any exception other than the new account exception, the bank may extend the time within which funds must be made available under the schedule by a reasonable period of time. This provision establishes that an extension of up to one business day for “on us” checks, five business days for local checks, and six business days for nonlocal checks and checks deposited in a nonproprietary ATM is reasonable. Under certain circumstances, however, a longer extension of the schedules may be reasonable. In these cases, the burden is placed on the depositary bank to establish that a longer period is reasonable.” (Emphasis added).

Please note, the exception does not specify a maximum hold time. Credit unions may want to consult with in-house or local counsel for further guidance regarding specific scenarios the credit union may encounter.  

However, the commentary provides a few examples of “circumstances under which the reasonable cause exception may be invoked”. One such example is the following:

“ b. The depositary bank may have received information from the paying bank, prior to the presentment of the check, that gives the bank reasonable cause to believe that the check is uncollectible. For example, the paying bank may have indicated that payment has been stopped on the check, or that the drawer's account does not currently have sufficient funds to honor the check. Such information may provide sufficient basis to invoke this exception. In these cases, the depositary bank could invoke the exception and disclose as the reason the exception is being invoked the fact that information from the paying bank indicates that the check may not be paid.” (Emphasis added).

Furthermore, section 229.19(c)(2) of Regulation CC indicates that a credit union may be able to craft its policies in such a way that Regulation CC does not affect a credit union’s right “to accept or reject a check for deposit.” The regulation provides credit unions with the flexibility to formulate their policies in such instances and to communicate this to its membership.

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