Compliance Blog

Editorial warning: Long blog post ahead.  Take several sips of coffee now.

Posted by Anthony Demangone

Regulation CC was created to place limitations on how long financial institutions can hold deposits.  The regulation, however, does provide some flexibility for financial institutions to extend holds in a limited number of situations.  One of those holds is the "reasonable cause to doubt collectibility" exception.  Let's take a look at this hold, shall we?

From the staff commentary, here's a nice overview of the exception:

In the case of certain check deposits, if the bank has reasonable cause to believe the check is uncollectible, it may extend the time funds must be made available for withdrawal. This exception applies to local and nonlocal checks, as well as to checks that would otherwise be made available on the next (or second) business day after the day of deposit under §229.10(c). When a bank places or extends a hold under this exception, it need not make the first $100 of a deposit available for withdrawal on the next business day, as otherwise would be required by §229.10(c)(1)(vii). If the reasonable cause exception is invoked, the bank must include in the notice to its customer, required by §229.13(g), the reason that the bank believes that the check is uncollectible.

That sounds great, right?  If your tummy tells you the check might be problematic, you can slap an extended hold on it, right?  Not so fast.

The regulation provides that the determination that a check is uncollectible shall not be based on a class of checks or persons. For example, a depositary bank cannot invoke this exception simply because the check is drawn on a paying bank in a rural area and the depositary bank knows it will not have the opportunity to learn of nonpayment of that check before funds must be made available under the availability schedules. Similarly, a depositary bank cannot invoke the reasonable cause exception based on the race or national origin of the depositor.

Some credit may have been hit hard by bogus cashier's checks.  It might be tempting to institute a longer hold on all cashier's checks until you can get a handle on the problem.  But this guidance prohibits you from doing so. And what exactly is "reasonable doubt?"  The Fed gives several examples.  And if you look at these examples, a trend becomes clear.  There is some information about that specific check that raises the reasonable doubt.

If a bank received a notice from the paying bank that a check was not paid and is being returned to the depositary bank, the depositary bank could place a hold on the check or extend a hold previously placed on that check, and notify the customer that the bank had received notice that the check is being returned...

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...

The fact that a check is deposited more than six months after the date on the check ( i.e. a stale check) is a reasonable indication that the check may be uncollectible, because under U.C.C. 4–404 a bank has no duty to its customer to pay a check that is more than six months old. Similarly, if a check being deposited is postdated (future dated), the bank may have a reasonable cause to believe the check is uncollectible, because the check may not be properly payable under U.C.C. 4–401...

There are reasons that may cause a bank to believe that a check is uncollectible that are based on confidential information. For example, a bank could conclude that a check being deposited is uncollectible based on its reasonable belief that the depositor is engaging in kiting activity. Reasonable belief as to the insolvency or pending insolvency of the drawer of the check or the drawee bank and that the checks will not be paid also may justify invoking this exception...

As always, it is a good idea dive into the Regulation and Staff Commentary for additional details.

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Yesterday, Senator Dodd unveiled his 1,336 page reg reform bill.  Here's an 11-page summary from the Senate Banking Committee.  President Obama was supportive.  Senator Shelby (R-Ala.) was less so, urging the Senate to slow down and take time to review the massive bill.  Read the NAFCU Today article about it here.  Here are our initial thoughts:

NAFCU continues to oppose any independent consumer protection entity with authority over credit unions, as credit unions did not cause this crisis and should not be subject to the additional burden imposed by another regulator. While the bill as proposed has some improvements from the House-passed language, all credit unions would still be subject to rules written by the new consumer financial protection bureau, and credit unions holding over $10 billion in assets would also be subject to the examination and enforcement powers of the new regulator. As the bill is currently written, this $10 billion line is not indexed for inflation. This means that this arbitrary threshold will continue to capture more credit unions as they grow over time.

NAFCU is seeking to increase the $10 billion threshold for examination and enforcement to $50 billion in assets. The $10 billion line arbitrarily splits the credit union industry and leaves some credit unions subject to the examination and enforcement burdens of a new regulator. NAFCU fought against this division when the House Financial Services Committee took up its financial regulatory reform legislation last November, and was successful in its efforts to pass an amendment that increased the $10 billion threshold to $50 billion for paying into the Systemic Resolution Fund used to wind down large financial companies. NAFCU will be seeking to establish $50 billion as the line for consumer protection provisions also, with an adjustment to account for inflation. With the threshold at this level, no credit union will be subject to the additional burden of another regulator's examination and enforcement powers.