Even though this may get a bit technical and boring it explains one way banks use the system denying access to your money while they profit from it. In order to illustrate the problem I will use a real life case that just happened to me. I will quote chapter and verse the banking regulations they both use and abuse to accomplish this. I will give you an example of how this works. Be patient my explanation is as confusing as Fed Reserve Regulation CC itself.
My example As some of you know I recently retired. Part of my financial plan was to pay all of my outstanding debts and retire debt free. To that end I took a large cash distribution from my retirement savings with the intent of depositing it in one of my checking accounts and paying all my debts. We will follow that check to my bank to explain how they do it. To begin the story I have essentially Two checking accounts which I use. One at Bank of (A) which is little used and in fact sometimes months with no activity. The second account at Bank of (B) I use for everyday activities and is always in use. In this case I decided that I would deposit the check at Bank of (A) and pay all my accounts of from there this decision was based on the fact two of the accounts I was paying off were at the same bank so it would be convenient to do so.
On Dec 1 first I deposited the funds at the branch office via a teller transaction. When I did this I was informed that I would only have immediate access to the first $100 of the funds with access to the next $4900 by 5PM on 12/08/2008 and the remaining tens of thousand after 5PM on 12/10/2008. I was told that this was “Required” by bank regulations. I at the time questioned it and essentially was told by the branch manager that was the way it was take it or leave it, so I had no choice but to go along with it. When I got home I called the big 800 number in the sky for Bank of (A) and spoke to a person there who essentially said it was the branches right to hold the funds and it really didn’t matter what I wanted and in a rather rude voice told me I should read Federal Reserve Regulation CC.
Now this is where I got upset or more precisely went to the full livid state of anger, for you see I have read regulation CC as well as something called Check 21 rules which are related. and know this is how the game is played.
Understand firstly that in Reg CC part 229 which covers this type of thing all references to holding funds use the terms “MAY” or “Not Later Than” so all holds by language are at the discretion of the Bank and not “Required” and the term “Reasonable” is also used in defining duration.
Because my deposit was a large one it was reasonable to place a hold on the funds that is not what is disputed. The duration and lack of professionalism on the part of the bank when dealing with it and me is the contention and my reason for pointing out this moneymaker for the bank. I will describe step by step what I think is wrong and invite any knowledgeable banker to point out my errors. I wager there will be no response.
First Reg CC does say that at least the first $100 must be available and the next $4900 “No later than” 5PM on the 5th business day and the remainder no later than the 7th business day. The bank can hold the funds for one additional day if the account has been overdrawn by the customer regularly (Note: this does not mean overdrawn by the banks imposition of fees in fact there is an exception for the bank to collect the overdrafts before the hold is released.) In any event the bank must notify the customer in writing at the time of deposit of the hold extension and the reason. Even further pre-printed deposit slips are supposed to have a notice that not all funds may be immediately available. Funds over first $5000 can be held for up to 7 days from deposit.
Now for how the banks get rich on your money. I will use my case to describe what happens. The check I deposited was drawn on an Illinois bank so it clears via a different Fed Reserve Region and so it is a “Non-Local” item under the rules the bank teller deposited the check on 12/1 business. That night the check would have been transmitted electronically to clear the other bank. (Checks for the most part no longer transit the country for clearing today imagery is used) By virtue of that I believe this is now an electronic transaction which under the rules should mean my funds were cleared probably on the 3rd or 4th of December. If in fact it was electronic the funds are required to be available on the next business day. (5th) The bank however treats the transaction as an old fashioned paper transaction soully because it started with a paper demand. Because of that banks place the hold at the maximum when deposited. That gives the bank up to 7 days of use of the funds which belong to the depositor. in my case the 6 figure number probably generated a couple of hundred dollars as well as by delaying the ability of me to pay the 2 other accounts off another couple of hundred if I had not spoken with those account managers and got them to wave the interest. This free use of the funds made the bank money denying me use of the funds. Now if I multiply Bank of (A)’s number of held deposits which on any given week would probably be in the thousands they make a lot of money at our expense.
Some other shortfalls in Reg CC
Appendix A defines which banks clears in which regions The consumer normally does not have access to this info so the decision on which bank to deposit in to get the most rapid service does not exist.
Because the regulation has wide latitude banks take advantage by holding funds beyond what is necessary. In addition Managers differ in views and some are not as flexible with customers as they should be.
In fact consistency does not even make it through the example transaction. The teller told me the first $5000 would be available 12/08 but the customer service rep online email states 12/6 but they were not so I have no Idea when the funds will actually be available.
If I am wrong in my assertions I invite any qualified banker to explain it to me here. Just click on the comment button and explain away.
A perfectly good regulation with the designed intent to protect both the bank and consumer has turned into an instrument to take the consumers fund availability and give it to the bank for a period. Not fair in my opinion