I am a proud employee of a leading financial institution, (which for now shall remain nameless) but I am concerned we may not be properly complying with Reg CC.

Like many banks, customer deposits are subject to an "after the fact" back office review that sometimes results in a Reg CC exception hold being placed. When this happens we use the exception reason that we have "reasonable cause to doubt the collectibility of the check." However, most often our reason for doubting the collectiblity is that we were unable to verify funds. This is sometimes due to the payee bank's policy of not verifying funds OR because the report the back office area works from does not contain complete information. As a result, we have construed our inability to verify funds as "reasonable doubt."

As I understand Reg CC, the criteria for doubting collectibility is “the existence of facts that would cause a well-grounded belief in the mind of a reasonable person” that the check is uncollectible.

My concern is that we are placing these holds NOT be cause we have "a well grounded belief" but because we were not able to verify the funds. In other words, because of a problem on our end, we assume the check is uncollectible.

Have any of you run up against this type of scenario OR, better yet, discussed it with regulators?

I'm on a crusade to enlighten our compliance and risk services folks on this one . . .

Thanks for your insight!

Peter

Well, you may be asking the wrong group, because I'm not too sure how many of us are well-grounded. But in seriousness, I think you are right to question this practice. From a risk standpoint, how many of these checks that have a hold placed on them after the fact actually are returned, are the notices going out to the customer on a timely basis, and how much time is spent refunding overdraft fees on accounts where the checks are actually paid. I have found that unless we have some specific information regarding a check, it costs more to second guess the teller line than it's worth.

Inability to verify funds is not a reason to doubt collectability in my opinion. Of course, there is still plenty of debate on the topic. Check out this thread for more information.

I guess I would be in the other camp and I would not rely on the opinion of an unnamed source at the FDIC for a definitive answer on whether or not being able to verify funds constitutes "reasonable doubt". There are always a number of other factors to consider along with the inability to verify funds that goes into the equation, i.e., customer history, account longevity, etc. It's not black and white. But, I'm still in the camp that a blanket after the fact review of deposits is not worth the time.

I am with ricarey. Who knows your customers better than your tellers? The tellers deal with the customers on a daily basis and are accountable for making the wrong decision if the item comes back (it goes into their over/short). I may not always be a "happy camper" with them forgetting their compliance responsibilities, but I trust their judgement and respect their positions so I would rather see them make the "hold" decisions than a "back office" employee.

Opinions are mine not my employer

I am also a proponent of relationship based decisions on holds, and I would certainly consider inability to verify funds in aggregate with the other factors you mentioned. But I would not use that as my only reason, as I don't subscribe to 'proof by lack of evidence.'

Thanks for the link to the earlier discussion on this issue. It was very helpful.

I am surprised to find how many banks construe the inability to verify funds as a reason to justify the use of the "doubtful collectibility" exception hold. In my semi-reasonable mind, the lack of facts would not provide me with enough justification to feel comfortable placing the hold. Apparently that's not the case for everyone - including my own bank.

Thanks again!

Peter

Ric,

You've raised the very questions I have ben posing to our "risk" folks - and have yet to feel any less comfortable about our practice than I have before. Here's what I've found . . .

1. In my experience, none of the checks that have this type of exception hold on them are returned. Although I keep hearing how hard hit we are by fraud, I have not yet heard any kind of statistics that would support the placing of these types of holds.

2. Since these types of holds are placed by a back office area, the deposit is not reviewed until the following business day. The hold is placed and a noticed mailed to the customer by the end of the next business day after the date of the deposit. (I think we meet Reg CC guidelines in this respect.) However, since this review is not done locally, it is often a week or more before customers receive the notice. By then we've often returned more than a few checks.

3. While our bank does not charge overdraft fees until after the hold drops off, we often end up refunding the third party returned check fees they incur. On top of all that is the time (usually an hour or more) we spend trying to repair the damage done.

As you suggest, unless we have some specific information regarding a check, it costs more to second guess the teller line than it's worth.

Peter

So, how about this . . .

The back office area of my bank that review these deposits the following business day are working from a report that sometimes provides incomplete account numbers. As a result, when we contact the drawee banks they are unable to verify the item because we can't provide them with the information they need. So, as we do when the drawee bank has a policy of not verifying funds, we place the exception hold for the reason "we have information that leads us to believe that the check may not be paid." This doesn't sound like it could come anywhere close to passing the "reasonable cause" test.

Peter

I think that the actions you are describing are time consuming, costly, not very customer friendly, one reason why Reg CC was originally passed and would not be considered "reasonable". OK - there - I've said it. Please don't take offense.

One of the reasons "unable to verify funds" may be acceptable by some banks is because the compliance officer may have been to seminars where the "expert" says that reason is OK. I have been to two seminars conducted by well-known compliance companies where this reason has been offered as a recommendation.

Peter-
I am with rlcarey on this one, and I suspect that you are, too. But now I'm curious about the paramaters that you are using to generate your report. Is the decision to verify based on the check amount, locality, type (personal vs. business), etc? Keep in mind that the branch staff knows the customers better than the back office, and perhaps it would be best to train the branches to recognize situations that call for funds verification. Having the branches assess the check against the depositor's relationship and then forwarding items to the back office for verification woudl save you alot of time, money, AND angry customers.

Believe me - I won't take offense as I agree wholeheartedly. It's getting the fine folks in our Risk Services area to see the light that is my challenge!

Peter

IMHO, the recommendation from those "experts" that you impose a "collectibility" hold when you cannot verify funds borders on irresponsible. I find it hard to believe that the company sponsoring those sessions would back up the presenters in that opinion.

I should clarify that I'm on the branch side of this situation. Although I have spent more than a few years in back office operations, I am currently a branch manager who gets to clean up the messes generated by our bank's current approach.

As far as parameters, our back office area works from several different reports; some that capture info on deposits accepted at the teller window, others that capture ATM deposits, kiting reports, etc. It's the ATM and over the counter transactions that concern me most.

The decision to verify is based on a variety of factors, some of which you mentioned (check amount, locality, type, etc?) A couple of the more significant factors seems to be how long the account has been open and whether or not the deposit is for an amount much larger than the customer normally deposits. I fully understand that the branch staff knows the customers better than the back office but our risk services folks have come to believe that branch staff are too lenient in their judgement and that the back office can be more objective. (And don't get me started on how I fee about that!)

Peter

John - "IMHO"?

Peter - If the risk management people are pushing this then they must be doing on-going risk assessments - otherwise it's not risk managment, it's "best quess" or "personal preference" management. Ask then for their latest analysis on the number of holds placed verses the number of these checks returned. Then based on your historical collection statisitics on returned checks - figure your loss avoidance ratio on this process. This compared to the costs, i.e. third party refunds, negative customer impacts, etc. should provide some ammunition to question this practice with other members of management.

And how anyone could truly believe this reasoning meets the test of "the existence of facts that would cause a well-grounded belief in the mindo of a reasonable person" is beyond me!" Have NO FACTS is not the same as the EXISTENCE OF FACTS."

Peter

Interestingly enough, what you just suggested is along the lines of what I am thinking as well. Earlier today I contacted the manager of our Risk Services area and asked for just that type of information. It will be interesting to see what I find out . . .

Peter

As I understand the thought process behind the trainer's recommendation...it was OK to use in response to a failed attempt by the bank to verify funds. Apparently, because of "privacy" rules, the bank refused to verify funds. The trainer indicated that since the bank refused to verify funds, you could use the "unable to verify funds" reason. She also offered it as a recommendation for checks negotiated on Saturdays and other times when the paying bank was closed. She seemed to indicate that it could be the customer's plan to insure funds could not be verified.

Anyway, that's what I inferred from her comments. I should also add that we don't use that reason because I am personally not comfortable with it. If we are unable to identify a collectibility or exception reason, I train to place a case-by-case hold to buy yourself some time to verify funds just before the hold expires. Just make sure everyone's calendar is marked to verify the funds (somehow that's always when your kid gets sick and you're at the doctor's office!)

OK, IMNSHO. (In my not so humble opinion).

And I like Brenda's approach. The case by case hold for these items is much more defensible.