If we receive notice that a large item is being returned, what are our rights as far as placing a hold on the account into which the item being returned was deposited? Does this fall under Reg CC? In many cases notice is given after an exception hold would have expired (especially true of items drawn on Canadian banks). Can we just charge back the amount of the item to the customer, even if it puts the customer into an overdraft situation and not worry about placing holds at all?

This is no longer a Reg CC issue, because you are not delaying availability of a deposited item. You are charging back a previously deposited item. Whether you should place a hold until the item arrives or charge the account immediately will most likely depend on your overall relationship with this depositor and the reason for return. One other thing to keep in mind is your midnight deadline. Once you have notice of the return, you're on the clock for informing your depositor, even before the item gets back to you.

Where can I find the rules that cover this type of situation? Are they part of the UCC or part of one of the complince regulations? Thanks for your help!

You will find it in the UCC, Article 4. Here's a link: http://www.law.cornell.edu/ucc/4/overview.html