Expedited Funds Availability/Check-Holds

Expedited Funds Availability/Check-Holds
Pauline Smale
Economic Analyst
Government and Finance Division
Summary
In 1987, Congress passed the Expedited Funds Availability Act (EFAA),¹ which
addressed the check-hold policies of depository financial institutions for various types
of transaction accounts. The act was meant to ensure timely access to deposited funds
and requires institutions to disclose to customers their funds availability policies.
Federal Reserve Regulation CC implements the funds availability provisions and
includes a schedule with maximum time limits for withholding funds.
The 2003 enactment of P.L. 108-100 (the Check 21 Act)² refocused attention on
the check-hold policies of financial institutions. This act made it easier for financial
institutions to convert paper checks into electronically generated images and was aimed
at making the clearing process between institutions faster and more efficient. The law
did not require institutions to generate or receive check images, but required them to
accept substitute checks created from electronic images. Consumer advocates were
concerned that the implementation of Check 21 would result in money clearing out of
accounts faster without speeding up the availability of funds deposited into accounts.
Check 21 required the Federal Reserve to study and evaluate the impact of the act on the
clearing process. In April 2007, the Federal Reserve issued a report to Congress on the
results of such a study. The Federal Reserve recommended making no changes to the
prevailing funds availability policies. Consumer advocates continued to urge Congress
to reduce check holds by amending the EFAA. On September 16, 2008, the House
Financial Services Committee ordered to be reported the Expedited Funds Availability
Dollar Limits Adjustment Act of 2008 (H.R. 6871). This bill would make adjustments
to the check-hold provisions of the EFAA.
This report will be updated as events and legislation warrant.

¹ P.L. 100-86; 101 Stat.563.
² 117 Stat.1177.

Background
The intent of the Expedited Funds Availability Act (EFAA) of 1987 was twofold:
first, to ensure that account holders have timely access to deposited funds; and second,
that depository financial institutions provide to their customers clear disclosure about
check hold policies. The practice of placing holds on accounts was developed to protect
an institution in the event a deposited check was returned unpaid. Provisions of the 1987
act addressed the need for improvements in the check collection and return system to
counter the effect of reduced hold periods.
The potential costs to account holders from lengthy hold periods and insufficient
disclosure of hold policies provided the impetus for this legislation. During a hold period,
customers are unable to make withdrawals by check or other means against those
deposited funds on which the hold was placed. If a financial institution receives a check
written against an account before the hold is lifted and the account has insufficient funds
because of the hold, it can choose to cover the check and charge the customer an
“overdraft” fee. Alternatively, the institution can return the check without paying it and
charge the account holder a “bounced check” or “nonsufficient funds” fee. The third party
check recipient may charge the account holder an additional “returned check” fee. As it
is possible for more than one check to be presented during the hold period, the fees can
accumulate quickly.
The Federal Reserve’s Regulation CC implements the EFAA.³ Regulation CC
applies to all transaction accounts (as defined by Federal Reserve Regulation D) and it
extends to both consumer- and business-held deposit accounts. The regulation does not
require check holds. The check hold policies of depository financial institutions can vary
within the restraints of maximum time frames that are outlined in a schedule. The
regulation also provides for longer hold periods under “exception” situations. Regulation
CC contains rules for disclosure of funds availability policies and to expedite the return
of unpaid checks by institutions.
The schedule is measured in business days following the banking day of deposit, and
all references are to the maximum number of days that a financial institution can hold a
check deposit. The first $100 of any check deposit must be made available the first
business day following the day of deposit. Several types of check deposits are subject to
“next-day availability,” which means that funds must be available the first business day
following the banking day of deposit. In this category are U.S. Treasury checks and the
following checks when deposited in person: cashier’s, certified, or teller’s checks, U.S.
Postal Service money orders, Federal Reserve Bank or Federal Home Loan Bank checks,
state or local government checks, and checks drawn on another account held by that
institution (“on-us checks”). The time period is extended when deposits are made at an
ATM (automated teller machine). If the ATM is owned by the account holder’s financial
institution, the funds must be available by the second business day. Deposits made at
ATMs owned by other institutions must be available by the fifth business day.

³ 12 CFR 229. The full text is available at [http://ecfr.gpoaccess.gov/cgi/t/text/text/-
idx?c=ecfr&sid=635f26c4af3e2fe4327fd25ef4cb5638&tpl=/ecfrbrows e / T itle12/12cfr229_
main_02.tpl] and by way of [http://www.federalreserve.gov/bankinforeg/relisting.htm#CC].

In general, if a check is not subject to “next day availability” the clearing schedule
(except for the first $100) depends on whether the check is local or nonlocal. If the
account holder’s institution is in the same check processing region as the paying
institution,⁴ the check is local. Funds deposited by local checks must be made available
for withdrawal by the second business day and alternatively, funds from nonlocal checks
must be made available by the fifth business day.
Regulation CC also permits financial institutions to impose “exception” holds for
certain types of deposits or accounts. Included in the exception category are large deposits
(greater than $5,000), redeposited checks, deposits to accounts repeatedly overdrawn,
when the institution has a reasonable cause to doubt the collectibility of the check,
emergency conditions, and new accounts (open less than 30 days). In general, the
extended period of time for on-us checks is one additional business day (for a total of two
days), for local checks five additional business days (for a total of seven days), and for
nonlocal checks six additional business days (for a total of eleven days). However, the
financial institution shall make $400 of the deposited funds available by 5:00 pm on the
business day on which the funds would have cleared if the exception had not been
imposed. The $400 is in addition to the first $100.
Regulation CC requires financial institutions to provide customers with a written
disclosure of their funds availability policies prior to opening a transaction account. If the
availability terms on an existing account are changed, the account holder must be
provided with a new disclosure 30 days in advance unless the change expedites the
availability of funds, in which case, notice may be given no later than 30 days after
implementation. In addition, notices must be posted in each location where employees
accept deposits and at all ATMs. The customer must be notified when an exception hold
is placed on a deposit. Model disclosure statements are provided.
The regulation contains provisions to speed up the check-return process in an effort
to ensure that institutions are advised when a check is being returned before the deposited
funds are made available. Options and methods are addressed in Subpart C of Regulation
CC. In general, institutions are encouraged to use the most efficient path to route the
return and to provide for the automated processing of returned checks. Finally, the Board
of Governors of the Federal Reserve is directed by Section 603 (d) (1) of the EFAA to
make reductions in the hold time periods established in Regulation CC as warranted by
improvements in the check clearing system.
Issues Raised By Check 21
The Check Clearing for the 21^st Century Act (P.L. 108-100),commonly referred to
as Check 21, was enacted on October 28, 2003, to foster innovation in the payments
system and enhance its efficiency by facilitating the use of electronic check processing.⁵

⁴ Party responsible for making the payment of the amount written on a check.
⁵ For more information, see CRS Report RL32668, Electronic Banking: The Implementation of
the Check 21 Act, by Walter W. Eubanks and CRS Report RS22525, Electronic Banking: The
Post-Check 21 Payments System, by Walter W. Eubanks.

The implementation of the act has raised concerns with the current check-hold time
periods permitted by Regulation CC and whether they should be adjusted.
Overview of Check 21 Act
Check 21 deals with the check collection process, and its purpose is to enable
financial institutions to handle more checks electronically. The law does not require
institutions to adapt new collection procedures or generate digital check images, but it
does require institutions to accept a new negotiable instrument, a paper “substitute check,”
created from the electronic information captured from the original paper check. It was
anticipated that the Check 21 Act would not result in an immediate transformation, but
in a gradual evolution away from a paper-based payments system. Therefore, the benefits
from electronic check processing might not be immediately realized.
P.L. 108-100, the Check 21Act, required the Federal Reserve to conduct a study of
^!the percentage of total checks cleared in which the paper check is
not returned to the paying bank;
^!the extent to which banks make funds available to consumers for
local and nonlocal checks prior to the expiration of maximum hold
periods;
^!the length of time within which depository banks learn of the
nonpayment of local and nonlocal checks;
^!the increase or decrease in check-related losses over the study
period; and
^!the appropriateness of the time periods and amount limits
applicable under sections 603 and 604 of the Expedited Funds
Availability Act, as in effect on the date of enactment of [the] Act.⁶
The act also required the Board to report the results of the study, together with
recommendations for legislative action. The Board submitted the required report to
Congress in April 2007. (See discussion below.)
Check Processing Issues
Consumer advocates have raised several issues with Check 21. A major concern has
been that although the electronic check processing facilitated by this act would greatly
reduce the time it takes to deduct money from a customer’s account, the act would not
improve the account holder’s access to the deposited funds. Therefore, they have argued,
the benefits from the increased use of electronic processing would accrue mainly to banks.
Legislation (H.R. 799) to address this potential imbalance was introduced in the 109^th
Congress on February 15, 2005. H.R. 799 would have amended the Expedited Funds
Availability Act to reduce the maximum time frames for hold policies. Other adjustments
addressed in the legislation included raising the threshold for large check exceptions from
$5,000 to $7,500, treating Saturday as a business day if accounts are debited on Saturdays,
and requiring institutions to process credits before debits. The bill was referred to the
House Committee on Financial Services, but no further action was taken.

⁶ P.L. 108-100, 16.

In April 20, 2005, the House Committee on Financial Services, Subcommittee on
Financial Institutions and Consumer Credit of held an oversight hearing on the
implementation of the Check 21 Act.⁷ Among the issues addressed was whether to revise
funds availability schedules. The Federal Reserve testified that material improvements
from Check 21 had not yet been realized. The banking industry representatives testified
that the transition to electronic check processing would be gradual, and that the provisions
of Check 21 facilitate a gradual and orderly change. In addition, check hold policies
continued to provide protections against check fraud.
The consumer advocate testified that the Check 21 Act and advances in technology
have facilitated more efficient check processing. According to this testimony, changes
to the funds availability schedules should not have to wait until the vast majority of
checks are processed electronically. Congress was urged to reduce check holds by
amending the EFAA if the Federal Reserve’s 2007 report did not recommend changes in
hold times.
April 2007 Federal Reserve Report
In April 2007, and pursuant to P.L. 108-100, the Federal Reserve submitted a report
to Congress on the effects of the Check 21 Act on the nation’s check collection system.⁸
In March 2006, the Board of Governors of the Federal Reserve System conducted a
survey of the banking system to assess whether there had been sufficient improvement in
the check collection and return system to support changes to the funds availability
schedules. Based on the survey findings and other research gathered by the Board, the
Board recommended making no changes to the current funds availability policies.
At the time of the survey Check 21 had been in effect for 17 months. The March
2006 survey identified a slow-paced adoption of Check 21 by financial institutions. The
survey results indicated that approximately 93% of all checks paid involved a paper
check.⁹ The Federal Reserve’s report did state that by January 2007 the nation’s banking
industry had experienced a significant increase in the use of electronics to collect and
present checks for payment. The report also concluded that Check 21 was an important
catalyst for potential change but much broader adoption of new technologies and
processes must occur before check return times can decline appreciably.
The report also addressed the effect on check holds of the consolidation of the
Federal Reserve’s check-processing sites. The Federal Reserve had begun a program of
reducing the check-processing infrastructure in response to declining check volumes.

⁷ U.S. Congress, House Committee on Financial services, Subcommittee on Financial Institutions
and Consumer Credit, Implementaion of the Check Clearing for the 21^st Century, 109^th Cong., 1^st
sess., April 20, 2005, serial no. 109-20 (Washington, DC: GPO,2005). Available at
[http://financialservices.house.gov/ archive/hearings .asp@f ormmode=det a i l & h e a r i n g= 374.html ].
⁸ Board of Governors of the Federal Reserve System, “Report to the Congress on the Check
Clearing for the 21^st Century Act of 2003,” April 2007 (Washington, DC:2007). This report can
be viewed at [http://www.federalreserve.gov/boarddocs/RptCongress/check21/check21.pdf].
⁹ Ibid. p. 10.

When check-processing regions are combined into one larger region, the result is a change
in the classification of a number of deposited checks from nonlocal to local. This
reclassification reduces the maximum permissible hold periods for that volume of checks
now deemed local. The report stated that additional consolidations were expected.
Finally, the Board would continue to monitor the check collection and return system
and would use its existing authority, consistent with EFAA, to accelerate funds
availability schedules when the evidence warranted. As mentioned above, the Board of
Governors of the Federal Reserve is directed by Section 603 (d) (1) of the EFAA to make
reductions in the hold time periods established in Regulation CC as warranted by
improvements in the check clearing system.
H.R. 6871
The Expedited Funds Availability Dollar Limits Adjustment Act of 2008 (H.R.

6871) was introduced on September 11, 2008, by Representative Carolyn Maloney, co-

sponsored by Chairman Barney Frank, and referred to the House Committee on Financial
Services. H.R. 6871 would amend the EFAA with the intent to improve the account
holder’s access to their deposited funds. Representative Maloney stated that the Federal
Reserve Board was supportive of the dollar adjustments contained in the bill.¹⁰
The bill would make a one time adjustment to two withdrawal dollar amounts
addressed by Section 603 of the EFAA; it would
^!make an adjustment to the current requirement that the first $100 of any
check deposit be made available the first business day following the day
of deposit by increasing the amount from $100 to $175; and
^!change the amount of funds financial institutions must make available
when imposing an “exception” hold on deposits from $400 to $700.
In addition, H.R. 6871 would require the Federal Reserve Board to make regular
future adjustments based on inflation.
On September 16, 2008, the committee ordered the bill to be reported. No further
action has been taken.

¹⁰ See September 16, 2008, Rep. Maloney press release available at
[http://malone y.hous e.go v/ i ndex.php?opt i on=com_ cont ent &t a s k=vi e w&i d =1715&It emi d =61].