Regulation CC

Regulation CC refers to the rule introduced by the Federal Reserve with respect to the duration until when the banks can hold a check deposited by customers. The sole purpose of this regulation is to ensure that financial institutions and credit unions process the checks on time, maintaining transparency.

The origin of banking Regulation CC dates back to August 1987, when Congress passed the Expedited Funds Availability Act (EFAA), addressing the need for a rule detailing the maximum permissible holding time for checks and other deposits. It also emphasized returning any unpaid checks immediately to the paying bank. 

Regulation CC provides guidelines for clarity on the duration for which a bank can hold a check deposited by the customers, along with advocating the maintenance of transparency with the customers. These two provisions have been derived from the EFAA and the Check Clearing for the 21st Century Act introduced in 2003, which combinedly form the basis of the Regulation CC. 

According to this rule, if a bank receives dozens of checks, they must process them within the stipulated time. Also, it sets the requirements for the timely availability of deposits (funds) made by customers in their respective transaction accounts.  Likewise, any unpaid checks should be returned immediately. 

The use of regulation CC holds prime importance, given the transparency with customers it advocates for. The banks, per this regulation, must inform customers when the funds will be available for withdrawal. This regulation requires the financial institutions to have enough deposits in the customer's account, which can be further processed for check clearance to avoid payment failure because of a lack of funds in the customer's transaction account.

Credit unions and financial institutions must establish procedures and provide a copy to the employees involved. They must acknowledge the holding period for checks issued and notify customers of their funds being held. The Federal Reserve has provided a reasonable extended hold, which is:

• One business day (after the day of deposit) for the same bank checks
• Five business days for checks to be cleared in local banks
• Six business days for non-local checks

The history of this regulation belongs to the late 1980s when Congress felt the urge to address the concerns about the length of the holding period when customers deposited checks in the banks. As a result, in August 1987, Congress passed the Expedited Funds Availability Act (EFAA) to regulate the same. However, it was officially made public in September 1988. This EFAA 21 Act became a subpart B of Regulation CC and 12 Code on Federal Regulations (CFR) part 229. With this regulation, the nation's check-clearing system received more flexibility, including speeding up the return of unpaid checks. 

In the later stages (in the 1990s), the Board of Governors of the Federal Reserve System (Board) initiated the same-day settlement rule for most transactions to match the speed of private banks. Further, these same-day settlements and check-return rules became inclusive of Subpart C of this regulation. Considering this effect, on October 28, 2003, Congress passed the Check 21 Act, curated specifically for checks. This Act allowed financial institutions to process checks electronically by creating a substitute check. In 2004, the Check 21 Act became Subpart D of this regulation. 

Since then, many regulation CC amendments have been introduced. On March 3, 2011, the Federal Reserve Board (FRB) put forth changes for disclosure content. Likewise, in 2020 and 2024, the FRB announced the Parliament's first and second rounds of Regulation CC amendments. However, the second round is said to become effective from 2025. 

Certain requirements of this banking regulation must be followed by all financial institutions and credit unions operating in the United States. Let us look at them:

1. Under the Check 21 Act, the issuance of substitute checks instead of original checks drawn became a new form of paper instrument legally equivalent to the earlier check issued. 
2. The same act also enables warranties for substitute checks, consumer expedited-recredit (claim refund process) procedures, or indemnity (loss).  
3. It allows banks to send checks electronically (instead of paper checks) to institutions in agreement.
4. Likewise, financial institutions must issue a substitute check when dealing with other entities or parties.
5. For withdrawals exceeding $5,525, the institution must make sure the availability of the first $5,525 and the rest can be handled in reasonable timeframes. 
6. If deposits to accounts are repeatedly overdrawn, the institution may hold them for two to six business days, depending on the balance held in the transaction account. 
7. Any reason for doubt about the collectability of the check must be informed to the customer along with a valid point of belief. 

As a customer, banking regulation CC ensures their funds stay safe and available for withdrawal whenever needed. It means how soon a customer can access the deposits kept in the account. Also, it entails a disclosure that notifies them of the funds held for check (or payment) clearance. 

For instance, per this regulation CC fund availability rule, if a person has $20,000 as a balance and a check of $10,000 is released, the bank must inform the customer when this amount is deducted from their total balance, thereby revealing the remaining balance, to ensure customers initiate the next set of payments, keeping the final figure in mind. 

This regulation serves a pivotal role in the daily operations of financial institutions, credit unions, and even customers. It enables a smooth functioning of the check clearance procedure and significantly reduces payment failure from every end. Also, it informs users of the potential deposits held for any payment clearance. As a result, customers ensure adequate funds that can be further processed for payments. Likewise, in the case of cash deposits, this regulation instructs banks to notify customers when they plan to hold funds beyond the estimated time so that the latter plans future withdrawals accordingly.