Say ‘Goodbye’ to Nonlocal Checks

FrontLine Newsletter
February 19, 2010 | COMMENTS

Check processing is about to change. The Federal Reserve has announced that in early 2010 it will complete a final restructuring effort to consolidate its check-processing operations for paper checks into a single region for the entire U.S.

What does this mean for your credit union? Once the Fed's consolidation is completed, the category of “nonlocal check” will be no more. This category currently provides for delayed availability of funds from a deposited check to the fifth business day following the banking day of deposit.

So, your credit union must stop placing a five-business-day hold on nonlocal checks once the Fed's change becomes effective.

Let's say a credit union located in New York receives a check from a member for deposit. The check is drawn on a financial institution in Idaho (or any other state). That check will be considered a local check, and translates to a two-business-day hold.

If your credit union already has a more “generous” check-hold policy—if it typically doesn't apply nonlocal holds to checks, and instead provides immediate, same-day, or next-day availability—this change won't have a big operational effect on you.

However, check with your supervisor regarding updates to your credit union's funds-availability policies, account disclosures, and other documents.

The reason for eliminating the nonlocal check category is partially because of the large number of paper checks turned into electronic images for processing. While members and consumers may welcome this change, it creates new challenges for your credit union.

You may be asking yourself, “What about situations where a local hold won't be long enough to determine whether there's a problem with a check?” Fortunately, for those situations, Regulation CC (The Expedited Funds Availability Act) will retain provisions that permit you to place extended holds on some checks (Table I).

Table I - Holds Allowed Under Reg CC

Nine days is the general rule for new-account holds; refer to federalreserve.gov for additional guidance. Source: Federal Reserve

You may place extended holds on checks because of:

• Large deposits that exceed $5,000. But the first $5,000 of the deposit must be available for withdrawal, subject to your credit union's availability policy.
• New accounts, defined as accounts open for less than 30 days.
• Redeposited checks, that is, checks returned because an endorsement was missing or because the check was postdated.
• Repeated overdrafts—accounts with negative balances on six or more days during the previous six months, or accounts with negative balances in the amount of $5,000 or more during the previous six months.
• Reasonable cause to doubt collectibility. This includes, but is not limited to, situations such as postdated checks, stale-dated checks, and checks the paying institution won't honor.
• Emergency conditions, including natural disasters and communications malfunctions.

For more details on allowable holds, visit federalreserve.gov; enter “Reg CC” in the search box.

The author, Chris Collver, is senior regulatory and legislative analyst for the California and Nevada Credit Union Leagues. Contact him at 800-472-1702, ext. 6053, or at chrisc@ccul.org. This story first appeared in CUNA's Credit Union Front Line Newsletter and is reprinted with permission.