We hold funds in time deposit accounts pursuant to loan terms; this is not covered under Regulation CC, so we are okay on that point. However, as I said, it is pursuant to a loan agreement so that the customer has okayed the hold on those funds (usually for the term of the loan).
However, I've not heard of holding funds as 'insurance' for overdrafts and I'd also be concerned about the lack of a written agreement.
I hear and I forget. I see and I remember. I do and I understand.--Confucius