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#2229482 - 01/23/20 03:28 PM Loan Hold on a Checking Account
burkemi Offline
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I have stumbled onto a hold placed on a personal checking account for a loan. The loan officer's explanation is understandable, even if I disagree. Reg CC, as I understand it, permits no such hold on a checking account - even if the depositor acknowledges the hold during loan processing. That is, we can't make a customer (willingly or otherwise) sign away his/her right to the funds availability schedule in Reg CC.

Is my understanding correct? Would it matter if this was a business checking account?

I feel like this needs to be converted to a money market. Customer would still have check writing capability this way and then Reg CC would be completely moot. For reference, I've pasted the Loan Officer's response:


"The above mentioned account is a maintenance reserve account that was established as a loan approval condition where the borrower was required to establish a maintenance reserve account and fund the account with $100,000 which can be used for the ongoing maintenance of the borrower's rental portfolio that serves as collateral on multiple loans that we have.

Per our loan agreement with the borrower, the borrower can access funds in the reserve account only for maintenance items related to the rental portfolio. They do this by providing proof of invoices for the maintenance items and then the Bank has to approve the disbursement of these funds from the account. If the funds are accessed by the borrower, then the borrower has to begin making $2,500 monthly deposits back into the account per the loan agreement until the account balance is again at $100,000. The account is also collateral for our loans.

In order to make sure that the funds are disbursed only for maintenance items related to the rental portfolio, it is necessary to place a hold and restrict access on the funds in this account."
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#2229484 - 01/23/20 03:51 PM Re: Loan Hold on a Checking Account burkemi
rlcarey Offline
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This should be established through a separate bank controlled account and not one in which the customer has any sort of access too. You don't just hold these funds in the customer's operating account.
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#2229493 - 01/23/20 05:16 PM Re: Loan Hold on a Checking Account burkemi
burkemi Offline
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That is the intent of the account. But the account is titled and stylized as any other consumer purpose DDA we have in our deposit portfolio. There is no indication, at least on the front, that this is a reserve account. The account received all of the disclosures we provide at account opening, which includes funds availability.

229.2(d) Available for withdrawal with respect to funds deposited means available for all uses generally permitted to the customer for actually and finally collected funds under the bank's account agreement or policies, such as for payment of checks drawn on the account, certification of checks drawn on the account, electronic payments, withdrawals by cash, and transfers between accounts.

There is the part of "permitted to the customer" but that is followed by "under the bank's account agreement." It seems to me that if we are going to continue using DDAs as loan collateral, we will need to draft account agreements which cover that. I just have a hard time seeing that we can place an indefinite hold on a checking account.

Am I overreaching?
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#2229494 - 01/23/20 05:18 PM Re: Loan Hold on a Checking Account burkemi
burkemi Offline
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And please understand I'm not being intentionally argumentative. This just goes against everything I thought I understood about account holds and Reg CC. So I'm just trying to make sure I have a good grasp. Either to support my argument that I'm right; or, if I'm wrong, to understand where my misunderstanding lies.
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#2229498 - 01/23/20 05:43 PM Re: Loan Hold on a Checking Account burkemi
burkemi Offline
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Still digging in. Reg CC [229.2(a)(1)] states that an account is a deposit is an account as defined by 204.2(a)(1)(I) and described in 204.2(e).

204.2(e) defines transaction account as "Transaction account means a deposit or account from which the depositor or account holder is permitted to make transfers or withdrawals by negotiable or transferable instrument, payment order of withdrawal..." and includes Demand Deposit accounts. 204.2(a)(2)(b)(1) defines Demand Deposit as a deposit that is payable on demand. And one step further, UCC 3-108 defines Payable on Demand as "A promise or order is "payable on demand" if it (i) states that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder, or (ii) does not state any time of payment."

Because this is a demand deposit account, how can we refuse to negotiate a check (demand)? The hold placed does not fit into either of the exceptions for holds provided by Reg CC.
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#2229511 - 01/23/20 06:44 PM Re: Loan Hold on a Checking Account burkemi
rlcarey Offline
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You have a problem with your process. While you might maintain this as a DDA account on your system, the account is owned by the bank and not the customer. While the customer retains an underlying interest in the funds, it is not a true DDA account. A true DDA is a demand account in which the customer has unlimited withdrawal capabilities. The customer has no access to this account. I suggest sitting down with your legal counsel. You are confusing how you are booking this account on your system with what this account actually represents.
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#2229518 - 01/23/20 07:11 PM Re: Loan Hold on a Checking Account rlcarey
Richard Insley Offline
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Richard Insley
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Originally Posted by rlcarey
the account is owned by the bank and not the customer.
Is this the arrangement, or does the customer retain ownership subject to the lien spelled out in the loan agreement(s)? In any case, there are lots of dollars at risk here--and a review by counsel is justified. You want to be sure all the agreements will hold up in court and that you are handling the relationship exactly as the agreements specify.
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#2229539 - 01/23/20 07:56 PM Re: Loan Hold on a Checking Account rlcarey
burkemi Offline
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Originally Posted by rlcarey
While the customer retains an underlying interest in the funds, it is not a true DDA account. A true DDA is a demand account in which the customer has unlimited withdrawal capabilities. The customer has no access to this account.


This is the majority of my concern. The account is set up as any of our DDA accounts. I've looked up various passages, some of which are past discussions on BOL, but the question is always centered on checking accounts (as I did, myself). I went a step further and looked for the definition of a checking account. In every instance it states some variation of "an account from which checks, drafts, orders, etc. may be written." Only in one of those definitions was included "demand deposit account," and even then was "usually a demand deposit."

Industry wide I know DDA and checking account are used interchangeably, but is that truly the case?
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#2229543 - 01/23/20 08:32 PM Re: Loan Hold on a Checking Account burkemi
rlcarey Offline
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You are still focusing on how you put this account on your system. Like I and Richard indicated, you need to get with legal counsel and make sure this account is set up correctly - correct titling, correct agreements, correct ownership, correct access, etc. You are focusing on Reg CC when you might find out that you are going to out the whole $100,000 if this is not all correct.
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#2229552 - 01/23/20 09:08 PM Re: Loan Hold on a Checking Account burkemi
burkemi Offline
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You're right. I tend to get a bit of tunnel vision at times. Thank you, Randy and Richard, for your input.
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