Correct me if I am wrong, but can a bank choose to not pay on uncollected funds? For example, suspect kite report, notification of bankruptcy, etc. Also assume that a hold was not placed on the funds in question. It is my understanding that we need to place a hold on funds if we do not want to pay against funds.

Yes, you can choose not to pay debits on an account unless/until funds are collected. We simply place an instruction on the account with our software stating "pay on collected funds only". During our overdraft/stop hold/instruction review (done daily), such accounts are checked to determine whether and how much of a balance of collected funds exists, and anything debited more than that current collected amount is returned with the reason "Uncollected Funds" (similar to return for "NSF"). We also assess a fee for returned uncollected funds checks; this fee is different from our NSF fee.

We currently only have a handful of accounts with such instructions, and it is usually because we are monitoring the account for some high-risk activity (e.g. suspected kiting).

I'm pretty sure this requires notification/disclosure to the customer in writing that funds are not available until collected, but since I'm not the person who sends out such letters to customers, I'm not 100% positive if we do this as a matter of policy, simply a courtesy to the customer to inform them, or as a matter of compliance with a reg.

Reg CC can guide you in the details of when, why, and how long funds from a deposit can be considered unavailable for paying checks, as well as notice requirements. I believe there is always still a "hold" involved, but sometimes, a hold may be placed after the time of deposit, because new information has come to light.

"Uncollected funds" is an accounting term, not a legal term. It simply means that the funds from the deposited item are not yet available for your bank to invest.

If you are going to legally return an item drawn on a transaction account unpaid, then it will be because you placed a legally disclosed hold in accordance with Regulation CC, not because the funds are uncollected. Congress passed the Expedited Funds Availability Act to put an end to practices like this.

If you look at the Reg CC definition of "available for withdrawal" it states that it means "available for all uses generally permitted to the customer for actually and finally collected funds." The Official Staff Commentary for this definition further supports this position. This means that Reg CC doesn't make any distinction between "available balance" and "collected balance". As Ken says, "collected balance" now is merely an accounting term and typically is only used in determining what balances interest will be calculated on (because Reg DD does allow for interest accual to delay until after the float period has passed). So RegGeek is correct in that the only way to delay the availability of check deposits to cover cashiers checks, wires, etc., is to place an appropriate hold on the account in accordance with Reg CC provisions. When you are making decisions about whether to pay an item, issue a cashiers check, etc. the deciding value is the "available balance" not the "collected balance". Now you can look at the relationship of the collected balance and the available balance. If the relationship indicates that there may have been a recent check deposit that is not considered collected yet, you may have an opportunity to place an "after-the-fact" hold if the specific circumstances allow for it.

For example, suppose your customer with $100 in their account came in yesterday and deposited a $10,000 non-local cashiers check. Your teller didn't think anything was wrong so didn't place a hold. Collected balance still shows $100 today, but available balance shows $10,100. Customer comes in today and wants to wire out $8,000. Under Reg CC, you must honor this unless you place a hold on the funds deposited yesterday. So you look and sure enough you do have a couple of options. You can place a "large-deposit" exception hold on the cashiers check deposited yesterday, and hold $5,000 of the deposit for up 11 business days from yesterday (day of deposit). Or you could make an attempt to verify the cashiers check with the issuer. If they tell you the item may be a counterfeit, now you can hold the entire $10,000 under the "reasonable cause to doubt collectibility" exception hold.

Burnt, it sounds like your practice is dangerously close to violating Reg CC.

Thank you for the information, I appreciate it, and I'll certainly bring this to the attention of compliance here at my institution.