hello, if opening a new account electronically with funding from another institution through external transfer, is the incoming credit subject to any holds or extenstions of holds under Reg CC. I would guess the transactions would be ACH which normally carry immediate availability, is there another method of funds exchange (other than wire) that would perform this type of transfer other than ACH that would permit a delay in availability? Thanks

CJ

I seem to recall this coming up before on BOL. My recollection was that these do not fall under the same requirements and you can hold the funds since the ACH was originated by you and are not guaranteed. If you receive an ACH originated from elsewhere you have to give immediate availability.

But, do a search of old posts and see what you can find.

I searched but only found one other post and the last message asked about holds on ACH but there was no response. Who is considered the originator of the ACH debit, is it the sending bank or the bank opening the account? If the bank opening the new account is actually the originator of both debits to the funding bank and credits at their own institution to open the account that might be different. We seem to be entering a whole new world of banking.

Philly fan in Dallas, try being a NY fan in Miami. <g>

Here's how I've answered this question in the past, assuming that the ACH entry is originated by the bank opening the new account:

Question:
We are working with our core service provider to offer ACH transfer capabilities.

To mitigate risk, we are requesting that funds pulled from another institution through the ACH Network not be credited to the customers account for 5 business days. Our service provider wants the funds to be credited to the account on day 1 and for a monetary hold to be placed on those funds.

Are there any legal or regulatory reasons for placing a monetary hold on ACH funds?

Answer:
Don't confuse this type of credit with an incoming ACH credit entry. The latter is presumed to be good funds once you've received credit for the ACH settlement and the information needed to post the transaction. The former (your transaction) is an internal credit based on the ACH debit entry originated by or for your bank to pull funds from another institution. As such, it is not an "electronic payment" for the purposes of Regulation CC, and it is not subject to any hold restrictions in Regulation CC.

Why put on a hold? Because there's no assurance that the ACH debit sent to the other institution will be honored. It could be presented against insufficient or unavailable funds or against a non-existent or frozen account, etc. So it is prudent to deny access to the funds at your bank until sufficient time has passed to mitigate the possibility of a return. Five days is not overly long for such a risk-avoidance practice. Consider that an ACH debit originated by you on Monday and presented at the RDFI on Tuesday gets reviewed on Wednesday and returned to you as ODFI on Thursday. You would want to delay availability until Friday (fourth business day) and perhaps one more day (until Monday) to allow for any delay.

Who is performing the "external transfer"? When they open the account and you say they fund the account through external transfer.

1. Are they transferring the funds from the other account to the new account at the bank via an ACH credit transfer from the other bank, or

2. is your bank taking information from the customer and crediting the account by sending an ACH debit to the other bank account?

If it is #1, you have a lot lower risk.

If it is #2, then you have huge risk.

Institutions that allow #2, usually perform the following steps:

1. Require that the customer provide the other bank account information.
2. The bank initiates an ACH credit transfer to the other account (bank money not customer money) for a nominal amount ($.01 to $.15 for example).
3. The customer watches the other account and when they can confirm the amount of the deposit, the account is opened to allow transfers and any future transfers are available after the money is received and the normal NSF return time expires.

If you go with #2 without confirming that the customer even controls the other account, your risk window is as long as the fruadulent return time on ACHs.

Thanks John. Now it is very clear, the missing piece was that the bank receiving the credit is also originating the debit to the external account at the other institution.

we go with method 2.

Regarding the steps we take they are as follows:

1-yes, customer provides transfer from account info
2-yes, the customer needs to confirm test transactions and then is given a code to use to "finalze" the account opening process
3-we don't do this step but the bank is placing a hold on the funds transferred. 4 or 5 days I believe.

Thanks for your input on risk.

I agree with Randy as to the risks of using method 2 unless you use a verification of ownership step like the one he's outlined.