Holds on Credit Card Checks

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Question:

We would like to know why we cannot put an exception hold on a credit card check or a insurance draft. A credit card check is truly a request for credit and an insurance draft is not a check. These checks have restrictive endorsements. We just participated in a Pegasus phone seminar and the gentleman replied that the Reg states that we cannot put a classification on a specific type of check.

Answer:

Answer by John Burnett
One of the first rules to remember when you are trying to understand a regulation is to go first to the definitions section.

We often see that the regulatory definition won't agree with our common understanding of a term. And the definition of "check" is a perfect example.

Reg CC defines a "check" as, among other things, a "negotiable demand draft payable through or at an office of a bank."

And that pretty well includes both insurance drafts and credit card checks.

As for the credit card check, it's probably more accurate to change your definition to say it's a draft drawn against a line of credit (not a request for credit).

So, the answer to your question lies in understanding the terms and what they mean. Both the credit card check and the insurance draft are "checks" under Regulation CC and fall within the rules on availability. So, you have to treat them like other checks when placing holds.

Your "out" could be to consider accepting some of these items only for collection. Then Regulation CC won't apply at all.

Answer:

Answer by Ken Golliher

Just hauling a little water for John... He gave you the definition of a "check."

The relevant prohibition from the regulation follows:
12 CFR 229(13)(e) ... Reasonable cause to believe a check is uncollectible requires the existence of facts that would cause a wellgrounded belief in the mind of a reasonable person. Such belief shall not be based on the fact that the check is of a particular class or is deposited by a particular class of persons...

The definition of a "check" cannot be changed, even by contract. I routinely analogize a credit card check to an application for a loan, but it is still a check as far as this regulation is concerned.

If you have a problem with a particular credit card check or a particular insurance draft; e.g. unable to verify a prior endorsement, the exception hold is available to you. It's just that you cannot say all credit card checks or all insurance drafts are of doubtful collectibility.

Putting holds on all credit card checks and insurance drafts has become a "giveaway" violation in examinations the bank does not have a credible response to the criticism. If checks are returned because of an illegal hold, the magnitude of the problem far exceeds a Reg CC violation. As noted above, there are other ways to manage the unique risks credit card checks and insurance drafts represent.

First published on BankersOnline.com 6/3/02