Money IQ

Have you ever wondered why a Financial Institution may delay availability of funds on your deposit? There are many different reasons why a Bank might choose to place a temporary “hold” on your deposit. Before we discuss these reasons, let us be clear on what exactly is a check.

Here are some definitions of common terms related to checks:

• Check:  An order written by someone directing the bank to pay a specified sum to the order of a certain named person(s.) The check also directs the bank to debit the drawer’s account by the amount of the check.

• Drawer: The person who writes and signs the check, or who is identified in the check as the person directing payment.

• Drawee: The person ordered in the check to make the payment, typically a bank (also known as Payor Bank.) The bank paying the check, or on which the check is drawn, is responsible for seeing that money is paid to the proper person if the payee is named.

• Payee: The person designated on the face of the check as the person to be paid by the drawer.

A check must contain many specific elements before it can be accepted. Some of these elements are pre-printed on the check and some are filled in by the drawer. There could be a problem with the Bank accepting a check if some of the required information is incomplete.

The use of checks is governed by many laws. However, the law with the most impact on check usage is the Uniform Commercial Code (UCC.) The UCC was drafted in 1953 to facilitate the handling of banking and business transactions. The UCC contains nine articles, of which Article 3 is the most important for check usage. Article 3 defines the term “negotiable instrument” and describes the liabilities and rights of all the parties who deal with checks, drafts, notes and other banking documents such as certificates of deposits.

For a check to be considered negotiable by the bank, it must meet the following criteria, failure to comply with these requirements are subject to refusal.

• The check must be dated
• There must be a “pay to the order of” line
• A specific amount must be written
• The check must be signed by the drawer of the check
• The name of the drawee bank must be stated
• The check MUST be properly endorsed

**Please note that the written amount is the legal amount on the check. If the numbers of the amount do not match what is written, the bank will process the check for the written amount.

Checks are being handled in some new ways these days and these changes affect how you handle your money. The time between your payment and the deduction from your account is called the “float.” When you write the check (or even when the check is received) you might not have the money in your account to cover the payment.  Perhaps you know that it will take some time for the payment to be processed, and you know that your paycheck will be deposited in the meantime. In such a case, you’re taking advantage of the float.

The Uniform Commercial Code state that you are not supposed to write checks if you don’t have the funds to cover it at the time it is written. People have been taking advantage of this float time for years. However, that float time, is becoming shorter and shorter. Why?

In 2004, Congress passed the Check Clearing for the 21^st Century Act (known as Check 21.) This Act allows banks to use electronic versions of checks to operate more efficiently. They no longer send the paper checks to each other anymore-they use a substitute check. Substitute checks are images of your paper check, but they’re considered just as valuable as the genuine article (original check.)

Regulation CC serves as a protection not only to the Financial Institution but also to the customer. This regulation stipulates four types of holds that a bank may place on a check deposit at its discretion. Each has its own qualifications and it is legal for the bank to place any type where the requirements are met, although bank policy may instruct that the type of hold placed be the one that holds the most funds the longest that can be applied legally. Therefore, it is important to know your bank’s rules.

First, is the “case by case” in which funds are held on a limited basis (two business days.) This is called the “Statutory.” No other hold applies and can be put into place almost anytime.

Second, is the “Large Deposit” hold allows an aggregate total of checks deposited into one account on one business day, greater than $5,000. The first $5,000 will be made available, the remainder on the seventh business day.

Third, is when the account being deposited into has only been open for less than 30 days, in which case, a bank can choose to place a hold for seven business days. 

Fourth, we have the “exception” hold type. A seven business day hold will be placed if an account has been overdrawn for six or more business days of the previous six months, or an account has been overdrawn for two or more business days in excess of $5,000 in the previous six months.

Next, if the depository bank has reason to doubt the check is good by receiving a notification from the paying bank, if the item being deposited is a legal copy of an item previously returned for NSF and if the item is accepted for deposit during a power outage or computer failure. If it is determined that a hold is necessary, the customer will be notified at the time of deposit or within 24 hours after the deposit is made (in writing.)

It is no secret that fraud and swindling schemes are on the horizon. Therefore we encourage anyone who receives a check(s) from unknown person(s) or companies to use caution when depositing said checks. (This topic was covered in the November issue of Money IQ)

Do you as a customer have options? Absolutely! If there is any doubt or concern regarding a check that is to be deposited, you as a customer can benefit from requesting that a hold be placed. This will allow time for your bank to find out if the deposited check(s) are legitimate. You may also make the deposit and wait seven to 10 business days before using the funds. 

If a check is to be returned typically the bank will know within that timeframe. Please remember that if a deposit is returned unpaid for any reason, you as the customer are liable and the Bank does have the right to off-set from an alternative account if possible. The last thing you want is to ruin your credit, possibly lose your banking relationship or find yourself in a legal situation or lawsuit.

It’s always better to be safe than sorry. And if it sounds too good to be true, then it probably is. 

Editor’s note: Denise M. Martinez is an Operations Officer and the Bookkeeping Department Supervisor. She has worked at LANB since 2002.

• Watch for Money IQ on the third Wednesday of each month in the Los Alamos Daily Post.