[Dana Staley]

Seeking an opinion on a situation we encountered during Reg CC testing. A customer brought in a check dually payable to the customer and the Bank from an insurance company which was disbursement from a flood insurance claim related to collateral securing a loan that the customer has with us. The check was deposited to the customer’s checking account and a hold was placed on the customer’s account for the entire amount of the check for 30 days. Per the lender, the customer has multiple properties that were affected by storm damage and is expecting several claim checks related to the properties securing our loan. The lender planned to release funds as needed for repairs, etc. until the borrower determines which properties will be rebuilt and which will be demolished and the loan can be rebalanced. Per the lender, the borrower/customer has been in full agreement and understanding of the hold(s) related to these insurance checks. From a safety and soundness perspective, we understand protecting the collateral; however, the manner in which the funds were deposited and held appear to violate Reg CC. We are seeking a second opinion as to whether this deposit might not be covered by Reg CC because either 1) the check that was deposited was payable to both the customer and to the Bank, giving the bank rights to the funds as much as the customer, and/or 2) the insurance claim check is related to damaged property that is collateral on a loan. Additionally, best practice recommendations for these situation to maintain compliance while protecting the collateral on the loan would be appreciated.

[Brent V]

This is a response from Reg CC expert, Rebekah Leonard of Elucidate, LLC:

Reg CC hold times are strictly limited, and the 30-day hold placed in this situation was not correct. In allowing the check deposit to be made the depositor’s personal checking account, Reg CC fully applies and indeed was violated. Reg CC doesn’t much care what the deposit is for, only it’s collectability. Reg CC allows a bank to delay availability in exceptional circumstances only when it doesn’t believe the deposited funds will be collected for some specific reason (options are listed in 229.13). Such exceptional circumstances allow a bank to place a “safeguard” hold to reduce the risk of sustaining loss on a returned deposited item… NOT because the depositor spends deposits in a way the bank doesn’t like.

If the bank wished to control the release of funds for specific loan-related milestones (to ensure collateral protection), the bank should have deposited the funds into a bank-controlled account, to dole out monies as agreed upon to ensure collateral restoration. In short: this wasn’t an issue of concern over check viability but rather desire to control funds. Those are two different issues entirely, and Reg CC was incorrectly applied as the fund control function.

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