Order Code RS22036
Updated September 6, 2007
Expedited Funds Availability/Check-Holds
Pauline Smale
Economic Analyst
Government and Finance Division
Summary
In 1987, Congress passed the Expedited Funds Availability Act,1 which addresses
the check-hold policies of depository financial institutions for various types of
transaction accounts. The act assures timely access to deposited funds and requires
institutions to disclose their funds availability policies to customers. Federal Reserve
Regulation CC implements the funds availability provisions and includes a schedule
with maximum time limits for withholding funds.
The enactment of P.L. 108-100, the Check 21 Act,2 refocused attention on the
check-hold policies of financial institutions. The act, which became effective on
October 28, 2004, makes it easier for financial institutions to convert paper checks into
electronically generated images, and has the potential of making the clearing process
between institutions faster and more efficient. The law does not require institutions to
generate or receive check images, but they must accept a substitute check created from
an electronic image. Consumer advocates are concerned that the implementation of
Check 21 will result in money clearing out of accounts faster without speeding up the
availability of funds deposited into accounts. Check 21 required the Federal Reserve to
study and evaluate the impact of the act on the clearing process. The Federal Reserve
issued a report to Congress on the results of its study in April of 2007. This CRS report
provides information on the current Regulation CC provisions, the issues raised by the
Check 21 Act, and the Federal Reserve’s findings. This report will be updated as events
and legislation warrant.
Background
The intent of the Expedited Funds Availability Act (EFAA) of 1987 was twofold:
first, to ensure that account holders have timely access to deposited funds; and second,
that depository financial institutions provide clear disclosure about check hold policies
to their customers. The practice of placing holds on accounts was developed to protect
1 P.L. 100-86; 101 Stat.563.
2 117 Stat.1177.

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an institution in the event a deposited check was returned unpaid. Provisions of the 1987
act addressed the need for improvements in the check collection and return system to
counter the effect of reduced hold periods.
The potential costs to account holders from lengthy hold periods and insufficient
disclosure of hold policies provided the impetus for this legislation. During a hold period,
customers are unable to make withdrawals by check or other means against those
deposited funds on which the hold was placed. If a financial institution receives a check
written against an account before the hold is lifted and the account has insufficient funds
because of the hold, it can choose to cover the check and charge the customer an
“overdraft” fee. Alternatively, the institution can return the check without paying it and
charge the account holder a “bounced check” or “nonsufficient funds” fee. The third party
check recipient may charge the account holder an additional “returned check” fee. As it
is possible for more than one check to be presented during the hold period, the fees can
accumulate quickly.
The Federal Reserve’s Regulation CC3 implements the EFAA. Regulation CC
applies to all transaction accounts (as defined by Federal Reserve Regulation D) and it
extends to both consumer- and business-held deposit accounts. Check holds are not
required. Check hold policies can vary within the restraints of maximum time frames
which are outlined in a schedule. The regulation also provides for longer hold periods
under “exception” situations. Regulation CC contains rules for disclosure of funds
availability policies and to expedite the return of unpaid checks by institutions.
The schedule is measured in business days following the banking day of deposit, and
all references are to the maximum number of days that a financial institution can hold a
check deposit. The first $100 of any check deposit must be made available the first
business day following the day of deposit. Several types of check deposits are subject to
“next-day availability,” which means that funds must be available the first business day
following the banking day of deposit. In this category are U.S. Treasury checks and the
following checks when deposited in person: cashier’s, certified, or teller’s checks, U.S.
Postal Service money orders, Federal Reserve Bank or Federal Home Loan Bank checks,
state or local government checks, and checks drawn on an another account held by that
institution (“on-us checks”). The time period is extended when deposits are made at an
ATM (automated teller machine). If the ATM is owned by the account holder’s financial
institution, the funds must be available by the second business day. Deposits made at
ATMs owned by other institutions must be available by the fifth business day.
In general, if a check is not subject to “next day availability” the clearing schedule
(except for the first $100) depends on whether the check is local or nonlocal. If the
account holder’s institution is in the same check processing region as the paying
institution,4 the check is local. Funds deposited by local checks must be made available
for withdrawal by the second business day and alternatively, funds from nonlocal checks
must be made available by the fifth business day.
3 For the full text of Regulation CC, see [http://www.federalreserve.gov/regulations/default.htm].
4 Party responsible for making the payment of the amount written on a check.

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Regulation CC also permits financial institutions to impose “exception” holds for
certain types of deposits or accounts. Included in the exception category are large deposits
(greater than $5,000), redeposited checks, deposits to accounts repeatedly overdrawn,
when the institution has a reasonable cause to doubt the collectibility of the check,
emergency conditions, and new accounts (open less than 30 days). In general, the
extended period of time for on-us checks is one additional business day (for a total of two
days), for local checks five additional business days (for a total of seven days), and for
nonlocal checks six additional business days (for a total of eleven days).
Regulation CC requires financial institutions to provide customers with a written
disclosure of their funds availability policies prior to opening a transaction account. If the
availability terms on an existing account are changed, the account holder must be
provided with a new disclosure 30 days in advance unless the change expedites funds
availability, in which case, notice may be given no later than 30 days after
implementation. In addition, notices must be posted in each location where employees
accept deposits and at all ATMs. The customer must be notified when an exception hold
is placed on a deposit. Model disclosure statements are provided.
The regulation contains provisions to speed up the check return process in an effort
to ensure that institutions are advised when a check is being returned before the deposited
funds are made available. Options and methods are addressed in Subpart C of Regulation
CC. In general, institutions are encouraged to use the most efficient path to route the
return and to provide for the automated processing of returned checks. Finally, the Board
of Governors of the Federal Reserve is directed by Section 603 (d) (1) of the EFAA to
make reductions in the hold time periods established in Regulation CC as warranted by
improvements in the check clearing system.
Ongoing Issues
The Check Clearing for the 21st Century Act (P.L. 108-100) was enacted on October
28, 2003, to foster innovation in the payments system and enhance its efficiency by
facilitating the use of electronic check processing.5 The implementation of the act,
commonly referred to as Check 21, has raised concerns with the current check-hold time
periods permitted by Regulation CC and whether they should be adjusted. Check 21 deals
with the check collection process, and its purpose is to enable financial institutions to
handle more checks electronically. Importantly, the law does not require institutions to
adapt new collection procedures or generate digital check images. The law does require
institutions to accept a new negotiable instrument, a paper “substitute check,” created
from the electronic information captured from the original paper check. It is anticipated
that the Check 21 Act will not result in an immediate transformation, but instead the law
will facilitate an evolutionary path away from a paper-based payments system. Therefore,
the benefits from electronic check processing may not be immediately realized.
5 For more information, see CRS Report RL32668, Electronic Banking: The Implementation of
the Check 21 Act, by Walter W. Eubanks and CRS Report RS22525, Electronic Banking: The
Post-Check 21 Payments System, by Walter W. Eubanks.

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Provisions of Check 21 required the Federal Reserve to conduct a study and issue
a report to Congress on current funds availability policies (appropriateness of time
periods), whether the schedule in Regulation CC reflects the current needs of financial
institutions (are institutions routinely clearing checks faster), should the amount of the
large check exception be raised, and the impact of the new law on hold periods. The
report would address any recommendations for legislative action.
Consumer advocates have raised several issues with Check 21. A major concern is
that the electronic check processing facilitated by this act will greatly reduce the time it
takes to deduct money from a customer’s account, but won’t affect the account holder’s
access to the deposited funds. Therefore, they argue, the benefits from the increased use
of electronic processing will accrue mainly to banks. Legislation (H.R. 799) to address
this potential imbalance was introduced in the 109th Congress on February 15, 2005. No
further action was taken on the bill. The legislation would have amended the Expedited
Funds Availability Act to reduce the maximum time frames for hold policies. Other
adjustments addressed in the legislation included raising the threshold for large check
exceptions from $5,000 to $7,500, treating Saturday as a business day if accounts are
debited on Saturdays, and requiring institutions to process credits before debits.
The issue of whether funds availability schedules should be shortened was debated
at a subsequent oversight hearing held on April 20, 2005. The Subcommittee on
Financial Institutions and Consumer Credit of the House Committee on Financial Services
held a hearing on the implementation of the Check 21 Act.6 The Federal Reserve testified
that material improvements from Check 21 had not yet been realized. The expectation
was for gradual change as banks invest in new check processing technologies over time.
In addition, the lead time for the operational and technical preparations necessary to use
new payments services also slows the pace of implementation.
The banking industry representatives testifying agreed with the Federal Reserve that
the transition to electronic check processing will be evolutionary not revolutionary. The
provisions of Check 21 facilitate a gradual and orderly change. In addition, check hold
policies continue to provide important protections against check fraud. The funds
availability schedules should not be shortened until the check processing system is
operating more efficiently.
The consumer advocate testified that the Check 21 Act and advances in technology
have facilitated more efficient check processing. Changes to the funds availability
schedules should not have to wait until the vast majority of checks are processed
electronically. Congress was urged to reduce check holds by amending the EFAA if the
Federal Reserve’s 2007 report did not recommend changes in hold times.

6 The printed hearing can be viewed at [http://financialservices.house.gov/archive/
hearings.asp@formmode=detail&hearing=374.html].

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April 2007 Report
In April 2007, the Federal Reserve submitted a report to Congress on the effects of
the Check 21 Act on the nation’s check collection system.7 In March 2006, the Board of
Governors of the Federal Reserve System conducted a survey of the banking system to
assess whether there had been sufficient improvement in the check collection and return
system to support changes to the funds availability schedules. Based on the survey
findings and other research gathered by the Board, the Board recommended making no
changes to the current funds availability policies.
At the time of the survey Check 21 had been in effect for 17 months. The March
2006 survey identified a slow-paced adoption of Check 21 by financial institutions. The
survey results indicated approximately 93% of all checks paid involved a paper check.8
The Federal Reserve’s report did state that by January 2007 the nation’s banking industry
had experienced a significant increased use of electronics to collect and present checks
for payment. The report also concludes that Check 21 is an important catalyst for
potential change, but much broader adoption of new technologies and processes must
occur before check return times can decline appreciably.
The report also addressed the effect of the consolidation of the Federal Reserve’s
check-processing sites on check holds. The Federal Reserve has begun a program of
reducing the check-processing infrastructure in response to declining check volumes.
When check-processing regions are combined into one larger region the result is a change
in the classification of a number of deposited checks from nonlocal to local. This
reclassification reduces the maximum permissible hold periods for that volume of checks
now deemed local. The report stated that additional consolidations are expected.
Finally, the Board will continue to monitor the check collection and return system
and will use its existing authority, consistent with EFAA, to reduce funds availability
schedules when the evidence warranted. The Board of Governors of the Federal Reserve
is directed by Section 603 (d) (1) of the EFAA to make reductions in the hold time
periods established in Regulation CC as warranted by improvements in the check clearing
system.

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7 Board of Governors of the Federal Reserve System, “Report to the Congress on the Check
Clearing for the 21st Century Act of 2003,” April 2007. This report can be viewed at
[http://www.federalreserve.gov/boarddocs/RptCongress/check21pdf].
8 Ibid. p.10.

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