When you deposit a check to your account at your bank (“depositing bank”), it is sent to the bank on which it is written (“paying bank”). The paying bank may return the check unpaid for many reasons, such as insufficient funds, payment stopped, or signature irregularities. Until recently, the paper check was sent to the paying bank through one or multiple clearing banks. If the paying bank returned the check, it made its way back through the same banks. It could take several days before a bank received the returned check. You would not be aware of the check being returned until the bank debited the funds from your account. If you had already issued checks against these funds, then your account might be overdrawn.
In an effort to alleviate some of the potential for losses on returned checks, banks began placing “holds” on the depositor’s funds to allow time for the check to clear. Some banks began taking advantage of this ability to place holds. They held funds for extended periods of time, even when there was little risk involved.
To address this, federal regulators adopted Regulation CC to limit how long a hold could be placed on a check and the types of checks on which the hold could be placed. The length of the hold was originally based on locations of the paying bank and the depositing bank. If the paying bank was located outside of the clearing district of the depositing bank, a longer hold period could be used, because it physically took a longer period of time for the check to reach the paying bank and be returned.
As technology changed, more banks began clearing checks electronically. The Federal Reserve consolidated all of the paper check clearing to one location and it no longer made a difference where the paying and depositing bank were located.
The bank is limited on the time a hold can be placed on a deposited check. You, as an accountholder, should always consider the source of the check you deposit. Even after the funds have been released by your bank, the check may be returned. If that happens, you are still responsible for reimbursing the bank for the funds they made available to you.