Financial Institutions

In response to concerns that financial institutions were placing exorbitant holds--as long as 14 days--on checks deposited into customers accounts, Congress passed legislation limiting the length of time that financial institutions could hold funds. GAO found that a regulatory and administrative framework has been established through which the Act of 1987 can be effectively implemented. While financial institutions generally seem to be complying with the funds availability provisions of the act, regulators in the offices GAO visited except for the Federal Reserve Board, did not adequately assess financial institutions' compliance. For the most part, they did not test financial institutions' check holds, as required, to ensure that the institutions' hold practices were actually consistent with their policies. Moreover, documentation of what examiners did to determine compliance and support their conclusions was often limited or nonexistent. The industry continues to be worried about check fraud as a result of the act's availability schedules. Yet financial institutions contacted by GAO had not compiled evidence to substantiate such concerns.

GAO found that: (1) FRB has established a regulatory and administrative framework and a council of regulatory agency representatives to provide for the effective implementation of the act; (2) since selected examination and complaint files do not identify excessive check holding practices, GAO believes that financial institutions are generally complying with the act's funds availability schedules; (3) although the most frequent violations identified usually pertained to disclosure requirements, additional clarification of the act's provisions may be needed to achieve greater compliance; (4) while FRB examinations reviewed were thorough, other regulators did not follow the uniform examination procedures for testing check holds to ensure that the institutions' hold practices were consistent with their hold policies; (5) documentation of the procedures that the examiners followed in reviewing compliance with the act and in supporting their conclusions varied widely and was often limited or nonexistent; (6) the 33 financial institutions contacted were concerned about their exposure to check fraud loss, but did not believe it would be cost-effective to collect data on fraud losses attributable to the act because of the difficulty of isolating fraud losses that occurred as a result of the act's availability schedules; and (7) it could not determine the extent to which losses could be further alleviated through technological or operational improvement to institutions' check collection and return systems.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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