What is Regulation CC?

Regulation CC is a regulation promulgated by the US Federal Reserve Bank. The purpose of the regulation is to implement the Expedited Funds Availability Actof 1987, which sets standards for the endorsements on checks drawn on or paid by regulated banks and depository institutions. It also implements portions of the Check Clearing for the 21st Century Act, removing certain legal restrictions on processing electronic checks.

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How Does Regulation CC Work?

When someone writes a check, it is drawn on a bank at which the writer holds an account. The recipient of the check is the payee. The payee may cash or deposit the check at a different bank or depository institution. As such, the receiving bank will pay the check, endorse it, and forward it to the original bank on which the check was drawn. The original bank will then make payment on the check. Regulation CC implements check-return rules (the depository bank returning the check to the original payor bank) and same-day settlement rules. More specifically, it limits the period of time for holding the deposited check before forwarding it to the original payor bank. This expedited period reduces the risk to the depositary bank in making funds available after the check is deposited. The same-day settlement policy increases the likelihood that the depositary bank will quickly learn if a check is dishonored (not paid) by the payor bank. The depositary bank can quickly remove the deposited funds from the depositors account before it can be spent or withdrawn. Also, the endorsement must correctly identify the endorsing bank and unpaid checks must be immediately returned to the paying bank. And, the depositary bank must provide the account holder with disclosure as to when the deposited funds will be available for withdrawal. Regulations CC also allows banks to create substitute paper checks as part of the electronic checking process. These checks are a substitute for and legal equivalent of the original paper check between banks with processing agreements. If the banks do not have agreements in this regard, it allows the depositing bank to send a substitute check for payment. This allows checks to be processed, forwarded, and paid electronically - without waiting for the paper check to be forwarded. Since the promulgation of Regulation CC, the majority of check processing within the US has become electronic.