|December 6, 1996|
Dear [name deleted] :
This is in response to your letter dated September 6, 1996, and your subsequent telephone conversation with Gordon Miller of my staff, concerning the application of the overdraft provision of the Board's Regulation O (12 C.F.R. 215.4(e)) to your bank's check processing procedures.
As indicated in your letter and telephone conversation, the bank initially settles for all checks that are presented to it by other banks during a given banking day, while reserving the right to return the checks before midnight of the following banking day (the "Midnight Deadline").1 The bank makes a final decision to pay or return a presented check by 2:00 p.m. on the banking day following receipt of the check. If a director's checking account would be overdrawn by payment of a presented check, the director is informed of the situation and given an opportunity to deposit sufficient funds in the checking account to cover the overdraft before the bank's 2:00 p.m. deadline. If the director does not deposit sufficient funds before the 2:00 p.m. deadline, the bank may return the check because of insufficient funds or it may finally pay the check and charge the director's account, at which time an overdraft in the director's checking account would be booked.
Under Regulation O, an extension of credit is defined as the making or renewal of any loan, the granting of a line of credit, or an extension of credit in any manner, and includes any transaction of this nature as a result of which a person becomes obligated to pay money to a bank. 12 C.F.R. 215.3(a). Since the bank may return a check that is drawn against a director's account at any time before the Midnight Deadline, and the bank does not in fact decide to return a check before the bank's 2:00 p.m. deadline, it does not appear that the bank irreversibly advances its own funds to cover a director's overdraft before the bank's 2:00 p.m. deadline. Accordingly, it does not appear that a director would incur an obligation to pay any money to the bank on account of an overdraft in his checking account before the bank's 2:00 p.m. deadline. The bank's procedure of initially settling for all checks on the day the checks are presented, while reserving the right to return the checks by the Midnight Deadline, does not appear, therefore, to give rise to an overdraft in the director's account for purposes of Regulation O before the bank's 2:00 p.m. deadline.
This interpretation is based on and solely addresses the facts described in your letter and telephone conversation. For example, this interpretation does not apply to checks presented over the counter for payment in cash, or to any other circumstances that would cause the bank's advance of funds to become irreversible before the bank's 2:00 p.m. deadline. Any changes in the facts as described in your letter and telephone conversation may require reconsideration of this opinion, and may require this opinion to be revised or withdrawn. In addition, the bank's practices in paying checks that cause overdrafts continue to be governed by general standards of safety and soundness and prohibitions against fraud and abuse.
I hope this information is helpful to you. If you have any further questions concerning this matter, please contact Gordon Miller of my staff at (202) 452-2534.
(signed) J. Virgil Mattingly
J. Virgil Mattingly
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