My bank recently put a seven day hold on an out of state check because they said they could not verify funds. They said that even if the check cleared before the end of the hold, they would hold my money. How are they allowed to do that?
Although the fact that banks are able to place longer holds on non-local checks than on local checks deposited with them is related to the fact that non-local items typically take longer to clear. There is no direct link between the length of a hold and whether or not the checks being held have cleared.
Put another way, banks don't usually know specific checks drawn on other banks clear. Because the vast majority of checks get paid routinely, banks usually only hear about the checks that do not clear, so regulations like Regulation CC (a regulation designed to limit the length of holds on deposited checks) permit banks to place holds on deposited checks to protect the banks (and their customers) from losses on bounced checks.
The usual limit on a hold on a non-local check is five business days (usually seven calendar days). Although a bank could release such a hold early if it learned that a deposited check had been finally paid, it would not be required to do so.
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Although the fact that banks are able to place longer holds on non-local checks than on local checks deposited with them is related to the fact that non-local items typically take longer to clear. There is no direct link between the length of a hold and whether or not the checks being held have cleared.