New law ends checking traditions

By Laura Bruce • Bankrate.com

Who can forget the anxiety and hoopla that preceded Y2K? Pundits warned that computer systems would either fail miserably or take over the world when we slipped into the year 2000. When the moment arrived, nothing happened.

The advent of Check 21, albeit on a far smaller scale, is getting the same sort of attention. Some consumer advocates emphasize that checking account customers will no longer have the right to receive their original canceled checks and the float will be reduced, threatening some consumers with a maelstrom of bounced check fees. But people within the banking industry say Check 21 will be evolutionary rather than revolutionary and that many customers will hardly notice the changes.

Check 21, shorthand for Check Clearing for the 21st Century Act, takes effect Oct. 28, 2004. It's designed to modernize the way checks are processed; turn the paper check into an electronic image and speed its image and data through the system. In addition to saving the banking industry billions of dollars in transportation and processing costs, it will avoid situations where transportation grinds to a halt due to weather or more dreadful reasons such as 9/11.

"The old law said paper checks had to be presented (for payment), but that was written before computers," says John Hall, spokesman for the American Bankers Association. "The whole checking system is being brought from the Pony Express days to the computer age. The current system is clunky, antiquated and it's being made more efficient with cheaper overhead."

Check 21 creates a new negotiable instrument called the substitute check (image source: American Bankers Association). It is a paper reproduction of the original check and contains an image of the front and back of the original check. It must carry the legend: "This is a copy of your check. You can use it the same way you would use the original check."

If you receive an electronic image of your check and it doesn't have that legend, it's not a substitute check.

When you mail a check to pay your utility bill, the check winds its way through local and regional banks before ending up at your bank, where it's deducted from your checking account. Check 21 allows any business or financial institution along that path to stop, or truncate, the paper check, turn it into an electronic image and destroy the original. A substitute check can be created from the electronic image if an institution along the path says they don't accept electronic images and instead wants to be sent a substitute check.

Check 21 only requires that banks accept substitute checks; they don't have to create substitute checks or exchange electronic images, says ABA's Hall.

"A lot of banks aren't doing it because of cost. It's a laborious change for some banks. It's very expensive and takes time. Check 21 doesn't mandate electronic check processing. Electronic and paper systems will coexist for a number of years to come."

Washington Mutual, one of the 10 biggest banking institutions in the country, is just dipping a little toe in the Check 21 waters.

"WAMU (will) simply accept substitute checks," says Washington Mutual spokeswoman Lisa Margolin-Feher. "We're taking a more deliberate approach. We anticipate that we'll be evaluating where this goes and determine when the next step is appropriate."

Bank of America will also take its time, according to spokeswoman Betty Riess.

"We'll begin exchanging a limited volume of check images after it goes into effect. We'll do some imaging, but only to a limited degree. Ultimate adoption of image exchange is a full build-out of systems and processes that could take the industry and Bank of America a matter of years."

What this means is that customers who have their canceled checks returned with their statements can expect to see a mix of substitute and original checks with the substitutes just trickling in at the beginning.

That leads us to one of several hot-button issues surrounding Check 21: returned paper checks.

Original checks
The ABA estimates that 64 percent of checking account customers do not get their canceled checks returned with their statement. Those customers have opted for truncation, or "safekeeping." Their bank keeps the original and gives it to the customer only when requested. Banking industry representatives say those customers will likely not see any difference under Check 21 until they request a check and instead receive a substitute or an image. The bank or credit union will include an explanation of Check 21 in those situations.

A sticking point with consumer advocates is that the 36 percent of customers who didn't agree to safekeeping will now have to accept an imitation, says Mark Budnitz, a law professor at Georgia State University College of Law.

"With Check 21, Congress imposed something on consumers. Consumers who said they wanted to get their original checks back didn't agree to truncation. That was an agreement these customers had with their banks. Now Congress says, 'We don't care. Take a substitute check instead.'"

Deflating the float
If you keep enough money in your account to cover the checks you write, you probably don't care about float. But banks rake in enormous amounts of money every year in bounced-check fees indicating that there are plenty of people living close to the edge with their checking accounts.

Check 21 will significantly reduce the float -- the amount of time that lapses from when your utility company receives your check to when your bank receives the check and debits your account.

"The float won't disappear," ABA's Hall says. "For local checks the float is about 24 hours today. That will remain the same. The big one will be nonlocal checks. For out-of-town checks you will notice that rather than the current two- to three-day float, it will clear in 24 hours if the bank uses electronic processing."

Keep in mind that the banking industry does not include the time a check is in the mail when it calculates float. Float begins when the check arrives, for example, at the utility company and ends when it shows up at your bank and is deducted from your account.

Also, Check 21 does nothing to shorten so-called check-hold periods -- the amount of time that an institution can hold checks you deposit before crediting your account. John Hall says the issue is being studied to see if changes are warranted, but, he says, many banks make funds available faster than the rules require.

Recrediting your account
Check 21 protects you if there's a problem that can be traced to the creation of a substitute check. Perhaps there's been an incorrect charge on your statement because the dollar amount of your original check isn't readable on the substitute, or maybe your account is double-debited meaning the original check is deducted and the same amount is deducted again because of the substitute check. In either case, you'd have a right to an expedited recredit.

Check 21 says the bank must either:

1) produce the original check or a copy that accurately represents the check and demonstrate that the charge is valid, or

2) recredit funds on the business day following the business day the bank finds the claim valid. If the bank cannot determine the validity by the 10th business day it must recredit the first $2,500 on the 10th day and the remainder by the 45th day.

Exceptions are made for "new accounts, repeated overdrafts and reasonable cause to believe that fraud is involved."

The problem, say some consumer advocates, is that the customer must have a substitute check in order to have the right to an expedited recredit.

"Some bankers argue that you lose your rights to get substitute checks when you agree to check imaging -- and with respect to getting substitute checks back (with your statement) yes, you did," says Gail Hillebrand, senior attorney at Consumers Union. "What's not clear is, can you still say to your bank that you need a particular substitute? It will be interesting to see if any banks say we don't have to give it to you."

Nessa Feddis, senior federal counsel at American Bankers Association, says a bank does not have to provide a substitute check to any customer, either upon request or with their statements. She emphasizes that copies and images have been accepted for many years as proof of payment by the IRS, landlords and merchants.

"The only difference for the consumers, if they do not receive an actual substitute check, is that they cannot insist, in the event of a dispute, that funds be recredited within 10 business days.

"That doesn't mean that banks don't and won't act quickly," Feddis says. "There are Uniform Commercial Code rules and potential liability that put pressure on them to respond quickly. In addition, there are customer-service pressures. Banks have a good track record of resolving disputes in a timely fashion."

Professor Budnitz, who specializes in consumer law, says a lot of consumers might disagree.

"We don't really know what will happen once Check 21 becomes operational," he says. "I don't think consumer groups are being unreasonable in having concerns. Most of the time financial institutions handle most consumer problems with dispatch and sensitivity, but I'm constantly getting calls from consumers and lawyers who represent them saying that they can't get the bank to sit down and listen to the problem the consumer is having.

"When there's a misunderstanding, when something gets messed up, the consumer just doesn't understand what went wrong. Banks will have a lot of discretion. They can make it easy or they can make it miserable."

Notification rules
The only customers that banks are required to notify about Check 21 changes are those who receive their original checks with their statements and those who have a dispute and request a copy of their original check.

The ABA says many institutions will be alerting all of their checking account customers to changes that will come with Check 21. During interviews for this article, both Washington Mutual and Bank of America said they would be notifying all of their checking account customers about Check 21.

Many banking sites already have detailed information about Check 21 and what it will mean to consumers. Some sites are better than others. Gulf Coast Educators Federal Credit Union in Pasadena, Texas, makes it quite clear that there's an increased risk of checks bouncing because they'll clear sooner.

"We try to do that as a credit union -- be upfront and progressive with our members," says Terrie Wollard, senior vice president. "We always try to educate our members that when writing checks there's nothing to stop the merchant from coming in directly and getting their money. People have to assume responsibility, but we're trying to help the transition to Check 21."

Customers who provide the credit union with an e-mail address will be notified if there are insufficient funds to cover a check and they'll be given a few hours to do something about it.

"We'll e-mail you in the morning and give you the chance to make a deposit and have the check late paid for a $6 fee," says the credit union's Web site.

According to Wollard, it's all part of providing good service.

"We're member-centered, so the decision wasn't a difficult one. We need the fee income like most institutions to help us stay viable. But we're not looking to gouge customers."

Even though paper and electronic checking systems may coexist for several years, it's evident that the paper check's traveling days are numbered. There was a time when credit card receipts were returned with the monthly statement. No doubt consumers will become accustomed to relying on copies of checks to resolve disputes the same as they now have to rely on copies of credit card receipts.

As Mark Budnitz put it, banks can make this process easy or they can make it miserable. If your bank tries to make it miserable and you know you're in the right, complain. If the issue isn't resolved contact the appropriate regulatory agency.

It's far more likely that the bulk of problems under Check 21 will arise from consumers getting dinged by nonsufficient funds fees. It's critical that consumers make sure there's enough money to cover checks. Few institutions will zap you an e-mail and generously give you a few hours to make good on a check that's over your balance. Most will sock you with a hefty nonsufficient funds fee instead.

Good money management will help save you money and, for consumers at least, make Check 21 the Y2K ripple of 2004.

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