    [House Hearing, 107 Congress]
    [From the U.S. Government Publishing Office]

                         H.R. 5414--THE CHECK CLEARING
                            FOR THE 21ST CENTURY ACT

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                   FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED SEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               SEPTEMBER 25, 2002

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 107-84

    83-587              U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2002
    ____________________________________________________________________________
    For Sale by the Superintendent of Documents, U.S. Government Printing Office
    Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800
    Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        MICHAEL G. OXLEY, Ohio, Chairman

    JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
    MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
        Chair                            PAUL E. KANJORSKI, Pennsylvania
    DOUG BEREUTER, Nebraska              MAXINE WATERS, California
    RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
    SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
    MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
    PETER T. KING, New York              MELVIN L. WATT, North Carolina
    EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
    FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
    ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
    BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
    SUE W. KELLY, New York               JULIA CARSON, Indiana
    RON PAUL, Texas                      BRAD SHERMAN, California
    PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
    CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
    DAVE WELDON, Florida                 BARBARA LEE, California
    JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
    BOB RILEY, Alabama                   JAY INSLEE, Washington
    STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
    DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
    WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
    DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
    JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
    MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
    PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
    CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
    JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
    VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
    GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
    ERIC CANTOR, Virginia                STEVE ISRAEL, New York
    FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
    MELISSA A. HART, Pennsylvania
    SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
    MIKE FERGUSON, New Jersey
    MIKE ROGERS, Michigan
    PATRICK J. TIBERI, Ohio

                 Terry Haines, Chief Counsel and Staff Director
           Subcommittee on Financial Institutions and Consumer Credit

                       SPENCER BACHUS, Alabama, Chairman

    DAVE WELDON, Florida, Vice Chairman  MAXINE WATERS, California
    MARGE ROUKEMA, New Jersey            CAROLYN B. MALONEY, New York
    DOUG BEREUTER, Nebraska              MELVIN L. WATT, North Carolina
    RICHARD H. BAKER, Louisiana          GARY L. ACKERMAN, New York
    MICHAEL N. CASTLE, Delaware          KEN BENTSEN, Texas
    EDWARD R. ROYCE, California          BRAD SHERMAN, California
    FRANK D. LUCAS, Oklahoma             MAX SANDLIN, Texas
    BOB BARR, Georgia                    GREGORY W. MEEKS, New York
    SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
    PAUL E. GILLMOR, Ohio                FRANK MASCARA, Pennsylvania
    JIM RYUN, Kansas                     DENNIS MOORE, Kansas
    BOB RILEY, Alabama                   CHARLES A. GONZALEZ, Texas
    STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
    DONALD A. MANZULLO, Illinois         JAMES H. MALONEY, Connecticut
    WALTER B. JONES, North Carolina      DARLENE HOOLEY, Oregon
    JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
    PATRICK J. TOOMEY, Pennsylvania      BARBARA LEE, California
    ERIC CANTOR, Virginia                HAROLD E. FORD, Jr., Tennessee
    FELIX J. GRUCCI, Jr, New York        RUBEN HINOJOSA, Texas
    MELISSA A. HART, Pennsylvania        KEN LUCAS, Kentucky
    SHELLEY MOORE CAPITO, West Virginia  RONNIE SHOWS, Mississippi
    MIKE FERGUSON, New Jersey            JOSEPH CROWLEY, New York
    MIKE ROGERS, Michigan
    PATRICK J. TIBERI, Ohio

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        September 25, 2002...........................................     1

    Appendix:
        September 25, 2002...........................................    39

                                   WITNESSES
                         Wednesday, September 25, 2002

    Biggerstaff, Joel, CEO, AirNet Systems, Inc......................    29
    Fenner, Robert M., General Counsel, National Credit Union
      Administration.................................................     8
    Ferguson, Hon. Roger W. Jr., Vice Chairman, Federal Reserve Board     6
    Hage, Curtis L., Chairman & CEO, Home Federal Bank...............    21
    Hillebrand, Gail, Senior Attorney, Consumers Union...............    23
    Schram, Lee, Vice President and General manager of Payment
      Solutions, NCR Corporation.....................................    27
    Walker, David, President and CEO, Electronic Check Clearing House
      Organization...................................................    25

                                    APPENDIX

    Prepared statements:
        Oxley, Hon. Michael G........................................    40
        Ford, Hon. Harold E. Jr......................................    41
        Gillmor, Hon. Paul E.........................................    43
        Grucci, Hon. Felix J. Jr.....................................    44
        Royce, Hon. Ed...............................................    46
        Sherman, Hon. Brad...........................................    47
        Biggerstaff, Joel............................................    48
        Fenner, Robert M.............................................    55
        Ferguson, Hon. Roger W. Jr...................................    62
        Hage, Curtis L...............................................    70
        Hillebrand, Gail.............................................    77
        Schram, Lee..................................................    86
        Walker, David................................................    91

                  Additional Material Submitted for the Record

    Kelly, Hon. Sue W.:
        Information Technology Industry Council letter, September 25,
          2002.......................................................   112
        National Association of Federal Credit Unions letter,
          September 25, 2002.........................................   113
    Biggerstaff, Joel:
        Airnet Timelines.............................................   115
        Snapshots, November 2001.....................................   126
    Association of Corporate Credit Unions, prepared statement.......   127
    Association for Financial Professionals, prepared statement......   131
    Chen-Yu Enterprises LLC, prepared statement......................   137

                         H.R. 5414, THE CHECK CLEARING
                            FOR THE 21ST CENTURY ACT

                                  ----------

                         Wednesday, September 25, 2002

                 U.S. House of Representatives,
                 Subcommittee on Financial Institutions
                                   And Consumer Credit,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to call, at 10:12 a.m., in
    Room 2128, Rayburn House Office Building, Hon. Michael Oxley
    [chairman of the full committee] presiding.
        Present: Representatives Royce, Lucas of Oklahoma, Kelly,
    Gillmor, Grucci, Ferguson, Tiberi, Waters, Watt, Bentsen,
    Sherman, Moore, Ford, Hinojosa, Lucas of Kentucky and Inslee.
        The Chairman. [Presiding.] The committee will come to
    order.
        The chair would like to announce that the reason that
    Chairman Bachus is not here is that his 85-year-old mother had
    fallen and broken her hip this morning and he is now en route
    to Alabama to be with her. Obviously, all of us on the
    committee wish Chairman Bachus' mother a speedy recovery. I
    will begin the hearing and stay as long as I can, and then Ms.
    Kelly will assume the chair.
        I want to begin by thanking Chairman Bachus for arranging
    this important hearing on the bipartisan legislation introduced
    by the gentleman from New Jersey, Mr. Ferguson and the
    gentleman from Tennessee, Mr. Ford. I would also like to thank
    the panel of witnesses who have come to testify before the
    subcommittee and give their insights into the need for this
    legislation. In particular, I want to welcome Mr. Lee Schram of
    NCR, based in my home state of Ohio in Dayton, and Mr. Joe
    Biggerstaff of AirNet Systems, based in Columbus, Ohio. I am
    looking forward to your thoughts and comments. I want to
    particularly thank Chairman Bachus for having two Ohioans
    testify before his committee.
        When I became chairman of the Financial Services Committee,
    one of my primary goals was to ensure that U.S. financial
    institutions have the tools to operate in the most efficient
    manner possible, while maintaining the safety and soundness of
    the financial system. I believe we must implement the
    technological advances made in the field of payment systems to
    provide customers with expedited access to capital and credit,
    while ensuring that they are protected from fraud. The Check 21
    legislation clearly achieves that goal.
        Additionally, significant cost savings to customers and
    financial institutions will be realized with increased
    electronic check presentment. Too often we are hamstrung in our
    efforts to provide U.S. businesses and customers with access to
    the most effective means of dealing with one another.
        There is another important reason why this legislation is
    needed. The terror attacks of last year forced us to reexamine
    how our country operates under adverse circumstances. This
    committee has been at the forefront of the efforts to ensure
    the integrity of our capital markets, to protect the U.S. money
    supply, to provide insurance against terror attacks, and with
    Mr. Ferguson's proposal and Mr. Ford's proposal, to safeguard
    the U.S. payment system against interruptions in transportation
    services.
        So I anticipate we will hear from several of the witnesses.
    The days following September 11, 2002, placed the U.S. payments
    system in crisis when the flights that normally transported
    checks between banks across the country were grounded. With the
    enactment of Check 21, the need for the physical transportation
    of checks between financial institutions will be reduced, and
    any threat to the transportation system will not affect the
    presentment of checks in the payment system.
        Finally, I would like to thank the Federal Reserve for its
    hard work in helping develop H.R. 5414 in consultation with
    this committee and other interested parties. I am hopeful we
    can achieve broad bipartisan support to move this proposal
    early in the next session. I am looking forward to the
    discussion on this legislation on future innovations in the
    U.S. payments system.
        I now yield to the gentlelady from California, the ranking
    member of the subcommittee.
        [The prepared statement of Hon. Michael G. Oxley can be
    found on page 40 in the appendix.]
        Ms. Waters. Thank you very much, Mr. Chairman.
        We are here today to discuss the Check Clearing for the
    21st Century Act. This legislation considers the transformation
    of our nation's payment system from a physical one to an
    electronic one. I have heard many arguments for and against
    this legislation, but my concern today is to ensure that we
    have a balanced bill that also focuses on issues that are vital
    to consumers. I am not opposed to the principle of having an
    efficient payment system in our country which would reduce
    significantly the check clearing time and provide substantial
    savings to the federal government and financial institutions as
    it relates to the transportation of physical checks. If this
    process requires elimination of paper checks, then so be it.
    Personally, I do not receive my checks back from my bank and
    that is by choice. This legislation should be about choice. It
    is my understanding that this legislation will eliminate the
    ability of millions of U.S. customers to get their checks back.
    There are currently 45.8 million households who enjoy receiving
    their checks back with their bank statements. This legislation
    will force them to change their practices. I do not support the
    fact that consumers have to give up their rights to receive
    their checks back. These 45.8 million American households
    should have the choice to say no to substitute checks.
        Another concern I have is the issue of recredit. For
    example, if a check is paid twice or for the wrong amount, it
    is my understanding that this legislation does not grant the
    consumer an automatic right to a recredit of the disputed
    funds. In fact, consumers whose accounts are governed by a
    voluntary check truncation agreement will not receive the right
    of recredit. Instead, they will have to wait months to get
    their funds returned since there is no limit on how long the
    bank can take to resolve a dispute about a check. My question
    is, what are the additional levels of protection a consumer has
    that proponents of this legislation are talking about? Does
    this proposed legislation cover this?
        The issue of privacy is also a big concern of mine. There
    is a great deal of personal information conveyed on the face of
    a check, such as the name, address, telephone number and the
    Social Security of the issuer as well as the payee's name. When
    this information is captured and stored in a shared database
    through electronic imaging, banks can determine the consumer's
    check spending habits. Information about the consumer's
    religious, political and lifestyle affiliations can be revealed
    easily. Will this legislation take the invasion of a consumer's
    privacy under consideration?
        What about the issue of availability? If customers accounts
    are going to be debited faster, will the funds be made
    available to them faster. Is the legislation taking this into
    consideration?
        Having brought up the aforementioned issues to light, I
    look forward to the testimonies of the distinguished witnesses
    on the panel today and I hope to find answers to my questions.
        I yield back the balance of my time, and I thank you.
        The Chairman. The gentlelady yields back. Are there further
    opening statements?
        The gentlelady from New Jersey--well close enough..
        Mrs. Kelly. New York.
        The Chairman. Yes.
        [Laughter.]
        Mrs. Kelly. We do not consider it close enough. We like the
    state as it is.
        Thank you, Mr. Chairman.
        Last week, the gentleman from New Jersey, Mr. Ferguson, and
    the gentleman from Tennessee, Mr. Ford, introduced H.R. 5414,
    Check Clearing for the 21st Century Act, or Check 21. This
    builds on a legislative proposal that the Federal Reserve
    submitted to Congress last December. We are very pleased to
    have the Federal Reserve represented here by Mr. Ferguson, as
    well as the distinguished group of other public and private
    sector witnesses.
        Characterized by innovation, efficiency and speed, our
    nation's payment system has no equal in the world. And yet one
    of the many hard lessons that we learned in the aftermath of
    September 11 terrorist attacks is that this system is not
    without vulnerabilities. With planes grounded and the nation's
    air traffic system at a standstill, the check collection
    process which relies heavily on air and ground transportation
    to move checks around the country experienced serious
    disruptions. Since one of the terrorists' stated goals is
    crippling the U.S. economy, it is clearly in our national
    security interest to take those steps reasonably necessary to
    insulate the payment system from the effects of future
    terrorist attacks that target our financial centers and other
    critical infrastructures.
        While there has been a marked decline in the use of paper
    checks in recent years, as consumers rely more heavily on
    credit and debit cards and ATMs and other forms of electronic
    payments, Americans still write more than 40 billion checks
    annually, according to the Federal Reserve estimates. In
    processing this huge volume of paper checks, banks and credit
    unions are already realizing significant benefits for
    themselves and their customers through the use of electronic
    presentment and check imaging technology. H.R. 5414 will help
    speed those innovations in the marketplace by removing legal
    impediments to electronic check processing, thereby promoting
    greater efficiency in the overall payment system and reducing
    the system's current reliance on the nation's transportation
    grid.
        Consumers will benefit from a more electronic banking
    environment. Already, many institutions are deploying new
    technology to offer their customers enhanced products and
    services, including access to images of checks they have
    written on secure web sites and even ATMs. The Federal Reserve
    has identified other potential consumer benefits from the
    proposed changes to the payments system, such as broader
    deposit options and more timely account information and faster
    check collection and return.
        Since receiving the Federal Reserve's check truncation
    proposal last December, the committee has engaged in extensive
    outreach to all interested parties including regulators, the
    banking and credit union industries, and consumer groups. H.R.
    5414 is the product of all these consultations. While it does
    not reflect perfect consensus on all issues, the legislation is
    an excellent first step toward the creation of a payment system
    for the 21st century.
        Let me again commend Mr. Ferguson and Mr. Ford for their
    collaboration on this important work. Thank you. I yield back
    my time to the chairman, the gentleman from West Virginia--or
    close enough.
        [Laughter.]
        The Chairman. All right. Touche.
        [Laughter.]
        Are there further opening statements? The gentleman from
    New Jersey, the author of said legislation.
        Mr. Ferguson. The gentlelady from New York and the
    gentleman from Ohio are both welcome in New Jersey anytime they
    would like.
        [Laughter.]
        Mr. Chairman, I want to thank you and Mr. Bachus for
    scheduling this important hearing on legislation that will help
    modernize the nation's check payment system and bring paper
    checks into the electronic age. As you know, current law
    requires banks to physically present and return original
    checks. This is a tedious and antiquated process that is
    inefficient, expensive and it is rife with potential for fraud.
    Today, millions of paper checks are physically transported
    between banks every day--a system that has historically relied
    on the steady flow of air and ground traffic in order to ensure
    that checks are presented to paying banks in a timely manner.
        When the horrific events of September 11 halted all air
    traffic in the United States, hundreds of millions of checks
    did not move and the U.S. payments system was stalled. This
    created a situation that severely threatened our economic
    security. As a result, the Federal Reserve after consulting
    with the banking industry and technology companies and consumer
    groups, submitted a proposal to Congress that would reduce the
    need for physical transportation of checks through increased
    electronic truncation. Since the Fed's proposal, this committee
    has been actively engaged in a dialogue with many interested
    parties, many of whom are represented here today.
        Last week, Congressman Ford and I introduced the Check
    Clearing for the 21st Century Act, or Check 21, which builds on
    the Federal Reserve's proposal to modernize the nation's check
    payment system by allowing banks to exchange checks
    electronically. The legislation strengthens our economic
    security by capitalizing on existing technology to make the
    collection process faster and more efficient, while improving
    customer service, access to funds, and anti-fraud protections.
    By reducing the dependence of the check payment system on
    transportation networks, Check 21 will help to avoid negative
    economic impacts from unexpected disruptions to the outdated
    transportation system, whether caused by weather, natural
    disaster, terrorist attack or any other type of crisis. It will
    help to provide the framework for new financial infrastructure
    that is stronger, smarter and allows financial institutions to
    better serve consumers with quality, efficient products and
    services at greater cost savings.
        I am pleased with the constructive feedback that we have
    already received from many of our witnesses here today and
    others, as well as the interest and support that my colleagues
    that expressed on this issue. While I believe that the Check 21
    legislation is a sound product that reflects a multitude of
    views, I recognize that there is much work that needs to be
    done before we move toward a final product. I look forward to
    hearing the testimony and certainly welcome our witnesses and
    appreciate the testimony that they will be sharing with us here
    today on this important issue.
        I yield back.
        The Chairman. The gentleman yields back. The chair would
    indicate unanimous consent for any member to submit an opening
    statement for the record. Without objection, so ordered.
        The chair would note that there are a series of votes--
    three votes on the floor of the House. What I would like to do
    is get started with the witnesses and then we will suspend and
    return. Let me introduce our first panel, the Honorable Roger
    W. Ferguson, Jr., vice chairman of the Board of Governors at
    the Federal Reserve. Mr. Ferguson, welcome back to the panel.
    Our second witness on this panel, Mr. Robert M. Fenner, general
    counsel of the National Credit Union Administration. I think
    this is your first appearance before the committee, is it not?
        Mr. Fenner. In some years.
        The Chairman. In some years. Okay.
        [Laughter.]
        Well, it is good to have both of you here and we appreciate
    your participation in this hearing. Mr. Ferguson, we will go
    with you first.

    STATEMENT OF HON. ROGER W. FERGUSON, JR., VICE CHAIRMAN, BOARD
                  OF GOVERNORS, FEDERAL RESERVE SYSTEM

        Mr. Ferguson. I would like to thank the subcommittee for
    inviting me to discuss H.R. 5414, the proposed Check Clearing
    for the 21st Century Act. Since many of the members have
    already referred to the work of the Federal Reserve system, I
    would like to also do something which is frankly unprecedented,
    and acknowledge the strong work of three of the staff members
    who are here with me today--Stephanie Martin, Louise Roseman
    and Jack Walton.
        This bill, which is similar to a proposal the board sent to
    Congress late last year, will remove existing legal barriers to
    the use of new technology in check processing, and holds the
    promise of a more efficient check collection system. The board
    commends Representative Ferguson and Representative Ford for
    introducing this bill.
        Check processing is far more efficient than it once was.
    Less than 50 years ago, clerks hand-sorted millions of checks
    each day. In the 1960s, the banking industry began to use
    mechanical high-speed check processing equipment to read and
    sort checks. Today, banks, thrifts and credit unions, which I
    will collectively refer to as banks, process, as you have
    already noted, more than 40 billion checks that consumers,
    businesses and the government write each year.
        Legal impediments, however, have prevented the banking
    industry from fully using new electronic technologies such as
    digital imaging, to improve check processing efficiency and
    provide improved services to customers. This is because
    existing law requires that the original paper checks be
    presented for payment unless the banks involved agree
    otherwise. During each step of the check collection process,
    the check must be physically shipped to its destination by air
    or ground transportation from the branch or ATM of deposit to
    the bank's operations center and often through one or more
    intermediaries before being delivered to the bank on which it
    was drawn. Of course, banks can agree to accept checks
    electronically, but the large number of banks in the United
    States makes it unfeasible for any one bank to obtain such
    agreements from all other banks, or even a large proportion of
    them.
        Therefore, legal changes are needed to facilitate the use
    of technologies that could improve check processing efficiency,
    which should lead to substantial reductions in transportation
    and other check processing costs. H.R. 5414 makes such changes.
    The proposed Check Clearing for the 21st Century Act solves a
    longstanding dilemma--how to foster check truncation earlier in
    the check collection or return process, without mandating that
    banks accept checks in electronic form. The Act facilitates
    check truncation by creating a new negotiable instrument called
    a substitute check which would permit banks to truncate the
    original checks, to process the check information
    electronically and to deliver substitute checks to banks that
    want to continue receiving paper checks.
        A substitute check, which would be the legal equivalent of
    the original check, would include all the information contained
    on the original check--that is, an image of the front and back
    of the check, as well as the machine-readable numbers that
    appear on the bottom of the check. Under this Act, while a bank
    could no longer demand to receive the original check, it could
    still demand to receive a paper check. Because substitute
    checks could be processed just like original checks, a bank
    would not need to invest in any new technology or otherwise
    change its current check processing operations.
        This change would permit banks to stop transporting
    original checks and would enable the banking industry to reduce
    its reliance on physical transportation, thereby reducing the
    risk that checks may be delayed in transit, for example, due to
    inclement weather. The banking industry's extensive reliance on
    air transportation was underscored in the aftermath of the
    September 11 tragedy, when air transportation came to a
    standstill and the flow of checks slowed dramatically. During
    the week of the attacks, the Federal Reserve banks' daily check
    flow ballooned to more than $47 billion, which is more than 100
    times its normal level. Had the proposed legislation been in
    effect at that time, banks may have been able to collect many
    more checks by transmitting electronic check information across
    the country and presenting substitute checks to paying banks.
        The Act might also better position banks to provide new and
    improved services to their customers. For example, banks might
    allow some corporate customers to transmit their deposits
    electronically. Further, if banks begin to transmit check
    images from the point of deposit to their operations centers
    for processing, they may be able to establish branches or ATMs
    in more remote locations and provide later deposit cut-off
    hours to their customers. Because the Act will likely encourage
    greater investments in image technology, banks might also be
    able to expand their customers' access to enhanced account
    information and check images through the Internet. In addition,
    banks might be able to resolve customer inquiries more easily
    and quickly than today by accessing check images.
        We recognize that the most challenging policy issues in the
    proposed law and the aspect of this legislation that has
    generated the most spirited discussion relates to customer
    protections. Current check law protects customers if there is
    an unauthorized debit to their accounts. A customer already has
    a claim against its bank for an unauthorized charge, and the
    bank may be liable for interest on the amount of the
    unauthorized charge and consequential damages for the wrongful
    dishonor of any subsequently presented check.
        The proposed legislation applies these existing check
    protections to substitute checks. There are, however, differing
    views as to whether additional customer protections are
    necessary for substitute checks and if so, how extensive those
    protections should be. We believe that in determining the form
    these protections should take, the associated benefits and
    costs will need to be carefully balanced. There are some
    technical matters in the current version of the bill that could
    be improved or clarified and we look forward to working with
    the committee as it further considers this legislation.
        In conclusion, although an increasing number of payments
    are being made electronically, it is clear that checks will
    continue to play an important role in the nation's payments
    system for the foreseeable future. We believe that over the
    long run, the concepts embodied in the proposed Check Clearing
    for the 21st Century Act will spur the use of new technologies
    to improve the efficiency of the nation's check collection
    system and provide better services to bank customers.
        It is important to recognize three fundamental facts.
    First, the proposed Act merely replaces one piece of paper, the
    check, with another piece of paper, the substitute check, both
    of which contain exactly the same information front and back.
    Secondly, the proposed legislation lightens the regulatory
    burden on banks. And the third benefit is that it removes
    barriers to progress in this important area of payment systems.
    Because the Act should also result in substantial cost savings,
    it would also be desirable to begin obtaining these savings in
    the near future, ideally before the bill's proposed 2006
    effective date.
        Thank you for your time, and I would be happy to answer
    your questions.
        [The prepared statement of Roger W. Ferguson Jr. can be
    found on page 62 in the appendix.]
        The Chairman. Thank you, Mr. Ferguson. It is the intention
    of the chair to recess the committee to go over to the floor
    and vote, and then we will begin with Mr. Fenner when we
    return. The committee stands in recess for probably 20 minutes.
        [Recess.]
        The Chairman. The committee will reconvene. Before
    recognizing Mr. Fenner, the chair would ask unanimous consent
    that the imaging exhibit that Mr. Ferguson referred to in his
    testimony be made part of the record so that the members can
    actually get a look at the process. Without objection, so
    ordered.
        We now turn to the aforementioned Mr. Fenner. Mr. Fenner, I
    am sorry for that delay, but you are now recognized for your
    testimony.

    STATEMENT OF ROBERT M. FENNER, GENERAL COUNSEL, NATIONAL CREDIT
                          UNION ADMINISTRATION

        Mr. Fenner. Thank you, Chairman Oxley and members of the
    subcommittee. I am pleased to be here to report on NCUA's
    experience with truncation of sharedrafts in the credit union
    system. From 1974 when NCUA first authorized sharedraft
    accounts, which are the credit union version of checking
    accounts, until 1982, NCUA regulations actually required
    truncation. Truncation was an integral part of the early
    proposals that were developed in the credit union system for
    sharedraft programs, and NCUA believed that requiring
    truncation would foster the development of a more efficient
    system of checking accounts for credit unions and their
    members.
        In practical terms, what truncation in credit unions meant
    then and what it means now is that when a member writes a check
    on the member's account at the credit union, the draft or the
    check proceeds all the way through the clearing process to the
    point where it is truncated or held by either the credit union
    or its corporate credit union or other processor. At that
    point, the information on the draft is stored electronically
    and printed on the member's monthly statement. In some cases,
    electronic images of the draft are returned with the statement,
    but that is not required.
        When a member requests production of the original draft or
    a copy, the issue of fees is determined by agreement between
    the credit union and the member, and also issues of liability
    in the case of fraud or improper debiting or the like are
    determined under the Uniform Commercial Code and other relevant
    law. Since 1982, NCUA has not required truncation, but rather
    our regulations now leave that decision to the individual
    credit unions. Nonetheless, today 20 years later, 91 percent of
    all credit unions that offer sharedraft accounts do utilize
    truncation. We believe that that is the best evidence that
    truncation has been both a cost-effective innovation and one
    that is well accepted by credit union members.
        Moreover, our evidence suggests that truncation has not
    been a frequent source of credit union member complaint.
    Surveys of our regional offices over the last two years have
    revealed no unusual hardships to credit union members, and only
    two instances of complaints made to NCUA. Both of those
    complaints related to fees associated with obtaining the
    original or a copy of a canceled draft, and that is an issue
    that we believe should be determined in the marketplace, and
    not by government regulation.
        In closing, considering our positive experience with
    truncation, we are pleased to support the initiatives being
    considered by the subcommittee that would facilitate truncation
    at a much earlier stage in the collection process than the
    practices that exist in credit unions today, and also allow
    truncation of the check return process. We believe this
    legislation would clearly facilitate broader use of truncation
    and in our view it would improve the efficiencies of the
    payment system.
        Thank you.
        [The prepared statement of Robert M. Fenner can be found on
    page 55 in the appendix.]
        The Chairman. Thank you, Mr. Fenner.
        Let me begin the questioning with Mr. Ferguson. In the
    Fed's initial proposal, Treasury checks were exempted from
    being electronically truncated. Can you explain to the
    subcommittee why this provision was included in the initial
    draft? Assuming that there will be universal security
    precautions, shouldn't we be able to assume the safety of both
    federal checks and of private checks?
        Mr. Ferguson. That is obviously a very good question. You
    are right to note that in the draft that had been originally
    sent up from the Board, an exemption for the Treasury was
    included. That was included explicitly after some discussion
    with the Treasury. I do note that in H.R. 5414, there is no
    such exemption. From my personal point of view, and I think
    others who have thought about this would share this
    perspective, if the government through the course of the
    Congress and then through legislation signed by the president,
    believes that this approach as put forward in H.R. 5414 is a
    proper approach, then I would think it is quite reasonable for
    representatives of the Treasury to come forward to Congress and
    explain why it is that one set of checks issued by the
    government should be exempt from a procedure when we are
    allowing it for others.
        The other thing to recognize is, as I have said before,
    this is really a question in which there are options being
    presented. Truncation is not being mandated. I do not think we
    should have the debate about truncation, so much as about
    whether or not one piece of paper should be allowed to
    substitute for another. But to answer your question again on
    the Treasury, I think it is appropriate since it is not
    included in the Act, for them to simply come forward and
    explain their rationale. That seems to me a perfectly
    reasonable place to start this discussion.
        The Chairman. We appreciate the Fed's efforts in this
    regard to modernize our payments system. Have you had any
    estimates as to how much money the government can save as a
    result of this legislation?
        Mr. Ferguson. What we know overall, not just the
    government, but overall in the country, the cost of processing
    checks is about 50 cents per check, which is about $20 billion
    given that there are 42-43 billion checks written. It is very
    hard to get a sound estimate of the savings that would emerge
    out of this proposed bill for the following reason. The way the
    bill works, it is really up to each individual bank to decide
    the degree to which they want to pursue this process of
    creating substitute checks, as opposed to sending paper checks
    through the system. The bill does something very clever, and I
    commend you for it, it puts the onus, if you will, on banks to
    look at both the benefits and the costs to determining whether
    or not they want to pursue this path. Since we do not know at
    this stage the answers from all of the banks that might be open
    to using a substitute check, it is very hard to figure out what
    the cost savings would be.
        I would also encourage you--I know there will be some
    bankers who may have some experience and some exposure in this
    area--they may be able to give you the individual institution's
    perspectives, but we have not attempted to try to quantify
    particular savings here for the country overall, recognizing
    that there are decisions that will be made by individual
    institutions.
        The Chairman. Thank you.
        Mr. Fenner, NCUA adopted truncation back in 1980, and it
    did so even though there were some objections raised by the
    opponents for such a change. What has been your experience in
    this change? Is there any potential undue harm done to
    consumers because of the system that you have developed?
        Mr. Fenner. The potential is always there, of course, but
    our experience has been very positive.
        The Chairman. Have you had any horror stories in those 20-
    some years?
        Mr. Fenner. No, we do not. We actually first authorized
    sharedrafts for credit unions way back in 1974. From that time
    until 1982, we required truncation. We stopped requiring it
    when we deregulated in 1982, so for the last 20 years, it has
    been the choice of each individual credit union whether to
    truncate the drafts or return them to the member. There is
    something in the range of 6,000 credit unions offering
    sharedraft programs today. Over 90 percent, over 5,000 of them
    still make the choice to truncate. What that suggests to us is
    that they find it to be more efficient and that their members
    accept it.
        The one specific piece of information I can give you about
    consumer complaints is that we did survey our regional offices.
    In the last two years, we have had only two complaints come to
    our attention from credit union members, and those were
    complaints about the fees that they were assessed for obtaining
    an original or a copy of a draft that they needed.
        The Chairman. If you could just take me briefly through--I
    am a member of the Wright-Patman Federal Credit Union here on
    the Hill. I write checks to all kinds of folks. Take me through
    the process as to how the system works today, versus what it
    was before 1980. I would not notice any real difference unless
    I insisted on having my canceled checks, right?
        Mr. Fenner. The only difference which I think is immaterial
    to the credit union member is that until 1980, credit unions
    were required to use what we call a payable-through bank and
    truncate at that point. Now, they are allowed to truncate at
    the credit union, at their corporate credit union or at their
    other processor. But in all of those situations, it is the case
    that truncation for credit unions takes place very late in the
    clearing process, either at the credit union or at the point
    where their processor receives the draft.
        The Chairman. It is true, though, that the sooner in the
    process, earlier in the process you can truncate, the more
    savings that are acquired?
        Mr. Fenner. The more cost-efficiencies in the collection
    and processing of the system, and that is why most credit
    unions truncate today. This legislation, if it were enacted,
    would give them the ability to truncate at an earlier stage and
    provide more efficiencies.
        The Chairman. Very good.
        My time has expired. The gentlelady from California, Ms.
    Waters?
        The gentleman from Texas?
        Mr. Bentsen. Thank you, Mr. Chairman.
        I do have a couple of questions. Governor Ferguson, the
    bill has certain consumer protections that I want to ask you
    about, then I want to ask you about the whole clearance and
    payments. This is a pretty low-tech issue, but thinking about
    this bill, I have had a couple of experiences of my own. I was
    talking to staff about one where I had paid a phone bill back
    in Texas, and went through a six-month debate with the phone
    company over whether or not I had actually paid the bill.
    Finally, they said you are going to have to send us a check,
    and my bank has an image form check that they give you of just
    the front. So then I had to order from the bank the image form
    front and back and fax it to the phone company, which of course
    was a disaster because then they could not read the fax.
    Ultimately, seven months later, the phone company realized that
    the check I wrote them for $39.50 or whatever it was had been
    deposited in a wrong account and so they credited my account
    and we worked it all out and the phone company did not go
    bankrupt because they did not get my $39.50.
        I had another instance where I had a check from a prior
    employer some years back that I deposited in my account, and
    for whatever reason the number was misread on the back and it
    did not go into my account, it went into some omnibus account
    within the bank. Ultimately, I went back to my employer, got
    the check as it cleared. They found that in fact it did not go
    in there. Well, it was a de minimus amount of money, it was not
    a huge amount. Nonetheless, how are we certain that this bill
    will be structured that everyday consumers are certain that
    they can make sure that their funds end up where they are
    supposed to, and they do not have to pay $10 fees or $15 fees
    to get a copy of the check just to make sure that they are
    protected? I understand the high-tech aspect of this, and it
    makes perfect sense, but how are we certain that this bill will
    protect that? And then I have a follow-up question.
        Mr. Ferguson. Very good questions. Obviously, many of your
    two anecdotes deal with things outside of the banking system.
    They deal with the telephone company and their ability, so we
    should recognize that some of these problems are not in the
    world of the check. To answer your specific question about how
    we can be certain, one of the things that the bill does is it
    creates again in the institution that initially decides to
    convert the check from the original paper to the image that you
    are looking at now, a number of warranties and indemnities that
    travel throughout the system. The warranties are quite
    important. They say two things basically from the original bank
    that converted the check. It says first that this image is an
    accurate image of everything on the check that is relevant to
    the payment process. And then the warranty also says that there
    will not be any double-debits of the type of you might have
    mentioned, or you sort of implied.
        It is quite important, because if you look through the rest
    of the bill, when you get to the section that deals with
    indemnities, where in fact all the banks in the line, but
    ultimately the one that originally converts the check, agree
    that if something goes wrong and they are notified of it, that
    they will indemnify for the results, the bad things that have
    happened. Under the part where it deals with warranties, they
    will not just simply pay whatever the face value of the check
    was, but also any of the damages that the bill calls
    proximately caused by the failure of those warranties, which
    gives a potentially very broad range of protections. It also
    gives the banks involved in this an economic incentive to get
    it right because they know that if at the end of the day if
    they do not get it right, they will have to pay potentially not
    just the face value of the check that went wrong, but if it is
    the failure of the imaging process or the use of the image or
    the electronics, they may have to pay a broad range of damages
    that resulted from that failure. That is really I think a very
    strong set of consumer protections.
        Mr. Bentsen. I appreciate that.
        Let me ask another question before my time is up. The way I
    understand this Act from your testimony, the clearance system
    could almost work electronically, and even though banks
    conceivably could do it now under the law, it would be mandated
    now so that I write a check on my account at Wright-Patman or
    wherever, or Acme Bank and Trust in Texas, and it goes to Acme
    Phone Company--they clear that check almost simultaneously.
    Does EFAA give the Fed the authority, then, if this were to
    become law, where there is same-day settlement on the check so
    that the money comes out of my account--basically, are we going
    to be able to shorten the time frame with which funds are
    available from what it is under the law?
        Mr. Ferguson. Let me give you some facts and then answer
    your question. First, now about 93 percent of checks clear
    overnight. We should recognize that we really have an extremely
    efficient check processing system. This bill, if it becomes
    law, will make it dramatically more efficient, but we are
    working with a system that is pretty efficient. There might be
    a few pockets of change where you would see that come down
    because of this for sure. Under the EFAA, Congress has in fact
    required the Fed to reduce the holds on most checks to try to
    get things moving sooner and we will continue to follow that
    process. If the banks under this law, which is really not
    mandatory, really quite optional--it does not mandate
    truncation; it mandates only they accept the electronic image
    which they may then--someone may reconvert to paper. If as a
    result of this indeed time is compressed, then under EFAA the
    Fed should be watching that closely. If it does lead to that
    kind of result, then that is what we should do. It is not clear
    to me yet what the result is going to be, but obviously that is
    what the--
        Mr. Bentsen. Madam Chair, if I might very quickly, this is
    very important--right now, if you deposit an out-of-town check
    in your account, I think it is a two-day or three-day hold
    period on the check.
        Mr. Ferguson. Right.
        Mr. Bentsen. If in fact that check can clear immediately
    through an electronic image, should the consumer--in what is in
    effect same-day funds for the banks--should the consumer get
    same-day funds as well?
        Mr. Ferguson. We should be careful about understanding what
    happens in terms of the clearing. What this will allow to have
    happen first is moving the presentment faster. The bank will
    then still have to see if there is sufficient funds. They will
    have to go through their process to see if there is a return.
    And so while the process will speed up quickly, I do not want
    to leave the impression that everything happens sort of
    instantaneously. So to keep going, to answer your question,
    insofar as there are benefits that emerge here, and again we
    have not seen them all yet, the EFAA does require us to monitor
    that closely and to change--now, as you observe in some cases,
    a three-day hold or a two-day hold for some checks--to change
    that. I do not know yet if that is what will happen, but that
    is what the EFAA requires us to do. So by definition, we will
    have to monitor closely and change the holds that are required
    here. But we also want to understand how all this works before
    I can commit to you that it will definitely come down exactly
    the way you have suggested because we do not have the facts
    yet. But the law requires us to monitor closely and to respond
    in the way you indicate, but I cannot in all honesty commit
    that is--
        Mr. Bentsen. That answers my question. Thank you, governor.
    Thank you, Madam Chair.
        Mrs. Kelly. Thank you very much.
        It apparently is now my turn to question, and I have a bit
    of business I need to do first, and that is I have two letters
    that have been handed to me--one from the Information
    Technology Industry Council and another from the NAFCU that I
    would like, with unanimous consent, to enter into the record.
    With unanimous consent, so ordered.
        [The following information can be found on page 112--113 in
    the appendix.]
        Vice Chairman Ferguson, I want to make it clear that I am a
    supporter of Congressman Ferguson's bill, but I am wondering
    what the Fed would think about going further than the bill?
    Currently, the bill allows checks to be truncated when the bank
    in which it is deposited receives it. What if we were to expand
    truncating to the point of service? Is this something that the
    Fed would consider? Would the Fed support further refinement
    and clarification of the rules to eliminate the paper checks
    from the system at the retail level?
        Mr. Ferguson. My view on this is that what we should do
    first is observe how this works. This gives a number of
    options. It does not mandate truncation. It allows it to
    happen. If it turns out that indeed this process works very
    well, then I think Congress--not the Fed--the Congress should
    be open to thinking further. This bill does not mandate
    truncation. So my perspective on this is that we need to see
    how this bill works.
        The other question that is important here is the question
    of these warranties--the consumer protections I talked about.
    It is quite important to understand that if the bank is willing
    to provide the same kind of consumer protections that are
    discussed here, that might make your proposal in some sense
    easier. It is quite important that we understand where the
    warranties are and that the interaction between benefits and
    costs or risks are similar to what is in the bill. So it is
    really a possibility. But my advice, frankly, is to work with
    the structure that is here, observe it, see if we can expand
    quickly, and that may allow us to go in the direction you are
    talking about. But I see no reason why we would object to what
    you have said. Being a cautious central banker by definition, I
    would like to see how this first approach works before I firmly
    say that what you propose is the obvious thing that must be
    done relatively quickly. And it does depend again on managing
    this question of warranty, so we that we can keep the level of
    consumer protection at the right level.
        Mrs. Kelly. I think there is some concern on the part of
    retailers. I think they are concerned about routing information
    on the check reflecting the financial institution, where the
    check is drawn; intentional mutilation of the checks, the MICR
    line on the checks. I think the retailers are also concerned
    that they may not be given the customer's identifying
    information on a returned ACH item. That is why I brought this
    question up. I do not know if you have thought about those
    things or have an opinion on them or not, but if you do, I
    would appreciate hearing.
        Mr. Ferguson. I have thought about it a bit, and I am
    obviously being forced to think about it here again. I am not
    sure that there is, while I respect everyone's degree of
    concern about something new, I am not sure that there are
    sufficient facts to support some of these concerns. The current
    check procedure, for example, has very little of the kinds of
    problems that you have just alluded to, and I see no reason to
    think that because we are under this bill allowing the option
    of taking a check and turning it into an image, that the kinds
    of concerns you have raised, or other fraud or misbehavior
    concerns, should necessarily rise. There is nothing inherent in
    taking one piece of paper and converting it electronically to
    another piece of paper that creates the kinds of problems that
    you have alluded to.
        The same thing applies with respect to return. In order for
    a return item to work smoothly, then you have got to have the
    right set of ABA numbers and return identifiers on the check in
    order for this whole process to work. And so I again think that
    while in a new world that is being discussed in this bill one
    might have some concerns, but I do not think the kind of
    concerns that the retailers appear to be raising strike me at
    this stage as a credible set of concerns that should slow us
    down in thinking through this process.
        I go back to the other point with respect to warranties.
    Again, the incentives on the part of the bank that decides to
    use electronics to convert the original checks to a substitute
    check are to do it properly because the cost to that
    institution, while it is hard to predict at this stage, could
    be larger than simply the amount of money to be paid on the
    check because of the point that I have made in response to the
    earlier question with respect to damages that may flow from it.
    So the incentives are all to do it right, and the reality of
    this process is such that I do not think it creates any new
    opportunities for fraud or misuse of the paper check. So I am
    actually, while I always respect those who are concerned, am
    relatively calm that the kinds of concerns that you have raised
    seem to me very remote and highly unlikely possibilities.
        Mrs. Kelly. I want to ask one further question. Since we
    are talking about the element of speed here, I want to know
    whether or not you would expect the Fed to reduce the amount of
    time that banks put holds on deposited checks, if that is
    something that you have any idea about or how short this time
    could become. It seems to me that that is a potential
    possibility that we could look it.
        Mr. Ferguson. Well, as I said in response to the earlier
    question, the EFAA does require us to continue to monitor this.
    We recognize that now we have got holds that, depending on
    where the check is written, are in the three-day range. I want
    to be careful not to commit to anything at this stage, but on
    the other hand I also want to say that the law requires us to
    continue to look down this path and we will obviously continue
    to do that. If this process as envisioned in the Act if it
    becomes law suggests that indeed there is room to reduce the
    degree of holds, and by definition that is what we are mandated
    to do. And so that is what we will do. The law will not push us
    there. I think it is the result of behaviors and observations
    of changes in behaviors that may allow us to go to that point.
        Mrs. Kelly. Thank you very much.
        Mr. Hinojosa?
        Mr. Hinojosa. Thank you.
        I would like to ask a question of Governor Ferguson. In
    following up with the questions that my friend from Texas, Ken
    Bentsen, was asking, are there any time limits on how quickly
    the banks and the credit unions must respond? If there is not,
    should there be one?
        Mr. Ferguson. If you look in the proposal as written, the
    consumers have 30 days, potentially extended to another 30
    days, to inform a bank that they recognize a problem. The banks
    then, and I think in this one it is 10 days they have to--10
    days in order to respond to that and to do if appropriate an
    initial recredit. There are some safe harbors that might allow
    the banks not to do that if it turns out that there have been,
    for example, any evidence of overdrafts or it is a brand-new
    account. But the answer to your question is basically after the
    30-day or 60-day notification from a consumer, 10 days for the
    original recredit, and the amount to be recredited is either
    the lesser of the face amount of the check or $2,500. When we
    did some research on this, the $2,500 covers the vast majority
    of checks that are being written. So given the fact it is
    unlikely to be a major problem, I think again the range of days
    here one could argue is certainly a reasonable place to start
    discussion.
        Mr. Hinojosa. Are small-and medium businesses utilizing
    this new technology to try to pay off a bunch of their bills
    electronically? If not, why?
        Mr. Ferguson. What we have noticed over the history of
    checks over the last 25 years or so, one is that the number of
    checks seems to have peaked about 1995 and has come down. But
    more interestingly, the average value of checks has also come
    down, which is suggesting that businesses in general are
    starting to use these technologies. The question of small-and
    medium-size businesses versus large businesses I think is one
    in which our data does not give us a clear answer. However, I
    would say that small businesses and medium-size businesses have
    exactly the same incentives as any other business to try to
    become much more electronic, because if you get the canceled
    check back then you have a real question of storage.
        If you find that what you have gotten--and this law allows,
    by the way, to get paper back, as I have indicated a couple of
    times, if what you find is that you are working with an
    institution that truncates checks, and about 30 percent of the
    checks in the country are now truncated, then you get more than
    enough information to link to the books and records of your
    system. So from my perspective, I know that businesses in
    general, or those who have tended to write larger checks, have
    moved more in the direction of electronics. We know that about
    30 percent of checks are truncated, and I think small-and
    medium-size businesses should have exactly the same incentives
    as any other business to go down that path.
        One of the things that has been difficult in the world of
    electronification of payments overall is the linkage between
    the payment system and the back office books and records of
    many businesses is at this stage pretty much nonexistent. So it
    makes it very hard to have end-to-end electronics. This bill as
    proposed would do nothing about that, and I am not suggesting
    that it should, but perhaps one of the challenges for small-and
    medium-size businesses is indeed that it is very hard to get
    the kind of interfaces that some large institutions have at
    this stage because the services, while they are available on
    the part of the banks, the investment on the part of a small
    business may be more than they want to take on.
        Mr. Hinojosa. How do you feel if our committee were to
    request that the banks do whatever it takes, through surveys or
    through forms, to be able to tell us whether the small and
    medium businesses, and even we could go further and say those
    that have the small business designation, are utilizing it, so
    that if they are not, that we can try to possibly earmark some
    money and do some education and help to those so that they can
    keep up with all of this technology that is available.
        Mr. Ferguson. Obviously, I think in large part you should
    ask the banks what they think about that. Obviously, one of the
    things that is proposed here that one could talk about is the
    need to have consumer education broadly defined. So insofar as
    that consumer education includes any customer that comes into
    the bank, I think it is written as "customer"--then that would
    pick up small-and medium-size enterprises as well, so they
    would be educated as are you and I with respect to what at
    least a substitute check is insofar as that becomes part of
    what they are doing. But certainly, I would say talk to the
    banks about their willingness or interest in doing this, and
    obviously if the wisdom of Congress suggests that there be
    money put forward from Congress to help in the process, that is
    always something to which I obviously could not object.
        Mr. Hinojosa. Thank you, Mr. Ferguson. And thank you, Madam
    Chair.
        Mr. Grucci. Thank you for your statements and your
    comments. Madam Chair has left and she will be back shortly.
        [Laughter.]
        Mr. Hinojosa. I apologize.
        Mr. Grucci. That is okay.
        The chair recognizes Mr. Watt for his questions.
        Mr. Watt. Thank you, Mr. Chairman. I will be brief. I want
    to apologize to the witnesses for missing their testimony, and
    just have one question of Mr. Ferguson. If I understand
    correctly from your response to earlier questions, about 30
    percent of the process is currently using some variation of
    this?
        Mr. Ferguson. About 30 percent of checks are currently
    truncated.
        Mr. Watt. In the same way that this bill basically provides
    for?
        Mr. Ferguson. Well, this bill does not mandate truncation,
    as you know. It just simply makes that an option or makes it
    perhaps a more attractive option because it allows for this new
    form of paper called a substitute check. What is currently
    happening with truncation is not that substitute checks exist.
    There are two things that are happening with truncation at this
    stage, and our credit union friend may also want to comment on
    this. One is that it is just purely electronic from end to end,
    if you will, and paper does not follow. More of the truncation
    I believe is a truncation with the original check to follow.
    And so we have some experimentation with truncation--some of
    the experimentation is 30 percent.
        Mr. Watt. So would it be fair to say that you do not view
    this as being anything radical that is being proposed?
        Mr. Ferguson. I do not view this as being radical in the
    least. I view it as moving things forward.
        Mr. Watt. You made some passing reference to possibilities
    of improprieties taking place in the system as it exists now.
    Are you satisfied that the technology is such that those
    possibilities are either not increased or even reduced?
        Mr. Ferguson. I am satisfied that those possibilities are
    certainly not increased. They may be reduced because this
    process allows what is called the return side of the process to
    go much more quickly, which is just saying if the individual
    finds that he or she has been given a check to which there is
    insufficient funds in the account on which the check is drawn,
    or that account has been called, will learn about that more
    quickly under this process.
        Mr. Watt. I understand the advantages of that. What I am
    concerned about is it does--I just want to be clear on whether
    you think the possibility of other forms of inappropriate
    activity such as hacking into the electronic process--things
    that I guess if you hack into the system now, you hack into it
    and you take the check. Are you satisfied that the electronics
    of this do not increase the risk to customers? I guess that is
    the bottom line.
        Mr. Ferguson. To be very clear, I am satisfied--to answer
    the question the way you phrased it--I am satisfied that the
    electronics of this--
        Mr. Watt. The technology, I guess. Electronics is not the
    future word--the technology, yes.
        Mr. Ferguson. I am satisfied that risks do not go up.
        Mr. Watt. Okay. I appreciate your response, and unless Mr.
    Fenner has some affirmative response, I will yield back the
    balance of my time.
        Mr. Grucci. The gentleman yields back the balance of his
    time.
        I have just one quick question for the vice chairman. We
    are going to change a policy that people who have been
    accustomed to doing for a number of years, and in fact when we
    have questions now in our own personal home financing, my wife
    will go back to the checks or I will go back to the checks and
    pull that one out. People have become very accustomed to that.
    I understand that in the modern age we try to speed things up
    and we try to make them even more efficient than what they have
    been.
        By truncating the check process and allowing it to be done
    through the Internet, how do we compensate, A, for those people
    who may not have access to an Internet, or have access to a
    public library or do not live in a community, or simply do not
    know how to use that system? What will be happening to those
    people? How will they track their checks and their records?
        Mr. Ferguson. Let me be very clear. This bill that we are
    discussing now does not require truncation. For an individual
    who has received a piece of paper called a check, this bill
    still allows that individual to receive a piece of paper that
    shows exactly the image of the check front and back as it has
    gone through the system. It also will have a little stub on it
    that basically says, this is an image of your check and it is
    the lawful equivalent of your check. So while 30 percent of the
    people do not get checks back under truncation currently or 30
    percent of checks are truncated, for those who want to hold
    onto a piece of paper to prove that indeed a bill was paid,
    nothing in this law as far as I can read I will stop them from
    doing that if their bank continues to offer that service. There
    is nothing in this law that requires a bank to stop offering
    that service.
        So if you are with a bank today that will give you your
    check back, as long they do not change their policy, and this
    law does not require them to change their policy, then you can
    get either, depending on what happens in their system, the
    original check if they have just only gone with the original,
    or you can get another piece of paper that is about the same
    size of the check that has all of the information on it. So
    those who are used to getting back month to month a small
    packet of paper that has gone through the system will get once
    a month a small packet of paper that has gone through the
    system. Now, I happen to not do that, and I have heard Ms.
    Waters describe that she does not do that, but there are people
    who do and there is nothing in this bill that will mandate any
    bank to stop doing that.
        Now, the bill would allow banks to decide if it is in their
    business interest to try to encourage or incent their customers
    to move away from getting those pieces of paper and some of the
    benefits that might accrue to the banks may also accrue to
    customers, which is true of many services in banks, for example
    ATMs. But for an individual who wants that paper and must have
    that piece of paper, they can get a piece of paper that shows
    them all of the information they need to sleep comfortably at
    night. I therefore think that from your standpoint, if anyone
    is attached to a canceled check, they will get something that
    should give them exactly the same degree of comfort.
        Mr. Grucci. Providing that the bank continues that kind of
    a policy. If the bank chooses not to, how would they then get
    that document?
        Mr. Ferguson. Well, there are a couple of things. One is
    they can always call the bank and get the information, if that
    is very important. Individuals will keep track of, presumably
    if they fill out their check register properly, the check
    number and the amount and the payee. They can always call the
    bank and ask for the image, and that image because it would
    either be the best evidence available if they needed some
    evidence; it would be potentially a substitute check if they
    have gone down the path of creating substitute checks; or they
    can go back to the process and get the original check if it
    still exists.
        The other point to make, if you look at the indemnity
    section here, if the original check still exists, there would
    be incentives for the bank to bring that forward. If the
    original check does not still exist, there are still important
    warranties and indemnities about the quality of the substitute
    check and the information thereon. So if something has gone
    wrong in the system, the fault will go back to the institution
    that originally got rid of the original check and went to the
    substitute. So there is plenty of room to get all the
    information that either will come to you regularly or through a
    simple phone call you can get it, or on the Internet or going
    to your bank to get it. So if you have a banking relationship,
    the bank still has the information, if they have not sent it to
    you in one form or another, and it is a simple question of
    picking up the phone, going to the bank, going to the Internet,
    et cetera. And there are many different ways, and in some cases
    on the ATMs, I suspect, may emerge--you may hear from the NCR
    representative about that.
        So I would say insofar as information matters, you need not
    worry. My staff has just send me a note here that part of the
    answer I was not going to give you, but to make them happy, I
    will.
        [Laughter.]
        By definition, if you do not like what your bank has done,
    you can go to another bank. The reason I did not give that
    answer originally, is having been in the process of opening and
    closing checking accounts, I know it is not an easy thing, but
    by definition if you do not like what your bank has done, you
    can always move to another bank. So when all is said and done,
    all these centers are to serve customers fully through a range
    of services that respond to their needs, either to encourage
    them to stay or to go to another bank.
        Mr. Grucci. For the benefit of your staff, if all the banks
    are doing the same thing, it really does not matter which bank
    you would go to. If they are all competing with each other and
    one bank is not, then they all are not going to do--
        Mr. Ferguson. Let me jump in and defend something here,
    though. If there is a broad demand among consumers for getting
    pieces of paper back, banks are profit-maximizing institutions,
    there will be banks that provide that. There will be banks that
    will advertise that as a service if there are sufficient
    numbers of consumers that want it. Under this law and under
    basic economics, the probability that all banks would do only
    one thing is very low if there are consumers who want some
    other service, just as we know all shirts are not white, though
    I happen to wear white shirts all the time.
        Mr. Grucci. I see that my time has expired. I will take the
    liberty, though, of just asking one final question. What
    happens to all of these checks? Where do they go?
        Mr. Ferguson. There is a process called safekeeping, where
    the bank that originally receives them may store them for a
    period. I think frankly to be honest with you, in the credit
    union and other systems, that period in which they are stored
    is a relatively short period of time. In other cases, it may be
    a very long period of time, but there need be no concern about
    that because the way laws in general operate, there is a
    concept called "best available evidence." If the original check
    is no longer available, then the image becomes the best
    available evidence and everything flows off of that. So the
    existence or lack of existence of the original check from the
    standpoint of anything that a consumer might care about really
    should not be that major a deal because laws are structured to
    allow for whatever the best evidence is to come forward.
        Mr. Grucci. Thank you.
        Are there any other further questions from any of the
    members? Hearing none, I would like to thank the panel for
    their time and their consideration and their insight on this
    issue. The chair notes that some members may have additional
    questions for the panel which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 30 days for the members to submit written questions to
    these witnesses and to place their responses on the record. I
    will adjourn the first panel and convene the second panel.
        Let me take the liberty of introducing our next panel. We
    have first Mr. Curtis "Curt" Hage, chairman and CEO of the Home
    Federal Bank; Ms. Gail Hillebrand, senior attorney, Consumers
    Union; Mr. David Walker, president and CEO, Electronic Check
    Clearing House Organization; Mr. Lee Schram, vice president and
    general manager of Payment Solutions, NCR Corporation. For the
    purposes of our final introduction, I yield to my colleague,
    Mr. Pat Tiberi.
        Mr. Tiberi. Thank you, Mr. Chairman.
        It is a pleasure for me to introduce a constituent of mine.
    Joe Biggerstaff has served as the AirNet Systems chairman of
    the board since August of 2000, and has served in other
    capacities since March of 1999. He has worked in the
    transportation industry for 23 years. AirNet is an integrated
    air transportation network based in Columbus, Ohio in my
    congressional district, and the system operates between 100
    cities in more than 40 states and delivers over 18,000 time-
    critical shipments each working day. It is the leading
    transporter of canceled checks and related information for the
    U.S. banking industry, meeting more than 2,200 daily deadlines.
    So it is great to have you here, Joe.
        Mr. Grucci. Thank you, Pat.
        Without objection, your written statements will be made
    part of the record. You will each be recognized for five
    minutes in summary of your testimony, and we will start with
    Mr. Hage.

     STATEMENT OF CURTIS ``CURT'' L. HAGE, CHAIRMAN AND CEO, HOME
                              FEDERAL BANK

        Mr. Hage. Mr. Chairman and members of the subcommittee, I
    am Curt Hage, chairman and CEO of Home Federal Bank in Sioux
    Falls, South Dakota. I am chairman of America's Community
    Bankers and I am here today representing the five major banking
    and financial services trade associations--ACB, the American
    Bankers Association, the Consumer Bankers Association, the
    Financial Services Roundtable, and the Independent Community
    Bankers of America.
        I am pleased to present our views on the proposed Check
    Clearing for the 21st Century Act--Check 21. It is somewhat
    exceptional that all of our groups fully agree on any topic.
    However, we all support efforts to increase the efficiency of
    the nation's payments system that benefit both consumers and
    financial institutions. I would like to extend our appreciation
    to both Chairman Bachus for holding this hearing, as well as to
    Congressman Ferguson and Congressman Ford for introducing this
    legislation. We also appreciate the outstanding efforts of the
    committee and Federal Reserve staffs who have worked tirelessly
    to address the issues of all concerned.
        While electronic payments are increasing, traditional paper
    checks remain the dominant form of non-cash payment. Checks
    will continue to play a significant role in the payment system
    for years to come. Processing these checks is enormously
    expensive and labor-intensive. Current law generally requires
    physical checks to move through the entire clearing process
    from the bank of first deposit to the payer bank. While
    physical checks continue to move through this process, an
    increasing number of consumers do not have their original
    checks returned to them. Instead, they receive detailed
    information about their check transactions in their monthly
    account statement. Passage of legislation like Check 21 will
    build on this experience and facilitate efforts to remove paper
    checks from the settlement process. Those banks that choose to
    process paper checks could use substitute checks that would
    retain the legal equivalence of the original.
        Most importantly, the proposal does not require the
    industry to adopt a fully electronic check clearing system. We
    could adapt to electronic check clearing over time without
    interfering with the existing paper check process. Expanding
    electronic check processing will also minimize the effect of
    unexpected disruptions to air and ground transportation
    systems. It will result in faster check collection, make funds
    available sooner, and help combat fraud.
        Check 21 will also help increase the use of check imaging.
    Many consumers already benefit from this process. Rather than
    dealing with bundles of canceled checks, consumers receive
    concise and convenient summaries of their transactions. Many
    can access check images on the Internet, helping them to
    quickly verify their transactions, identify potential errors,
    and detect fraudulent transactions sooner. Identifying errors
    and potential fraud quickly helps banks minimize customer
    inconvenience, control losses, and gives law enforcement an
    important time advantage.
        Check 21 could provide real benefits to rural communities.
    In South Dakota, we are constantly challenged to meet our
    federally mandated funds availability deadlines due to adverse
    weather conditions and limited access to air courier services.
    One Home Federal branch operates in a remote part of the state
    that is nearly a five-hour drive from our central processing
    point. We often have just enough time to meet the federal funds
    availability requirements. Home Federal customers pay a premium
    for moving checks across the state. Check 21 would allow Home
    Federal and other rural community banks to transmit electronic
    images of checks rather than sending them on unnecessary
    physical journeys.
        Some critics are concerned about relying too heavily on
    check images. Our industry's experiences show that these
    concerns are unfounded. Home Federal began offering checking
    accounts around 1980. From the beginning, we provided customers
    with the convenience of check safekeeping. They receive
    detailed information about checks drawn on their accounts,
    while the original physical check is microfilmed and stored at
    our check processing facility. Consumers receive a convenient
    summary of transactions and avoid the burden of receiving and
    storing reams of canceled checks. Banks reduce mailing and
    handling costs. These savings can be passed on to our
    customers.
        Home Federal began offering the option of having checks
    retained several years ago. Still, fewer than 10 percent of our
    customers choose this service. Home Federal will soon offer
    full image statements of processed check and online access to
    images. We expect that once these image products are available,
    almost all or our customers will choose not to have their
    original checks returned.
        Check 21 makes no fundamental change in existing check law,
    so we believe that new consumer protections are not necessary.
    The banking industry and millions of consumers have an
    established history of dealing with truncated checks and image
    documents. This experience demonstrates that existing law
    provides adequate protections. Check 21 establishes a
    complicated expedited recredit and reversal and recredit
    structure for consumers and banks. The banking and financial
    services trade associations believe this provision is
    unnecessary and may result in unintended consequences.
        Today, banks respond to customer claims of check fraud or
    processing errors in a timely and effective manner. Complaints
    are rare. In fact, Federal Reserve staff has indicated that an
    informal review of the consumer complaints filed with all the
    banking regulatory agencies reveal no significant consumer
    issues relating to existing check protections. Complicated new
    recredit procedures would confuse customers, create compliance
    headaches for banks, and expose banks to fraud.
        Our associations support the general principle outlined in
    the Check 21 Act to facilitate innovation in the check
    collection system. We believe, however, that existing law and
    regulations work. We urge Congress to preserve existing law
    with respect to substitute checks authorized under this
    proposal.
        Thank you for considering our views.
        [The prepared statement of Curtis ``Curt'' L. Hage can be
    found on page 70 in the appendix.]
        Mr. Grucci. Thank you, sir.
        I should have pointed out at the beginning of the testimony
    that there are a series of lights. We try to stay within five
    minutes. We are not going to ask you to truncate your
    statements, but certainly we would ask you to monitor the
    lights, and if you can stay within the five minutes, that would
    be great.
        Let's move now to Ms. Hillebrand.

     STATEMENT OF GAIL HILLEBRAND, SENIOR ATTORNEY, CONSUMERS UNION

        Ms. Hillebrand. Thank you, Mr. Chairman and members. I am
    Gail Hillebrand from the West Coast regional office of
    Consumers Union. Since 1936, Consumers Union has been in the
    business of protecting U.S. consumers and their interests. Our
    mission is to test, inform and protect. Needless to say, I am
    in the protect part of our organization. My written testimony
    today is joined by several other national consumer
    organizations--Consumer Federation of America, U.S. PIRG, and
    the National Consumer Law Center.
        Let me start by saying we are not against technology and
    efficiency. However, we are against the Check 21 Act in its
    present form. I will tell you why. We think that Congress needs
    a very good reason before disturbing the existing payment and
    financial management habits of somewhere above 45 million U.S.
    households. We are concerned that the Check 21 Act essentially
    changes the processing of checks to be much more similar to the
    processing of electronic payments of other kinds--debits and
    electronic funds transaction acts such as your regular
    recurring mortgage debit, without providing the same
    protections to all consumers.
        The Act is ingenious in that each consumer who now gets
    their original paper check will get a different piece of paper
    called the substitute check. But the Act does not guarantee
    that any consumer can receive a substitute check, and you heard
    Governor Ferguson say that will be up to the marketplace. The
    Act also does not guarantee that any consumer can get the
    original if the consumer needs it for a particular reason, such
    as a landlord or a phone company who does not understand the
    "best evidence" rule and wants to see the original, not
    whatever the bank has on hand.
        The original will not even be at the consumer's bank
    anymore. It will be somewhere else in the check processing.
    Quite a bit earlier in the processing scheme than today, where
    usually if you have truncation at all, you have got it right
    there at your own bank or at the pass through bank. Passing
    this Act would permit banks to blame any customer
    dissatisfaction with this change on Congress. Sorry, we cannot
    give you original checks back anymore. Congress says we can
    give you this piece of paper instead. That will not be quite
    true, but if your bank no longer has the original check, they
    will not be able to give it back to you.
        We estimate 45.8 million U.S. households are now getting
    their checks back. That is a very conservative estimate,
    because it is based on numbers that were provided by members of
    the banking industry about the percentage of consumers who get
    so-called voluntary truncation now. The numbers we heard this
    morning from Dr. Ferguson would suggest quite a higher number
    of households getting their checks back, because he said it was
    only 30 percent nationwide who have truncation.
        So what is the difference? What is the new error rate--the
    new potential error? We do not know because this system has not
    been used. But we do know that Congress has said when we have
    electronic funds transfers, we have consumer protections in the
    nature of a 10-day recredit under regulation E, and an ability
    to get that money back into the consumer's hands for use very
    promptly. You have something in your Act in section six that
    looks very much like the reg E 10-day recredit. The reason it
    does not work and cannot work for consumers is banks can take
    it away simply by saying to the consumer, look, you are not
    going to get back your original check anyway, so we would like
    you to just say we are not going to send you these foolish
    paper substitutes either. Instead, we will give you electronic
    image; we will give you online image; we will give you a set of
    copies, but they will not be the legal equivalent to your
    original check and you will not get that protection of the 10-
    day recredit.
        We do not know exactly what the new risks are. We suspect
    they could include duplication of the electronic image so that
    the check is paid twice, or what was described at one of the
    many meetings on this Act before the Fed, leakage of the
    original check back into the check system, so that both the
    original and the image might move through and at some point
    become two electronic images.
        Since the Fed estimates only one-quarter of checks are
    subject to electronic presentment now, that through bank-to-
    bank agreement, we cannot know what will happen if that is 100
    percent of checks, or some number higher than the current
    level. But we do know that existing law gives us rights as
    consumers when we pay with our debit card and we do not think
    it makes any sense to say, if you pay with a check, you have
    one set of rights; if you get not your original, but these
    substitute checks back, and a different set of rights if you do
    not get your substitute checks back.
        I would also note an important issue related to consumer
    privacy. There is a lot of personal information on a check. It
    is available now. People could pick it up off the check. But it
    is expensive to pick information up off of paper, and when that
    information can be picked up off of electronic images, we have
    a greater risk for privacy.
        You will be hearing from my colleagues, the bankers, that
    check truncation has been around for decades--it is not really
    a problem. We do not know whether it will be a problem because
    consumers have been able to choose yes or no to check
    truncation up to now. This will essentially prevent the
    consumer from getting the original returned on a regular basis.
    That means it would not be surprising to have a small number of
    complaints from consumers who have chosen check truncation
    voluntarily, but when it is imposed on them, we may see some
    different results. But even taking the bankers' numbers--they
    gave us an estimate in one meeting of 1.1 billion checks and
    480,000 customers asking for their checks back--if you take
    that same ratio on the 35 billion checks written per year in
    the U.S. or maybe a little higher according to the Fed's
    testimony, that is 15 million consumers a year who need their
    original check for one purpose or another. That is a lot of
    people.
        I would like to close by talking about what is not in this
    Act. We see the key thing that is not in the Act is a right of
    recredit that applies to every check which is not returned to
    the customer--every check that is electronically imaged along
    the way, regardless of what the very last step is where
    something is or is not returned to the customer. We also see
    that it has no privacy protections for the use or creation of
    databases containing information about consumers' payment
    habits in checks. It has no requirement that checks be credited
    to consumers any sooner. You heard Governor Ferguson say quite
    accurately that the Fed is not making any commitments at this
    time in that regard. It places no obligation on the bank to
    every provide the original check when the customer feels that
    they need that check. It places no obligation on the bank to
    provide the substitute check if the customer is not previously
    set up for substitute check returns. It places no obligation on
    the bank to offer accounts that the customer can use for
    substitute checks, and it places no restriction on how much
    more those accounts might cost than other accounts.
        We respectfully suggest that if Congress is going to revamp
    the check system to give all of us the benefits of additional
    electronic efficiencies, it needs to do so in a way that gives
    consumers the same protections for electronically imaged checks
    that we have for other electronic payments.
        Thank you.
        [The prepared statement of Gail Hillebrand can be found on
    page 77 in the appendix.]
        Mr. Grucci. Thank you very much for your testimony.
        Mr. Walker?

    STATEMENT OF DAVID WALKER, PRESIDENT AND CEO, ELECTRONIC CHECK
                      CLEARING HOUSE ORGANIZATION

        Mr. Walker. Mr. Chairman and members of the subcommittee,
    my name is David Walker. I am the president of the Electronic
    Check Clearing House Organization known as ECCHO. I am very
    pleased to be here today on behalf of ECCHO to discuss the
    Check Clearing for the 21st Century Act. ECCHO applauds
    Congressmen Ferguson and Ford for introducing the Act. We also
    commend Chairman Bachus and this subcommittee for holding a
    hearing to consider this important legislation.
        I would first like to provide some information about ECCHO
    and our role in the check clearing process. ECCHO is a
    nonprofit nationwide bank clearing house. Our member financial
    institutions hold approximately 60 percent of the total U.S.
    deposits. ECCHO has developed an extensive set of clearing
    house rules. These rules cover multiple check electronification
    scenarios, including electronic check presentment and check
    image programs. During 2001, ECCHO member institutions
    exchanged approximately two billion checks totaling
    approximately $3 trillion under one of the various check
    electronification programs supported by the ECCHO Rules. In
    addition, the Federal Reserve also provides check
    electronification services. The Fed used these services to
    process about 37 percent of the 17 billion or so checks they
    collected in 2001.
        Because of our involvement with electronic check programs,
    ECCHO has been working with our members and other interested
    parties on issues relating to substitute checks since the
    Federal Reserve first introduced the concept a few years ago.
    For example, we have for some time been working with the
    standard-setting organizations to develop technical and
    operational standards for substitute checks. As I indicated a
    few moments ago, check electronification and check imaging are
    in wide use today. However, check images can be exchanged only
    if the bank on which the check is drawn and its customer have
    agreed to accept the image instead of the original check.
    Accordingly, banks today must support two check collection
    processes. They need one process for checks they send to banks
    and their customers who have agreed to check imaging, and they
    need another process for checks they send to banks and their
    customers who have not yet agreed to check imaging.
        The Act will encourage even more check electronification.
    Banks will be able, if they so choose, to convert all of their
    paper checks to images and deliver substitute checks only when
    necessary. In short, the Act will help bridge the gap to a
    fully electronic check collection system. As a result, the Act
    will significantly benefit all stakeholders in the check
    collection process. These benefits include exciting new
    products and services for customers, a significant reduction in
    the cost of check collection, and better insulation of the
    nation's payments system from disruptions to the air
    transportation network, such as occurred after September 11.
        ECCHO supports the Act as it has been introduced by
    Congressmen Ferguson and Ford. We do have concerns with a few
    provisions of the Act, and we have provided a detailed
    discussion of these concerns in our written statement. There is
    one significant concern with the Act that I would like to
    address here today--the January 1, 2006 effective date. There
    is no need for delayed implementation. Sending banks will
    create substitute checks only when they are ready to do so. The
    receipt of the substitute check also will have no adverse
    effect on the receiving bank or its customer. This is because
    the substitute check can be processed just like the paper
    check, and because the Act provides that the substitute check
    is the legal equivalent of the paper check.
        The financial services industry will shortly be ready to go
    with substitute checks. The industry standards for substitute
    checks have already been under development for over a year. We
    anticipate that they will be ready for use within the next few
    months. A delay in the effective date until January 1, 2006
    will only delay the many benefits that the Act provides to
    banks, their customers, and the nation's payments system.
        ECCHO appreciates this opportunity to present our views to
    the subcommittee on the Check Clearing for the 21st Century Act
    and I would be pleased to answer any questions the subcommittee
    might have. Thank you.
        [The prepared statement of David Walker can be found on
    page 91 in the appendix.]
        Mr. Grucci. Thank you, Mr. Walker.
        Mr. Schram?

    STATEMENT OF LEE SCHRAM, VICE PRESIDENT AND GENERAL MANAGER OF
                   PAYMENT SOLUTIONS, NCR CORPORATION

        Mr. Schram. Chairman Grucci and members of the
    subcommittee, thank you for the invitation to testify today. My
    name is Lee Schram and I am the vice president of payment and
    imaging solutions at NCR Corporation. We are a global provider
    of financial and retail technology solutions, with over 100
    years of experience in consumer transactions. NCR is the
    world's leading provider of ATMs and a global market leader in
    retail point-of-sale products. For over a decade, NCR has been
    providing imaging technology to banks and our solutions touch
    more than 70 percent of check transactions in the United
    States.
        Mr. Chairman, I represent NCR as well as a consortium of
    high-tech companies, including IBM, Unisys and others. In fact,
    I have submitted this morning a letter from the Information
    Technology Industry Council in full support of House Resolution
    5414. This legislation will make the check payment system more
    efficient, user-friendly, and provides clear direction and
    adequate protection for all parties involved.
        Imaging technology is critical for successful bill
    implementation. Thus, it is important to understand the
    advanced state of this technology to demonstrate its readiness
    and to dispel concerns. Check imaging was introduced in the
    late 1980s. Most major and over 50 percent of community banks
    have been using it for over a decade. Internationally, many
    countries truncate checks. Imaging technology is readily
    available, secure and reliable today. Image quality is superior
    to checks, better than microfilm, and each image can be
    uniquely identified and linked to the original check.
        While the required technology is ready, concerns have been
    raised which I will address. First, while consumers may not be
    able to readily access the original check, image technology
    provides them with more options to access information,
    including online banking and image statements, while
    maintaining an audit trail to the original check transaction. A
    second concern is the number of times a substitute document may
    be converted to a digital check. Ideally, truncation would
    occur at original point of presentment with no subsequent
    conversion. However, at least initially substitutions will
    occur, but digital checks can be reliably created from
    substitute documents. Auditing processes exist to prevent
    duplicate entries prior to account posting, thereby maintaining
    consumer protection.
        A third concern, check readability, is eliminated as
    technology allows these images to be displayed in a wide range
    of sizes to meet consumer needs. The benefits of the bill far
    outweigh these concerns. Changes in banking laws written in an
    era when checks were cleared across town, rather than
    nationwide, have not kept up with technology advances,
    resulting in a costly, time-consuming, and fraud-ridden check
    clearing process. Today, a check presented to a retailer or a
    bank is typically handled over 15 times. Check 21
    implementation would utilize technology advances to streamline
    the payment process, and at the same time provide new value-
    added services to the consumer, like image-enabling ATMs in
    more convenient locations.
        With Check 21, retailers, where over a third of all
    consumer checks are written, will now know within seconds if a
    check is good and fraud-free. Consumers and retailers will gain
    quicker access to deposits as transactions clear electronically
    in minutes, not days. Image-based transactions can be archived
    for years and quickly accessed by customers online via the
    bank's web site. For consumers not having online access, bank
    service centers will access images instantaneously upon
    request.
        The elimination of moving paper checks around the country
    will take significant cost out of the system, from couriers
    transporting checks to mail handling. One major banks spends
    $25 million annually on courier service, while another spends
    $20 million opening envelopes. Market forces will ensure that
    consumers realize the savings that result from imaging. The
    bill will also virtually eliminate payment system logistical
    interruptions such as the grounding of commercial air service
    for several days following 9-11.
        Now is the time to leverage advances in communications and
    information storage to facilitate a more efficient payment
    clearing system. The benefits of check imaging should not be
    withheld from consumers and financial institutions for another
    three years, as currently proposed.
        NCR commends Director Roseman of the Federal Reserve and
    the Financial Services Committee staff who have worked in a
    cooperative manner to deliver a bill that is balanced, protects
    consumers and recognizes the immediate and future needs of the
    payment system. Through existing proven technologies,
    consumers, financial institutions and businesses can enjoy the
    benefits of checking accounts with the more effective payment
    system.
        Mr. Chairman, I thank you and the subcommittee for your
    time and attention.
        [The prepared statement of Lee Schram can be found on page
    86 in the appendix.]
        Mr. Tiberi. Thank you.
        Mr. Biggerstaff?

        STATEMENT OF JOEL BIGGERSTAFF, CEO, AIRNET SYSTEMS, INC.

        Mr. Biggerstaff. Good afternoon, Chairman Tiberi. I
    appreciate the opportunity to appear before this distinguished
    subcommittee in order to testify on proposed legislation known
    as the Check Clearing of the 21st Century Act. I am Joel
    Biggerstaff, CEO of AirNet Systems, Inc., a critical time-
    shipment carrier based in Columbus, Ohio.
        With over 130 aircraft and with Department of Defense
    certification, AirNet is recognized as an industry leader in
    the transportation of checks, time-sensitive medical shipments,
    cargo charter, passenger charter, critical parts and other top
    priority deliveries. AirNet employs over 1,100 team members
    nationwide, with over 300 ground couriers supplementing
    industry-leading door-to-door service.
        As a participant in the payment system for some 30 years,
    AirNet applauds your efforts to improve the overall efficiency
    of the nation's check clearing system. We are proud of the part
    our company has always played in ensuring the swift and
    reliable collection and processing of our checks. We estimate
    that AirNet flies 65 to 70 percent of all checks that are flown
    from point to point throughout the nation on a nightly basis.
    The remaining checks are flown either on the Federal Reserve's
    check relay network by large integrators such as UPS, or on
    commercial airlines.
        On September 11, 2001, we, like you, were in shock at the
    news that our country was under attack from the air. The
    Federal Aviation Administration's response, of course, was
    immediately to ground all aircraft nationwide that morning.
    This was the one and the only time the FAA has ever acted to
    close domestic national airspace, hereafter referred to as NAS.
    Despite the closing of the NAS, however, we at AirNet were
    called upon to make several flights on September 11 for the
    American Red Cross under what is known as lifeguard flight
    status. We were in the air at 3:37 that afternoon on the first
    of four flights that day.
        The next day, September 12, we flew another eight lifeguard
    flights while NAS was still closed. Our banking customers, of
    course, still had checks to move. To solve that challenge, we
    put into place a massive ground operation to cover as much
    territory as possible for our bank customers while NAS was
    closed. On September 13, with the reopening of NAS scheduled
    for that evening, AirNet received a call from the Federal
    Reserve. The Federal Reserve was requesting our assistance to
    coordinate the massive movement of checks that had been
    awaiting processing since the 11th. We were happy to respond.
    In fact, Mr. Chairman, we were in contact with this committee
    during that time to advise of our ongoing work plans and to
    seek logistical assistance with the Department of the Treasury
    in clearing our aircraft. On the evening of the 13th, AirNet
    helped move over 500,000 pounds of checks, five times the
    normal amount transported on a typical night, and moved another
    275,000 pounds later that weekend.
        One letter of thanks from a customer illustrates the
    quality of our performance, and I quote, on behalf of float
    management at Bank of America, I would like to express our
    sincere thanks for your dedication to service during the recent
    tragedy. Your commitment to your customers has always been
    evident in your customer service and delivery quality, and
    recent events have proved your competent staff to be
    exceptional. Thank you again for your dedication to keeping the
    payment system moving, end quote. That quote is from the senior
    vice president, Bank of America. With your permission, Mr.
    Chairman, we would also like to offer for the record a number
    of similar commendations from our customers, including the Red
    Cross.
        [The following information can be found on page 115--126 in
    the appendix.]
        The FAA took the right and necessary decision on September
    11. It was essential that NAS be closed. However, with all due
    respect to some in support of the measure being considered,
    reducing the impact of air service dispruption to the payment
    systems does not require the passage of new legislation. The
    impact of the disruption could have been significantly reduced,
    and perhaps been completely avoided had the transportation of
    checks in the payment system been given lifeguard status. The
    electronic transmission of check images is no guarantee of
    uninterrupted check processing. Electronic systems are much
    more sensitive to disruption than air transportation, and
    indeed cyber-terrorism is perhaps one of the greatest threats
    we now face.
        Moreover, even with passage of the Check Clearing for the
    21st Century Act, truncation would not be mandatory and air
    transportation would continue to be critical. Should events in
    the future ever cause the closing of NAS again, the air
    transportation of checks can be guaranteed by the simple
    designation of lifeguard status to these critical shipments.
    The electronic transmission of check information, side by side
    with air transportation, represents a fundamental principle of
    safe and sound banking redundancy. The full functioning of
    these two methods of check processing ensures the long-term
    integrity of the payment system. Indeed, a policy that
    dismantles the air transportation infrastructure could
    represent a threat to the integrity of the payment system.
        In this regard, the Federal Reserve along with other
    agencies recently requested comment on a draft white paper
    entitled Sound Practices to Strengthen the Resilience of the
    U.S. Financial System. The white paper refers to core clearing
    and settlement organizations which it defines as firms that
    provide critical clearing and settlement services for critical
    financial markets in sufficient volume or value to present
    systemic risk and their sudden absence, and for whom there are
    no viable immediate substitutes. The events of last September
    illustrate that AirNet is a core clearing and settlement
    organization. Its ability to operate was and is essential to
    the functioning of the U.S. financial system. We therefore urge
    that this subcommittee during future deliberations on this
    legislation seriously consider conferring lifeguard status for
    air transportation activities associated with the payment
    system.
        Mr. Chairman, by supporting the lifeguard designation for
    the payment system, by supporting the policy to protect
    redundancy in check processing infrastructure, and by
    supporting transportation as a core clearing function, you will
    promote and improve the overall efficiency of the payment
    system, which is the stated goal of the legislation.
        Thank you, Mr. Chairman, for this opportunity to testify. I
    would be happy to answer any questions of you or members of the
    subcommittee.
        [The prepared statement of Joel Biggerstaff can be found on
    page 48 in the appendix.]
        Mr. Tiberi. Thank you, Mr. Biggerstaff. Without objection,
    Mr. Biggerstaff's documents will be included in the record. No
    objections.
        Mr. Biggerstaff, first question is for you. You mentioned
    the first lifeguard flight on September 11 was approximately
    3:30 in the afternoon of September 11. When do you normally
    take off on any given day with checks?
        Mr. Biggerstaff. Our system goes into operation basically
    at the close of the banking day. Our initial flights occur late
    afternoon and continue through the night until mid-morning the
    following morning, moving checks around the country, hubbing
    three times through Columbus, Ohio in the process.
        Mr. Tiberi. So your point being in your testimony that if
    lifeguard status had been issued for that day, there would have
    been no interruption of service.
        Mr. Biggerstaff. That is absolutely correct. Our system
    operates independently of other systems and is very
    specifically tailored to the payment system needs. We could
    have easily functioned in a normal manner that night.
        Mr. Tiberi. In your testimony, you mention that the Fed had
    called upon AirNet to help the day that airspace was reopened,
    to handle the backlog. Would AirNet be able to run its own
    system and the Fed system?
        Mr. Biggerstaff. Absolutely. The Fed system and our system
    are basically duplicative at this time, operating from the same
    points of origin and serving the same end points at the same
    time. With capacity availability in both systems, it would be
    very easy for a single management structure to create
    significant efficiency and improve the service of the system. I
    found it interesting earlier that I think the percentage of
    checks cleared overnight is 93 percent, as mentioned by the
    Federal Reserve. For those checks that flow through our system,
    we consistently average in excess of 98 percent in terms of on-
    time delivery and subsequent clearance of those financial
    instruments.
        Mr. Tiberi. Mr. Schram, I am sorry I missed part of your
    testimony. I was voting. Can you talk to us about the costs for
    implementing a comprehensive system of electronic check
    presentation and truncation?
        Mr. Schram. The cost really depends on the size of the bank
    and the size of the check volume. So if you look at a large
    major bank in the United States--the Bank of America, for
    example, being the largest check volume today, about 15
    percent. Their cost is going to be more just because of the
    volume in terms of putting the system in, versus a cost that is
    in, let's say, a smaller community bank. Really, volume drives
    the imaging technology in terms of the cost.
        It depends also on how far you are going with
    electronification. Let me give you an example of what I mean by
    that. If you are just capturing the check image at truncation
    point, that is the capture piece of the check. There is a cost
    involved in that piece and again that depends very much on the
    size of the bank and the volumes. Then there is also a cost to
    store the check in terms of the archive application. Again,
    that is dependent on the volume and the size of checks going
    into that archive.
        So what we see today in our company is the size of putting
    in these systems. I will give you a general range. It ranges
    between maybe $4 million and $5 million, to $15 million. Again,
    it depends very much on the size. Those would be for a major
    bank application. Again, a smaller community bank would be--we
    do check imaging applications for them that are well under $1
    million, as an example. So again, you have to look at check
    volume, the through-put, the bank process in order to really
    get to a finite number in terms of the cost to put in a check
    imaging solution.
        And what we have to do in order to do this today with the
    banks is to prove a business case payback. We have to be able
    to go back to the banks and say, by putting in our check
    imaging solution, we are able to give you a more cost-effective
    operation. Generally what we do with the banks is sit down and
    go through how much is it costing to do an application today or
    run their operation today, and we have to make business-case
    paybacks that they put on our technology. I think that is a
    very important thing here. So they have to get the proof that
    our solutions can actually provide benefit to them and their
    customers.
        Mr. Tiberi. So your belief is that the cost to community
    banks would not be prohibitive.
        Mr. Schram. I do not believe so at all. In fact, like I
    said, we are providing this technology today and similar to the
    major banks, they go through a payback analysis with us, and we
    sit down and cost-justify our solution and our technology
    versus the benefits it provides to the banks and their
    consumers. It runs the same whether you a major bank or whether
    you are a very small community bank.
        Mr. Tiberi. NCR is a leader in technology. Some would say
    that if we went to this system tomorrow, because of some
    vulnerabilities in technology networks, peer networks, the
    computer infrastructure would be vulnerable from maybe some
    sort of cyber attack. Can you give your thoughts on that issue?
        Mr. Schram. Security is a major concern. It comes up often.
    But there is encryption technology, closed network technology
    that basically surrounds what we do in terms of imaging
    technology today that is very similar to ACH and debit and
    credit card technology. So the technology exists out there
    today. I think it is important that as you also follow the
    check through the capture point of the image all the way into
    the archive, there is archive security around not being able to
    change the check image that is in the archive; not be able to
    move things around. I mean, there is all sorts of technology
    both in the hardware and the software side that supports the
    security around the check. So it is all things that we are
    readily doing today and that are available today.
        I might also make a comment on ANSI standards, because one
    of the things that we are working with is the ANSI standards
    committee basically to draft and develop standards around check
    signatures, to make sure that those signatures are only and can
    only be assigned to one check. That is very important as well.
    So we are not only pushing the encryption and the closed
    network technology and strengthening that. We are also working
    with them on other standards that we can continue to do to even
    improve security even more.
        Another final comment I think is very important is, paper
    checks today are not totally secure either. We continue to read
    where courier services, checks are stolen from them. There are
    a lot of stories out on check washing. Finally, there is a lot
    of fraudulent paper checks and signature forgeries that can be
    done as well. So I think you have to look at the balance
    between this. We really believe that the security is there
    today around imaging.
        Mr. Tiberi. Thank you, sir.
        I am just going to continue to ask questions here. This is
    a pretty good position to be in.
        [Laughter.]
        Mr. Walker, opponents of the legislation have objected to
    allowing recredits to be granted only to customers that request
    substitute checks instead of other forms of check truncation or
    safekeeping. Can you address the objections and share with me,
    at least, your views of why additional notification would not
    be a viable option?
        Mr. Walker. The history and the experience in the industry
    is that for the last 30 years, banks and other financial
    institutions have been involved in check truncation and
    safekeeping processes. As Vice Chairman Ferguson indicated
    earlier, approximately 30 percent of existing check volume does
    not get returned back to customers today. We would suggest that
    this history indicates that there really is not a need for
    additional protections for the consumers; that consumers are
    adequately protected today when they receive check images. In
    fact, the experience that we have gained from the banks as well
    as from the Federal Reserve and from credit unions and other
    organizations would indicate that there are very few customer
    complaints in the area of check truncation and imaging.
        So the difference that you are talking about is in fact
    created by the Act itself. If there is a need for some
    additional protections in this more electronic process, the
    additional protections should only be provided to the customers
    where they have not agreed to get their original checks back,
    and they only receive substitute checks back. So the difference
    in consumer protections that you are asking about is in fact
    created by the Act itself. Even in the absence of lsuch
    protections, we think there is adequate protection under the
    existing check law, and there is no significant evidence to the
    contrary.
        Mr. Tiberi. Thank you, Mr. Walker.
        Ms. Hillebrand, I was here for most of your testimony, and
    your primary concern seemed to rest with the consumer's
    ability, the customer's inability to receive their original
    check back under this proposed legislation. Don't the benefits
    of the security issue that we talked about, the increased
    effectiveness, the expedited check presentation--do not those
    things outweigh the concern that you have, based upon the fact
    that we can at the end have a substitute check?
        Ms. Hillebrand. Let me respond to that, and then amend
    slightly your question. We have two primary concerns, and you
    identified one of them, which is getting the checks back. There
    are a lot of possibilities that have been raised about benefit,
    but the statute does not require that those benefits be
    delivered to consumers. In the Federal Reserve Board summary of
    the Act, they say I think quite candidly that this could reduce
    bank operating costs, quote, with savings passed on to
    shareholders in the form of higher returns, or to consumers in
    the form of lower fees, unquote. We do not know whether these
    so-called benefits will exist for all consumers.
        Certainly, some consumers are in the electronic age and
    want imaging and there is some customer demand for that. Those
    consumers are being served today in the marketplace. But other
    consumers who do not want that are going to lose something that
    they now have, which is the paper check. But more importantly,
    even those consumers who have said no thank you, I do not need
    to get my checks back, their checks will be processed
    differently. Their checks will be processed more
    electronically. You have that exhibit that Governor Ferguson
    gave you that shows, bank one, bank two, bank three, bank four.
    Today, when truncation occurs, it occurs right there at the end
    at bank four. Under the Act, it is going to occur somewhere
    near the beginning, probably at bank one or maybe at bank two.
    And then it will be converted in and out of electronic and
    substitute form. We think that that process creates for
    consumers the same kinds of risks that we face when we pay with
    a debit card. We should get the same kinds of protections.
        And the Act does have some protections, but it sort of
    gives them in section six, and then it takes them away by
    saying, well, if your account agreement does not call for
    substitute checks, you do not get those protections after all.
    I have a hard time explaining this to my colleagues, and I
    cannot imagine explaining it to my mom, or you explaining it to
    your constituents. If you insist on your original checks back,
    you will not actually get them, you will get something else,
    but you will have certain rights that you will lose if you say,
    oh, no thank you, the copy the bank is going to send me looks
    just like the substitute check. I cannot get my original checks
    back anyway; I may as well agree to the copy; maybe the account
    is a dollar a month cheaper. Consumers are not going to know
    that they are losing that important recredit right.
        So the Act kind of creates the right and then takes it away
    at the same time through what is essentially a waiver by
    agreeing to voluntary truncation. We do not think that makes
    any public policy sense.
        Mr. Tiberi. Mr. Hage, could you comment on the same issue?
        Mr. Hage. Our experience at Home Federal has been that 90
    percent of our customers have chosen to do business with us and
    have their checks truncated since the beginning of our offering
    checks. Ten percent of our customers have elected to keep a
    paper form. The feedback that we are getting from our customers
    is that when we go to check imaging, those 10 percent who are
    now getting the paper back have a high propensity to convert to
    check imaging. So the notion that there is a mass of consumers
    out there who are clinging to the paper as a security blanket I
    think is unfounded in today's world.
        This Act does not require nor force any bank to refuse to
    process paper. It only allows those banks who find it
    advantageous for themselves and for customers to now have a
    legal choice to use a substitute check, which facilitates then
    the use of the electronic form of transmitting those checks.
    When you think about the number of times that paper is handled,
    and at a minimum it is five to six times per check, think about
    all the risks that are embedded in that. If you can transmit
    this information electronically, you reduce that down to two to
    three handlings, and from that point on the data is secure in
    an electronic form that cannot be altered and can be passed on
    to any point of use in the system. There is certainly a lot
    more security in an electronic form of transmitting this kind
    of information. There is a lot less risk of losing, mutilating,
    losing, otherwise inadvertently destroying or having limited
    access to the paper.
        I also encourage you as a committee to think in terms of
    the private sector forces, the market forces that are in play
    here that are very real. My company spends several hundred
    thousand dollars a year in marketing to attract customers to
    come and do business in our bank. We are not going to turn our
    backs on them and we are not going to fail to give them the
    quality of service that they are going to demand in order to
    continue to stay loyal customers to our bank. I think that is
    true in every bank in this country. We pay dearly to get
    customers, and we work very hard to keep them. So if there is a
    sentiment among customers that they are being mistreated or
    misrepresented, we are going to respond to that.
        Mr. Tiberi. Just to follow up on your comments, then--you
    believe that if there is an outpouring of customers who say, I
    want my paper check, you think there will be some banks who may
    respond to that? Is that what you are saying?
        Mr. Hage. Absolutely, and my bank is one of them. The
    reason we added paper check processing to our system was
    because we acquired a bank where the majority of the customers
    at that bank were used to getting paper back. And we did not
    want to lose contact with those customers or drive them out of
    our bank to another bank. So we incurred the expense to provide
    paper check returns to satisfy that segment of customers, and
    they are very happy with the way we have done it. Our response
    to them now is that more competitors in our marketplace are
    offering check imaging, and our customers are saying, when will
    Home Federal do that? We are going to offer it in the next 30
    to 45 days.
        Mr. Tiberi. Responding to the market.
        Mr. Hage. Responding to the market.
        Mr. Tiberi. Mr. Walker, do you have any thoughts on the
    same subject?
        Mr. Walker. I do not recall, sir, whether you were here at
    the time that Mr. Bentsen was describing scenarios that he had
    experienced earlier.
        Mr. Tiberi. I was not.
        Mr. Walker. In his scenarios, he described checks that he
    had written and some difficulty he had in being able to get
    back information about those checks. These scenarios involved
    traditional paper checks. One of the key benefits that we think
    customers would begin to see with check imaging very early on
    in the cycle would be improved customer service on the part of
    the bank, because having access to electronic records of all of
    those checks would make it much easier to find and then provide
    the answers to customers about their questions than if you had
    to find either a microfilm copy in storage someplace, or
    physically go find the paper check, if the check is safe-kept.
        In this world where you would have electronic images,
    including pictures of all of those check's front and back, the
    banks' customer service areas would more readily have access to
    that information, and frequently would be able to answer a
    customer's questions while they are still on the phone, not
    several days or weeks later when the bank might be able to
    physically access the piece of paper.
        Mr. Tiberi. You guys are not in the banking business, but
    any thoughts?
        Mr. Schram. Just one other thing. Think about yourself
    personally and if you have a check that you want to cash today,
    or if you want to deposit it today. You walk up to an ATM
    machine. The technology is coming right now and available where
    you can basically put that check into the ATM machine and what
    will happen is an image of the check will automatically come up
    on the screen, and it will ask you to confirm whether the
    deposit amount is correct or whatever. And it will
    automatically then be able to start flowing down the check
    payment system. Whereas today, you walk in, you put an envelope
    in and you do not necessarily know where it is going, where it
    is flowing. You know you put the paper in, but what you will
    get immediately at that point of presentment is the opportunity
    to know, yes, I deposited that; yes, I validated the amount;
    and yes, I now know that once it has left my hands now and it
    is going down the payment system, I will be able to know that
    that image is a good image and I will know immediately at that
    point in time, rather than waiting, and did that black hole
    that is just went into actually accept my check and what
    happened to it, and so on and so forth.
        So we believe the technology is a real nice place for all
    parties involved in this, especially for the consumers.
        Mr. Tiberi. Joe, any comments on this issue?
        Mr. Biggerstaff. I would like to address one comment made
    relative to justification from a security standpoint, from
    migration to an electronic platform. In our company's history,
    we have never had a theft of canceled checks that we carry in
    the form of consolidated cash letters. So from a security
    standpoint, we do not have that issue of losing checks in
    transit.
        Mr. Tiberi. A good way to end it. Just a note, again to
    thank Chairman Bachus for having this hearing today. He was
    pretty excited yesterday about kicking this off and beginning
    this debate. Let's think of him as he helps his mother in the
    coming days. I know this issue will be on our plates in the
    coming weeks and coming months. I really appreciate you all
    coming out today and spending some time and talking to us about
    the issue.
        The chair notes that some members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 30 days for members to submit written questions to these
    witnesses and to place the response in the record.
        This hearing is adjourned. Thank you.
        [Whereupon, at 12:53 p.m., the subcommittee was adjourned.]

                                A P P E N D I X

                               September 25, 2002

    [GRAPHIC] [TIFF OMITTED] T3587.001

    [GRAPHIC] [TIFF OMITTED] T3587.002

    [GRAPHIC] [TIFF OMITTED] T3587.003

    [GRAPHIC] [TIFF OMITTED] T3587.004

    [GRAPHIC] [TIFF OMITTED] T3587.005

    [GRAPHIC] [TIFF OMITTED] T3587.006

    [GRAPHIC] [TIFF OMITTED] T3587.007

    [GRAPHIC] [TIFF OMITTED] T3587.008

    [GRAPHIC] [TIFF OMITTED] T3587.009

    [GRAPHIC] [TIFF OMITTED] T3587.010

    [GRAPHIC] [TIFF OMITTED] T3587.011

    [GRAPHIC] [TIFF OMITTED] T3587.012

    [GRAPHIC] [TIFF OMITTED] T3587.013

    [GRAPHIC] [TIFF OMITTED] T3587.014

    [GRAPHIC] [TIFF OMITTED] T3587.015

    [GRAPHIC] [TIFF OMITTED] T3587.016

    [GRAPHIC] [TIFF OMITTED] T3587.017

    [GRAPHIC] [TIFF OMITTED] T3587.018

    [GRAPHIC] [TIFF OMITTED] T3587.019

    [GRAPHIC] [TIFF OMITTED] T3587.020

    [GRAPHIC] [TIFF OMITTED] T3587.021

    [GRAPHIC] [TIFF OMITTED] T3587.022

    [GRAPHIC] [TIFF OMITTED] T3587.023

    [GRAPHIC] [TIFF OMITTED] T3587.024

    [GRAPHIC] [TIFF OMITTED] T3587.025

    [GRAPHIC] [TIFF OMITTED] T3587.026

    [GRAPHIC] [TIFF OMITTED] T3587.027

    [GRAPHIC] [TIFF OMITTED] T3587.028

    [GRAPHIC] [TIFF OMITTED] T3587.029

    [GRAPHIC] [TIFF OMITTED] T3587.030

    [GRAPHIC] [TIFF OMITTED] T3587.031

    [GRAPHIC] [TIFF OMITTED] T3587.032

    [GRAPHIC] [TIFF OMITTED] T3587.033

    [GRAPHIC] [TIFF OMITTED] T3587.034

    [GRAPHIC] [TIFF OMITTED] T3587.035

    [GRAPHIC] [TIFF OMITTED] T3587.036

    [GRAPHIC] [TIFF OMITTED] T3587.037

    [GRAPHIC] [TIFF OMITTED] T3587.038

    [GRAPHIC] [TIFF OMITTED] T3587.039

    [GRAPHIC] [TIFF OMITTED] T3587.040

    [GRAPHIC] [TIFF OMITTED] T3587.041

    [GRAPHIC] [TIFF OMITTED] T3587.042

    [GRAPHIC] [TIFF OMITTED] T3587.043

    [GRAPHIC] [TIFF OMITTED] T3587.044

    [GRAPHIC] [TIFF OMITTED] T3587.045

    [GRAPHIC] [TIFF OMITTED] T3587.046

    [GRAPHIC] [TIFF OMITTED] T3587.047

    [GRAPHIC] [TIFF OMITTED] T3587.048

    [GRAPHIC] [TIFF OMITTED] T3587.049

    [GRAPHIC] [TIFF OMITTED] T3587.050

    [GRAPHIC] [TIFF OMITTED] T3587.051

    [GRAPHIC] [TIFF OMITTED] T3587.052

    [GRAPHIC] [TIFF OMITTED] T3587.053

    [GRAPHIC] [TIFF OMITTED] T3587.054

    [GRAPHIC] [TIFF OMITTED] T3587.055

    [GRAPHIC] [TIFF OMITTED] T3587.056

    [GRAPHIC] [TIFF OMITTED] T3587.057

    [GRAPHIC] [TIFF OMITTED] T3587.058

    [GRAPHIC] [TIFF OMITTED] T3587.059

    [GRAPHIC] [TIFF OMITTED] T3587.060

    [GRAPHIC] [TIFF OMITTED] T3587.061

    [GRAPHIC] [TIFF OMITTED] T3587.062

    [GRAPHIC] [TIFF OMITTED] T3587.063

    [GRAPHIC] [TIFF OMITTED] T3587.064

    [GRAPHIC] [TIFF OMITTED] T3587.065

    [GRAPHIC] [TIFF OMITTED] T3587.066

    [GRAPHIC] [TIFF OMITTED] T3587.067

    [GRAPHIC] [TIFF OMITTED] T3587.068

    [GRAPHIC] [TIFF OMITTED] T3587.069

    [GRAPHIC] [TIFF OMITTED] T3587.070

    [GRAPHIC] [TIFF OMITTED] T3587.071

    [GRAPHIC] [TIFF OMITTED] T3587.072

    [GRAPHIC] [TIFF OMITTED] T3587.073

    [GRAPHIC] [TIFF OMITTED] T3587.074

    [GRAPHIC] [TIFF OMITTED] T3587.075

    [GRAPHIC] [TIFF OMITTED] T3587.076

    [GRAPHIC] [TIFF OMITTED] T3587.077

    [GRAPHIC] [TIFF OMITTED] T3587.078

    [GRAPHIC] [TIFF OMITTED] T3587.079

    [GRAPHIC] [TIFF OMITTED] T3587.080

    [GRAPHIC] [TIFF OMITTED] T3587.081

    [GRAPHIC] [TIFF OMITTED] T3587.082

    [GRAPHIC] [TIFF OMITTED] T3587.083

    [GRAPHIC] [TIFF OMITTED] T3587.084

    [GRAPHIC] [TIFF OMITTED] T3587.085

    [GRAPHIC] [TIFF OMITTED] T3587.086

    [GRAPHIC] [TIFF OMITTED] T3587.087

    [GRAPHIC] [TIFF OMITTED] T3587.088

    [GRAPHIC] [TIFF OMITTED] T3587.089

    [GRAPHIC] [TIFF OMITTED] T3587.090

    [GRAPHIC] [TIFF OMITTED] T3587.091

    [GRAPHIC] [TIFF OMITTED] T3587.092

    [GRAPHIC] [TIFF OMITTED] T3587.093

    [GRAPHIC] [TIFF OMITTED] T3587.094

    [GRAPHIC] [TIFF OMITTED] T3587.095

    [GRAPHIC] [TIFF OMITTED] T3587.096

    [GRAPHIC] [TIFF OMITTED] T3587.097

    [GRAPHIC] [TIFF OMITTED] T3587.098

    [GRAPHIC] [TIFF OMITTED] T3587.099

    [GRAPHIC] [TIFF OMITTED] T3587.100

    [GRAPHIC] [TIFF OMITTED] T3587.101

    [GRAPHIC] [TIFF OMITTED] T3587.104

    [GRAPHIC] [TIFF OMITTED] T3587.103

    [GRAPHIC] [TIFF OMITTED] T3587.102