    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

                         H.R. 1474--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 EIGHTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 APRIL 8, 2003

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 108-20

    89-408              U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2003
    ____________________________________________________________________________
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        MICHAEL G. OXLEY, Ohio, Chairman

    JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
    DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
    RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
    SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
    MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
    PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
    EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
    FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
    ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
    SUE W. KELLY, New York, Vice         JULIA CARSON, Indiana
        Chairman                         BRAD SHERMAN, California
    RON PAUL, Texas                      GREGORY W. MEEKS, New York
    PAUL E. GILLMOR, Ohio                BARBARA LEE, California
    JIM RYUN, Kansas                     JAY INSLEE, Washington
    STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
    DONALD A. MANZULLO, Illinois         CHARLES A. GONZALEZ, Texas
    WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
        Carolina                         HAROLD E. FORD, Jr., Tennessee
    DOUG OSE, California                 RUBEN HINOJOSA, Texas
    JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
    MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
    PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
    CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
    JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
    VITO FOSELLA, New York               CAROLYN McCARTHY, New York
    GARY G. MILLER, California           JOE BACA, California
    MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
    SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
    PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
    MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
    TOM FEENEY, Florida                  DAVID SCOTT, Georgia
    JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
    SCOTT GARRETT, New Jersey
    TIM MURPHY, Pennsylvania             BERNARD SANDERS, Vermont
    GINNY BROWN-WAITE, Florida
    J. GRESHAM BARRETT, South Carolina
    KATHERINE HARRIS, Florida
    RICK RENZI, Arizona

                     Robert U. Foster, III, Staff Director
           Subcommittee on Financial Institutions and Consumer Credit

                       SPENCER BACHUS, Alabama, Chairman

    STEVEN C. LaTOURETTE, Ohio,          BERNARD SANDERS, Vermont
    Vice Chairman                        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          BRAD SHERMAN, California
    EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
    FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
    SUE W. KELLY, New York               DENNIS MOORE, Kansas
    PAUL E. GILLMOR, Ohio                CHARLES A. GONZALEZ, Texas
    JIM RYUN, Kansas                     PAUL E. KANJORSKI, Pennsylvania
    WALTER B. JONES, Jr., North          MAXINE WATERS, California
        Carolina                         NYDIA M. VELAZQUEZ, New York
    JUDY BIGGERT, Illinois               DARLENE HOOLEY, Oregon
    PATRICK J. TOOMEY, Pennsylvania      JULIA CARSON, Indiana
    VITO FOSSELLA, New York              HAROLD E. FORD, Jr., Tennessee
    MELISSA A. HART, Pennsylvania        RUBEN HINOJOSA, Texas
    SHELLEY MOORE CAPITO, West Virginia  KEN LUCAS, Kentucky
    PATRICK J. TIBERI, Ohio              JOSEPH CROWLEY, New York
    MARK R. KENNEDY, Minnesota           STEVE ISRAEL, New York
    TOM FEENEY, Florida                  MIKE ROSS, Arkansas
    JEB HENSARLING, Texas                CAROLYN McCARTHY, New York
    SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
    TIM MURPHY, Pennsylvania
    GINNY BROWN-WAITE, Florida
    J. GRESHAM BARRETT, South Carolina
    RICK RENZI, Arizona

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        April 8, 2003................................................     1

    Appendix:
        April 8, 2003................................................    55

                                   WITNESSES
                             Tuesday, April 8, 2003

    Cloutier, C.R., President and CEO, MidSouth Bank, NA, ICBA
      Chairman, on behalf of Independent Community Bankers of America
      and America's Community Bankers................................    35
    Cole, Grant, Senior Vice President and Senior Change Management
      Executive, Transaction Services, Bank of America, on behalf of
      American Bankers Association, Consumer Bankers Association, the
      Electronic Check Clearing House Organization, and the Financial
      Services Roundtable............................................    37
    Dentlinger, Dale, Director, E*TRADE Access, E*TRADE Bank.........    39
    Duncan, Janell Mayo, Legislative and Regulatory Counsel,
      Consumers Union................................................    41
    Ferguson, Hon. Roger W., Vice Chairman, Board of Governors of the
      Federal Reserve System.........................................     8
    Kniceley, Joseph, Vice President, Payment Solutions, NCR
      Corporation....................................................    42
    Woodham, Celia C., Director of Operations, Chartway FCU, on
      behalf of Credit Union National Association....................    44

                                    APPENDIX

    Prepared statements:
        Bachus, Hon. Spencer.........................................    56
        Oxley, Hon. Michael G........................................    58
        Ford, Hon. Harold E. Jr......................................    60
        Gillmor, Hon. Paul E.........................................    62
        Hart, Hon. Melissa A.........................................    63
        Hinojosa, Hon. Ruben.........................................    64
        Israel, Hon. Steve...........................................    65
        Royce, Hon. Edward R.........................................    67
        Cloutier, C.R................................................    68
        Cole, Grant..................................................    76
        Dentlinger Dale..............................................    91
        Duncan, Janell Mayo..........................................   100
        Ferguson, Hon. Roger W. Jr...................................   109
        Kniceley, Joseph K...........................................   119
        Woodham, Celia C.............................................   126

                  Additional Material Submitted for the Record

    Ferguson, Hon. Roger W.:
        Federal Reserve Bank 2002 System Summary Report..............   132
        Written response to questions from Hon. Patrick Tiberi.......   214
    CheckClear, LLC, prepared statement..............................   216
    Chen-Yu Enterprises, LLC, prepared statement.....................   220
    National Association of Federal Credit Unions, prepared statement   244
    Sample copy of a legal check.....................................   249

                         H.R. 1474--CHECK CLEARING FOR
                              THE 21ST CENTURY ACT

                                  ----------

                             Tuesday, April 8, 2003

                 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 10:10 a.m., in
    Room 2128, Rayburn House Office Building, Hon. Spencer Bachus
    [chairman of the subcommittee] presiding.
        Present: Representatives Bachus, Bereuter, Baker, Lucas of
    Oklahoma, Gillmor, Biggert, Hart, Tiberi, Feeney, Garrett,
    Murphy, Barrett, Fossella, Capito, Kennedy, Hensarling, Oxley
    (ex officio), Sanders, Maloney, Sherman, Ford, Lucas of
    Kentucky, McCarthy, Crowley, Davis, and Frank (ex officio).
        Mr. Baker. [Presiding.] If I could ask individuals to take
    their seats. Chairman Bachus has been momentarily delayed and
    has asked that I go ahead and call the meeting to order since
    we have people ready and available to be heard.
        The subcommittee meets today for a legislative hearing on
    H.R. 1474, the Check Clearing for the 21st Century Act, or
    Check 21 introduced by two distinguished members the
    subcommittee, the gentlelady from Pennsylvania, Ms. Hart, and
    the gentleman from Tennessee, Mr. Ford. Mr. Bachus is also a
    cosponsor of the legislation, as is Full Committee Chair
    Michael Oxley.
        This is the second hearing the subcommittee has held on
    this important topic. As with last year, we are fortunate that
    the Vice Chair of the Federal Reserve, the Honorable Roger
    Ferguson, Jr., has joined us to discuss the Federal Reserve
    Board's view on this issue. We are also joined by a group of
    distinguished private sector witnesses that will share their
    views with us.
        The Check 21 legislation is intended to modernize the
    nation's check clearing system by providing an interim step
    towards allowing banks to exchange checks electronically,
    rather than in paper form. Electronic check imaging and the
    ability of financial institutions to exchange checks
    electronically is the first major innovation in the check-
    handling and processing process since the invention of the
    magnetic ink character recognition line in the 1950s. The
    consumer and economic benefits that will accrue from this
    technology are potentially immense.
        Perhaps the most dramatic example of the need for this
    legislation was demonstrated in the week after the September 11
    terrorist attacks. As some may recall, for approximately one
    week after September 11, planes were not allowed to fly. As a
    result, the check clearing system suffered from severe
    disruptions as the planes that customarily transport checks
    could not carry the paper to the financial institutions on
    which they were drawn. Bad weather also has a disruptive effect
    on check clearing. While the September 11 tragedy provides
    perhaps the most dramatic illustration of the need for the
    Check 21 legislation, the legislation is important for many
    other reasons.
        Consumers in particular will benefit because the
    legislation will enable depository institutions to offer their
    customers a host of new products and services. For example,
    consumers in rural areas may be offered extended deposit hours
    because financial institutions will then be able to transmit
    the images of checks through the check-clearing process, rather
    than having to send couriers out to remote branches or ATMS to
    pick up the deposited items. In addition, consumers and
    business customers will benefit from quicker collection and
    return of checks. Other indirect benefits potentially will
    occur as well.
        The Check 21 Act will create a new value proposition for
    check imaging technology, which will encourage depository
    institutions to implement check imaging and exchange. Financial
    institutions that have already implemented check imaging have
    learned how pleased their customers are that they can now have
    instant access to copies of their checks when they visit
    branches, speak on the phone with customer service
    representatives, or view pictures of their checks on the
    Internet. Moreover, the legislation will empower customers to
    better manage their finances and detect and prevent fraud
    against their accounts because they are provided more
    information about the transactions in a timely manner.
        In conclusion, we should acknowledge the work of all the
    persons who have contributed to the construction of H.R. 1474.
    Thanks should go to Chairman Oxley for making the legislation
    one of his committee's top priorities; to Vice Chairman
    Ferguson and the Board staff who first presented the committee
    with draft legislation in December, 2001, following many years
    of work by the Federal Reserve. Also, I wish to extend
    commendation to Ms. Hart and Mr. Ford for introducing the
    bipartisan legislation, and Congressman Mike Ferguson who
    sponsored similar legislation with Mr. Ford during the last
    Congress.
        Finally, there has been significant input from banks,
    thrifts, credit unions, technology providers, consumer groups--
    all stakeholders--to help assist in drafting the most
    appropriate legislative remedy.
        I just have one personal comment to make, too, with regard
    to the final consideration of this matter, and whenever markup
    may occur. Specific attention should be focused on the question
    of what I term ``float''--the time in which an out-of-area
    check is presented to a financial institution until the
    customer knows those funds are available for utilization. Under
    the current rule, out-of-area checks may have as a period up to
    five days before requiring the allocation of those resources to
    the appropriate account. It would seem very appropriate to have
    a careful analysis given the potential for electronic transfer
    to some significant reduction in that float period from the
    current five-day minimum to something customarily less than
    that, based on whatever the professionals tell us is
    achievable. But I know that many folks, when told they will not
    get access to their funds for a business week, are rather
    frustrated in the current system, and that offers potentially
    some significant benefits if we are able to move to a paperless
    electronic method of transfer. That is my own two cents, not
    Chairman Bachus'.
        At this time, I would like to call on Ranking Member
    Sanders for his openings statement.
        Mr. Sanders. Thank you, Mr. Chairman, and thank you, Mr.
    Bachus, for holding this important hearing.
        We are here today to discuss the Check Clearing for the
    21st Century Act. It is my understanding that this legislation
    will eliminate the ability of millions of U.S. customers to get
    their checks back. So the first point that I want to make is I
    am sure that there is a very positive aspect to this
    legislation, but as I understand it, you are making it
    mandatory. That means an 80-year-old woman who does not own a
    computer, is not comfortable with computers, is going to be
    caught into that trap. Whether or not this should be mandatory,
    impacting every American, or those rather who want to be part
    of the process is my first concern.
        According to an April 3, 2003 article in the Associated
    Press, Federal Reserve Vice Chairman Roger Ferguson said that
    this legislation, quote, would bring huge cost-savings for
    banks, end of quote. Well, that is good for banks, but the
    question is what does that mean for the average consumer? What
    we have been seeing in recent years, in fact, is a huge
    increase in consumer fees that millions and millions of
    Americans are paying. So what is good for large banks is not
    necessarily good for consumers.
        Mr. Chairman, I will look forward to hearing from the
    representative of the Consumers Union who has some concerns
    about this legislation from a consumer point of view. I share
    some of those concerns. But my first concern is that in a
    Congress which very often talks about choice and the right of
    people to make their own choice, I am concerned, deeply, that
    every American is going to be asked to participate in this
    process. For millions of people, especially elderly people who
    are not comfortable with computers, this may be a very unfair
    burden.
        Thank you, Mr. Chairman.
        Chairman Bachus. [Presiding.] Thank you, Mr. Sanders.
        At this time, does Chairman Oxley wish to make a statement?
        Mr. Oxley. Thank you, Mr. Chairman. I want to thank you for
    holding this important hearing on Check 21. It is bipartisan
    legislation, as we know, introduced by our friend Melissa Hart
    and Harold Ford, Jr. This hearing continues the work we began
    late last Congress in the subcommittee. I am confident this
    year we will succeed in getting a bill to the President's desk
    that truly modernizes the payment system.
        I would also like to thank the panel of witnesses who have
    come to testify--Mr. Ferguson, welcome back--and give their
    insights. I look forward to your thoughts and comments on the
    effect Check 21 will have on the domestic payments system.
        After the September 11 terrorist attacks, domestic flights
    were suspended, preventing millions of checks from physically
    moving through the payments system. While the system was
    stalled, float built-up in the payment system and the Fed was
    forced to take emergency action to continue the movement of
    checks around the country. This committee responded to the
    terrorist attacks with legislation aimed at eliminating
    terrorist financing, getting our financial markets open and
    operating, and providing businesses with protection from future
    losses from terrorist attacks.
        Check 21 is another effort by the committee to protect the
    payment system in times of national emergency by ensuring that
    checks will continue to be processed through the payment system
    with limited interruption. The technology exists to provide
    electronic check presentment, while combating fraud and
    improving service. As a matter of fact, if members of the
    committee have not seen the technology, it is really quite
    extraordinary. Today, millions of Americans could go online and
    examine their accounts, pull up images of their checks, and
    determine if the proper amounts were debited. Now, there is no
    need to wait until the end of the month to reconcile your
    account. It can be done on a daily basis. Americans without
    Internet access will benefit from this technology through
    expedited processing and will still receive images of their
    checks in the mail. There is little need for original paper
    checks in today's payment system. We should not mandate they be
    retained if they are not useful.
        We must ensure that our banking system operates as
    efficiently as possible, while preserving safety and soundness.
    Check 21 achieves these goals by improving our payment system
    and encouraging the electronic movement of checks across the
    country. At the same time, this bill protects consumers by
    ensuring that they have the ability to retrieve improperly
    debited funds and are given information on the operation of
    this new system. I am hesitant to burden this bill with
    additional and unnecessary provisions aimed at creating new
    rights not already available under the current law of
    negotiable instruments. Check 21 grants banks useful tools to
    improve the delivery of services to their customers and
    expedite the flow of funds through the system.
        We must ensure that the efficiencies achieved are not
    reversed by excessive regulatory intervention. The laws
    governing checks have not changed much over the past several
    decades, and by all estimates the system has worked very well.
    Consumers are well-protected through existing check law in the
    UCC and other regulations. This bill does nothing to reduce
    these protections and actually provides enhanced provisions for
    consumers. I expect we will receive and achieve broad
    bipartisan support to move this proposal through the committee
    and to the floor for consideration. We have the technology and
    the ability to make current check processing more efficient,
    less costly and more consumer-friendly. Let's take advantage of
    it.
        I yield back.
        Chairman Bachus. Thank you.
        At this time, we are going to recognize Mr. Ford. After Mr.
    Ford, we are going to recognize Ms. Hart and then Mr. Baker,
    and then if other members wish to be heard.
        Mr. Ford. I will be real brief, Chairman. Thank you, and
    thank you to Ranking Member Sanders and certainly to Chairman
    Oxley.
        I am pleased to join both Ms. Hart and my colleague Mr.
    Ferguson in introducing this. I know there will be some
    concerns expressed by some of my colleagues, including Mr.
    Sanders already, and I look forward to hearing from Ms. Duncan
    and from others on the panel to address some of the concerns
    raised by consumer groups and consumer organizations. I might
    add Ms. Duncan is a personal friend. I worked for her when I
    was in law school, a summer clerk for her at a law firm here in
    Washington, so it pains me a bit to be slightly on the opposite
    side with her and her interests at this moment.
        However, I think Check 21 builds upon some of the goals set
    forth by Mr. Ferguson and the Fed in reducing costs and
    providing consumers with more options, and generally making our
    banking system more effective and more efficient in delivering
    services to the consumers. I happen to believe that Check 21 is
    a strong pro-consumer bill. The bill has already been described
    at length by both Chairman Baker and Mr. Oxley, and I would
    imagine Ms. Hart will as well. Let me just address one or two
    issues regarding how I think the bill will benefit consumers in
    multiple ways.
        First, as I said, it will lessen reliance on the physical
    transportation and presentation of checks, promoting efficiency
    in big ways. It will lower costs and expedite services as well.
    As Vice Chair Ferguson has indicated, check truncation is
    generally more efficient, more cost-effective and less prone to
    processing errors. Second, a streamlined system will reduce the
    disruptions caused by bad checks. By speeding up the check
    clearing system, individuals will be notified faster if their
    check has not cleared. This will reduce the likelihood that a
    single bounced check will result in a chain reaction of bounced
    checks.
        Third, more customers will be able to benefit from new
    products and services such as online access and review of check
    images. Millions of consumers already enjoy these services,
    which give consumers instant access to information about their
    checks day or night. Also, if a consumer makes an inquiry about
    a check, his or her bank's customer services representative
    will be able to access and review the check instantly. This can
    sharply reduce the time for customer inquiries. Consumers may
    also benefit from more deposit options. Because electronic
    processing could eliminate the need for daily physical pickup
    of checks, consumers could enjoy extended deposit cut-off hours
    or deposit services at more ATMs and remote locations.
        Finally, Check 21 establishes a new consumer right--an
    expedited re-credit for contested substitute checks. If a
    substitute check is not properly charged to a consumer's
    account, banks must re-credit the consumer for the amount of
    the check, up to $2,500 within 10 business days. This is a new
    and important consumer protection established by this bill.
        Let me make one last point. I know my friend Mr. Sanders
    made the valid point about the actual presentation of checks. I
    might add that there is no right as we speak for consumers to
    actually receive that, and perhaps that is another conversation
    or something else the committee can take up. Check 21
    facilitates check truncation without mandating the receipt of
    checks in electronic form. It does this by establishing a
    negotiable instrument, a substitute check with the same legal
    status as original checks. These substitute checks can be used
    by banks and consumers in the same way as original checks.
        With that, I yield back the balance of my time, Mr. Bachus.
        Chairman Bachus. Thank you.
        Ms. Hart?
        Ms. Hart. Thank you, Mr. Chairman. Thank you also for
    scheduling this hearing, and also to Chairman Oxley for your
    leadership and foresight on this issue, on legislation to
    modernize our nation's check processing system.
        I also want to thank original cosponsor, Congressman Ford,
    and Congressman Mike Ferguson who was involved in this issue in
    the last session, for joining in the introduction of H.R. 1474,
    the Check Clearing Act for the 21st Century. Our truncated
    name, which I prefer, is Check 21. Finally, I also want to
    thank my colleagues, members of the committee, who have joined
    as cosponsors as well, of this important legislation.
        The Fed estimates that over 40 billion checks are written
    annually, resulting in $39.3 trillion in payments. Today, a
    check is processed numerous times before it is eventually paid.
    Each step of this process relies on the physical transportation
    of the check, resulting in billions of checks being driven or
    flown across the country every day. I can only imagine the cost
    to consumers of this cumbersome and anachronistic process. But
    under current law, unless a bank has an agreement with another
    bank to receive payment by electronic means, the bank must
    physically present and return the original check to receive
    payment.
        Today, there are over 15,000 banks, thrifts and credit
    unions negotiating separate agreements, which for each of these
    institutions would be an impossible task for even the most
    diligent financial institution. Building upon the Fed's check
    truncation proposal and legislation introduced in the last
    Congress, H.R. 1474 will end the requirement to physically move
    these paper checks, by removing existing legal barriers that
    prevent the banking industry from incorporating advances in
    technology such as digital imaging, to improve check processing
    efficiency and to provide improved services to customers.
        The members of the committee have at their desks an example
    of what one of these checks looks like. For those consumers who
    may not be technologically involved or maybe fear technology,
    it looks exactly like a canceled check. So this technology is
    not a non-consumer-friendly technology. In fact, it is
    extremely helpful to provide improved services to consumers.
    The legislation allows banks to technologically progress into
    the 21st century, as well as benefit these consumers in a
    number of ways. Financial institutions may have the ability to
    provide new and improved services to their customers, such as
    later deposit cut-off hours, expanded access to enhanced
    account information, and check images through the Internet, if
    that is what the customer prefers. Also, the ability to resolve
    customer inquiries more easily--and anyone who has ever had a
    problem with a lost check would understand how this enhanced
    opportunity to access account information will be helpful to
    consumers.
        In addition to these, consumers will benefit from a new
    expedited right of re-credit for amounts of up to $2,500. Most
    importantly, banks will be better able to stop and detect fraud
    very early in the check process, which is obviously another
    great benefit for the consumer.
        I would like to thank the witnesses in advance for the
    testimony they are going to give this morning, and look forward
    to hearing their suggestions on ways we can build upon or
    improve the bill. Mr. Chairman, I also have testimony from the
    National Association of Federal Credit Unions that they have
    asked me to submit. I ask unanimous consent that that testimony
    also be included in the record.
        Chairman Bachus. Without objection.
        [The following information can be found on page 244 in the
    appendix.]
        Ms. Hart. And I yield back. Thank you, Mr. Chairman.
        Chairman Bachus. Thank you.
        Are there members on the Democratic side that wish to make
    an opening statement? If not, Mr. Baker?
        Mr. Baker. Just a real brief comment, Mr. Chairman. First,
    I thank you, as other members have, for convening this hearing
    on this important matter. Secondly, I thought your opening
    statement was excellent and it was very persuasively delivered
    this morning.
        [Laughter.]
        Thirdly, I merely want to recognize your abilities to
    select a panel of very capable witnesses, not the least of
    which is the representative here today for the Association of
    Independent Community Bankers, Mr. Rusty Cloutier, who happens
    to be a good South Louisianean. I wanted to get that on the
    record so everyone would now it is Cloutier. I welcome him here
    today. Regrettably, I have another meeting which I must excuse
    myself, but it does not in any way diminish my interest in the
    subject, nor my appreciation for Community Bankers' testimony
    here today.
        Thank you, Mr. Chairman, I yield back.
        Chairman Bachus. Thank you.
        At this time, we are going to hear from Vice Chairman
    Ferguson. I do want to make one comment to the members. The
    gentleman from Vermont used an example of the 80-year-old that
    might not be comfortable with this new technology. Actually,
    this is not new technology, because what she is going to be
    getting will be a copy of her checks. The copying machine is
    very old technology. She is still going to write a check. She
    is still going to have paper checks. She is still going to
    write the check the same way she would in the past. In two-
    thirds of the cases today, she does not get back a check. She
    gets back a copy of the check on the back of her bank
    statements. So two-thirds of the 80-year-olds today are not
    getting this. The difference in her check and this copy--this
    is a legal copy, which the courts in our country have been
    using as, and giving the same weight of evidence as the
    original for some 60 years. And it looks very much--I mean,
    that is just a copy of her check.
        So I believe that, and I think we could disagree, but I
    think most 80-year-olds are used to seeing copies of things. In
    fact, many of them complain when they are asked to produce an
    original. We use copies of birth certificates, certified
    copies. We use all sorts of things today, and really our
    banking system is behind everything else in continuing to
    process these original checks. The checks will continue to go
    in. I did want to point out that. It is not anything overly
    complex about what she will be reading. And I think she can see
    a copy of it as easy as an original. I do not think that will
    give her any trouble.
        Mr. Sanders. We will learn more this morning. The question
    is not so much the copy that looks like the original. The
    question is how many people in fact will be getting the copies
    compared to how many get the original. That is one of my
    concerns.
        Chairman Bachus. Right. And she will have a right to get
    those, so she will have that right if she wants it. She can
    request it.
        Mr. Sanders. It is one thing to have a right and it is
    another thing when you are 80 years old to be able to implement
    that right.
        Chairman Bachus. Well, and two-thirds of people today are
    getting it on the back of their statements, or credit unions,
    for some 20 or 30 years--I do not know how long--have not been
    giving these checks. They do not do that, and there are many
    80-year-olds who are members of credit unions, who write
    checks. I have not heard any of them complain about this.
        Mr. Ferguson--our first witness is Vice Chairman of the
    Board of Governors of the Federal Reserve System, the Honorable
    Roger W. Ferguson. Vice Chairman Ferguson, we look forward to
    your testimony.

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

        Mr. Ferguson. Thank you very much, Mr. Chairman. I would
    also like to thank the subcommittee for inviting me to discuss
    the Check Clearing for the 21st Century Act, or Check 21, and
    for holding hearings on this very important legislative
    initiative.
        This bill, which is similar to a proposal that the Board
    forwarded to Congress in late 2001, removes legal barriers to
    the use of new technology in check processing. It accomplishes
    this essentially by allowing banks to replace one piece of
    paper during the check collection or return process, the
    original check, with another piece of paper that contains the
    same payment information--a substitute check as you have
    already said. This simple change holds the promise of a more
    efficient check collection system.
        Today, consumers, businesses and the government write about
    40 billion checks annually. Over the years, banks, thrifts and
    credit unions, which in the rest of this testimony I will refer
    to collectively as banks, have applied a variety of electronic
    technologies to automate check processing, which involves
    handling and sorting checks so that they can be physically
    shipped to their destinations.
        A typical check is processed several times before it is
    eventually paid. First, it is processed by the bank at which it
    is deposited. Then, it may be shipped for processing to one or
    more intermediaries, and finally it is shipped for processing
    and payment to the bank on which it is drawn. While most checks
    are currently processed in this fashion, some checks are
    removed from the collection process, and the payment
    information on the checks is captured and delivered
    electronically to the banks on which they are drawn. This
    process, which is commonly referred to as check truncation,
    reduces the number of times the checks must be physically
    processed and shipped. As a result, check truncation is
    generally more efficient, more cost-effective, and less prone
    to processing errors.
        The check system's legal framework, however, has not kept
    pace with technological advances and is now constraining the
    efforts of many banks to use new electronic technologies such
    as digital check imaging to improve check processing efficiency
    and to provide improved services to customers. Today, check
    truncation can occur only by agreement of the banks involved,
    because existing law requires original paper checks to be
    physically presented or returned in the absence of an agreement
    to the contrary. Given the thousands of banks in the United
    States, it is not feasible for any one bank to obtain check
    truncation agreements from all other banks or even a large
    portion of them. Therefore, legal changes are needed to foster
    the use of new electronic technologies to improve check
    processing and reduce the need for physical transportation in
    the check collection process.
        Check 21 facilitates check truncation early in the check
    collection or return process without mandating that banks
    accept checks in electronic form. The Act accomplishes this by
    creating a new negotiable instrument called a substitute check
    that banks could use in place of an original check. Under the
    Act, banks would be able to truncate original checks, process
    check information electronically, and deliver substitute checks
    to other banks and bank customers that want to continue
    receiving paper checks. As a result, banks could handle much of
    their check processing electronically without needing to obtain
    legal agreements from thousands of other banks to truncate
    checks.
        A substitute check, as you have already seen, would be the
    legal equivalent of the original check and could be used by
    both banks and their customers just as if it were the original
    check. As you know, it would look like a regular check. It
    would carry an image of both the front and the back of the
    original check, and could be processed on existing check
    processing equipment. Under the Act, a bank could still demand
    to receive paper checks, although it would likely receive a mix
    of original checks and substitute checks. Because substitute
    checks could be processed just like original checks, the bank
    would not need to invest in any new technology or otherwise
    change its current check processing operations. Further, bank
    customers that receive canceled checks with their monthly
    statements would continue to receive canceled checks, only some
    would be the original checks and some would be substitute
    checks. Bank customers would be able to use the substitute
    checks in exactly the same way they would use the originals.
        While allowing banks to replace one piece of paper with
    another might seem like a small change, eliminating the need to
    deliver original checks would allow banks to speed up the
    process, a technological transformation in check clearing that
    is already under way. By adopting a market-based approach that
    permits each bank to decide when and how to use substitute
    checks, the Act should result in the use of technology to
    provide a more efficient and flexible check collection system.
        The Act would also help address the risks to the check
    collection system from its extensive reliance on air
    transportation that was highlighted immediately after the
    September 11 tragedy. One effect of air transportation being
    grounded was that the flow of checks slowed dramatically.
    During the week of the attacks, the Federal Reserve Bank's
    daily check float ballooned to over $47 billion, which is more
    than 100 times its normal level. Had the Act been in effect at
    that time and had banks been using a more robust electronic
    infrastructure for check collection, banks would 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 enable 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 might be able to establish branches or
    ATMs in more remote locations and provide later deposit cut-off
    hours to their customers. Later deposit cut-off times could
    result in some checks being credited one day earlier and
    interest accruing one day earlier for some checks deposited in
    interest-bearing accounts.
        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 they
    do today by accessing check images. Further, as banks reduce
    their operating costs, the savings will be passed on through a
    combination of lower fees to their customers and higher returns
    to their shareholders. Banks have indicated that they expect
    cost savings to be substantial.
        While there is a fairly broad consensus on the desirability
    of the Act's underlying concepts that permit the use of
    substitute checks, the issue of customer protection has been
    the subject of much debate. The Board has had an opportunity to
    further reflect on the views that have been expressed by both
    consumer advocates and the banking industry, and it has
    concluded that expedited re-credit provisions are not necessary
    for the successful implementation of the Act. We recognize that
    the issue of customer protections is the most challenging
    policy issue in the Act, and that Congress might arrive at a
    different conclusion as it considers whether to include
    expedited re-credit provisions.
        I would like to discuss briefly consumers' rights under
    existing check law, additional rights granted under the Act's
    new warranty and indemnity provisions, and why we believe that
    expedited re-credit provisions are not needed. The Act extends
    the protection of existing check law, including the UCC, the
    Uniform Commercial Code, and the Federal Reserve Board's
    regulation CC, to substitute checks as though they were
    original checks. Long-established check law protects bank
    customers if checks are improperly charged to their accounts.
    While it is true that the UCC does not provide a specific time
    frame within which a bank must act, the UCC's provisions give
    the bank a significant financial incentive to resolve problems
    on a timely basis. Specifically, a bank generally would be
    liable to its customer for the amount of an unauthorized
    charge. Moreover, if a bank bounces a customer's check that
    would have been paid were it not for the unauthorized charge,
    the bank may also have to reimburse its customer for
    consequential damages. The only way a bank can limit its
    liability is by resolving its customers' claims as quickly as
    possible. This incentive appears to have worked well for many
    decades.
        In addition to the protections provided in the current
    check law, the Act requires banks to provide new warranties for
    substitute checks and to indemnify customers for losses
    resulting from the receipt of a substitute check instead of the
    original check. Customers whose checks have been converted to
    substitute checks receive a warranty that the substitute checks
    are legally equivalent to the original checks and that a check
    will not be paid more than once from a customer's account.
    Banks must also indemnify customers for losses they incur due
    to the receipt of substitute checks rather than the original
    checks. Taken together, these warranty and indemnity provisions
    provide customers with additional protections against losses
    related to the use of substitute checks.
        The use of a substitute check is not expected to result in
    problems different from those that are routinely addressed in
    today's environment, and existing law already encourages the
    prompt redress of consumer complaints. Therefore, the Board
    believes that the significant compliance burdens imposed by the
    expedited re-credit provisions on the banks that receive
    substitute checks would outweigh the small incremental benefits
    that the provisions would provide to consumers. Nonetheless,
    Congress may conclude that expedited re-credit provisions for
    consumers should be included in the legislation. In that case,
    we believe any expedited re-credit provision should be
    consistent with the Act's basic purpose and should not go
    beyond the provisions originally proposed by the Board in 2001.
    In the unlikely event that additional consumer protections are
    needed for substitute checks, the Act grants the Board
    authority to adopt such protections by regulation.
        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 payment
    system for the foreseeable future. The Board believes that,
    over the long run, the concepts embodied in Check 21 will spur
    the use of new technologies to improve the efficiency and
    flexibility of the nation's check collection system and provide
    better services to bank customers. The Act accomplishes this by
    simply permitting banks to replace one piece of paper, the
    original check, with another piece of paper, the substitute
    check, both of which contain exactly the same payment
    information. Because the Act should result in substantial cost
    savings, it would also be desirable to begin obtaining these
    savings as quickly as possible.
        We look forward to working with the subcommittee as it
    further considers this legislation. Thank you, Mr. Chairman and
    members of the subcommittee for your attention and your time. I
    would be happy to answer your questions.
        [The prepared statement of Hon. Roger W. Ferguson can be
    found on page 109 in the appendix.]
        Chairman Bachus. Thank you, Vice Chairman. Let me pose this
    question to you. There is a broad consensus among most of the
    members on the basic underlying need for this legislation.
    However, in your testimony you state that the Federal Reserve
    believes that the expedited re-credit provision is unnecessary.
    First of all, that is a change from last year when I think the
    Federal Reserve agreed that it was a necessary protection. Can
    you comment on what has led to apparently what is a change in
    position? I know there are some on this committee that think
    the expedited re-credit provision is an important consumer
    benefit.
        Let me go ahead and ask two questions and you can wrap them
    both up in one, because I think they are related. This
    legislation creates a new negotiable instrument, the substitute
    check. That is sort of the basis for this legislation. To have
    a substitute check, we have to produce an image of the
    original. Consumer groups have said that with an image out
    there, as well as the original check and then the substitute
    check, that it increases the likelihood that consumers may be
    double-debited on their accounts, and with both the original
    check, the substitute check and the image being made, that
    there may be a higher likelihood of fraud. Would you comment on
    these concerns?
        Mr. Ferguson. Certainly. Yes, the Board has changed its
    view from the original proposal. I thought it was important in
    our testimony to be very upfront about that so we could have
    just this discussion. The reason we have changed our view is
    that as we have analyzed both existing check law and
    importantly the experiences that have seen under existing check
    law, we believe that there are adequate coverages in that law.
    As we have said, this substitute check is a legal equivalent or
    would, should the Congress pass the bill, become the legal
    equivalent of the original check. Therefore, all the rights on
    the original check law under the UCC would apply. In the UCC
    there are a number of provisions that give banks incentives to
    avoid just the kind of problem that you have talked about in
    terms of double debit, for example. Those incentives emerge
    because should a bank inadvertently debit one's account twice,
    obviously there is no legal right to do that so they owe that
    extra debit back to the consumer right away. In addition to
    that, should other checks come in that are erroneously
    dishonored because of the original double debit mistake on the
    part of the bank, then the bank would be liable for
    consequential damages that may result from that original
    mistake.
        So having looked at that, and seen that the UCC, plus other
    regulations, seemed to cover most of the kinds of issues that
    people were worried about with respect to the substitute check,
    we thought that the expedited re-credit was no longer
    necessary. Now, to be very clear and to very fair, we are not
    opposing expedited re-credit if that is the judgment of
    Congress, but we also recognize that since there seem to be
    very, very few problems with 40 billion checks written now,
    there is a cost to adding a new kind of check law, and there
    are some burdens to the banks as well. I guess our judgment
    became, if one looks at the cost and benefits to society
    overall, that the expedited re-credit was not essential to
    putting forth the major benefits of this check truncation Act.
        Now, to go to the second part of your question, which is
    whether or not this substitute check, which again is very much
    like the real check and indeed has all the information on it,
    is prone to new types of mistakes. I would say the answer to
    that is no. First, with respect to double debit, exactly the
    same answer that applies to original checks would apply to the
    substitute check. The same set of incentives would apply to the
    substitute check. Secondly, the law as proposed in H.R. 1474
    and as we originally proposed it, includes a couple of new
    provisions as well--warranty and indemnity. If there is a
    violation of the warranty and the indemnity comes into play,
    then banks could potentially be liable for consequential
    damages again, so that adds an extra element of incentive. And
    finally with the question of information on the bottom line
    here, what is called the MICR line that contains all the
    information about the check, we do not believe that there would
    be further MICR or translation problems because of this
    proposed law. The current check system depends on the
    information on that line. There is not a great deal of evidence
    of translation problems that exist currently.
        More importantly, once the line is correctly input and is
    used in check processing, then whatever may or may not be
    easily legible on the paper check becomes irrelevant once you
    have the correct information on the MICR line. So I believe
    that going to more of an image base, more of an electronic
    system which this would allow--would not mandate, but would
    allow--has the possibility of reducing the number of errors
    that might occur. So for those reasons, one, I do not believe
    that on balance we need an expedited re-credit, but we are not
    in opposition should Congress choose to do that; and secondly,
    I do not believe that we are likely to see an increase in
    problems; and third, we have looked at our various databases
    among all the regulators and see no complaints that have
    emerged with respect to existing check law, and there is very
    little anecdotal evidence that this is a major problem
    requiring a new congressional intervention.
        So for that variety of reasons, yes, we did change our
    view. We are not in opposition if Congress wants to go down
    that path, but we do not expect a new range of problems to
    emerge from the availability of a substitute check.
        Chairman Bachus. All right, thank you.
        The gentleman from Vermont?
        Mr. Sanders. Thank you, Mr. Chairman, and thank you for
    your presentation, Mr. Ferguson.
        Mr. Chairman, it seems to me that there are two basic
    issues that we are dealing with today. One is the inherent
    strength or problems of the legislation, and Consumers Union is
    going to testify to some of the concerns that they have. The
    second broader issue is one that Mr. Ferguson touched on, and
    that is he indicated, and I think we are all in agreement, that
    the greater efficiencies that will be developed as a result of
    this legislation is going to save banks money. Is that correct,
    Mr. Ferguson? No argument there, right?
        Mr. Ferguson. Correct.
        Mr. Sanders. The question you also said is that you
    assumed, or you thought that because of these efficiencies and
    these cost savings, consumers in fact might result in terms of
    lower fees. What we can agree on, I think, Mr. Ferguson, is
    that fees have soared for many consumers in the last number of
    years. Is that a fair assertion?
        Mr. Ferguson. I think it depends on the product, and I
    would also observe that there have been new products and
    services introduced as well over the last several years,
    including for example, ATMs. So one should think about both the
    service benefit and the expansion of service.
        Mr. Sanders. I know, but my question was dealing with fees.
    ATMs are a great service. We all take advantage of it, but it
    costs us a pretty penny as well to take advantage of it. But my
    point here is that you are saying----
        Mr. Ferguson. But sir, you have to recognize there is no
    service without a cost to it.
        Mr. Sanders. Excuse me--my point was that banks are pushing
    this legislation. Banks will save money. Your suggestion was
    that you think consumers will benefit. Maybe they will; maybe
    they will not. I would suggest to you that the Bank of America
    in 2001 made over $6 billion in net income. What they are able
    to do with some of that income is provide their CEO with over
    $17 million in compensation. Meanwhile, that same bank took
    many jobs from the United States and sent them to India. I am
    not sure that the fees at that bank went down. In 2001, Wells
    Fargo made over $3 billion in net income. They were able to pay
    their CEO over $34 million in total compensation. I am not sure
    that fees at that bank went down. At J.P. Morgan Chase in 2001,
    they made over $1.6 billion in net income. They managed to pay
    their CEO close to $22 million in compensation, and on and on
    and on it goes.
        So I think that there are two issues here. Number one, the
    benefits and the problems associated with that legislation, but
    second of all the assertion that savings for large banks are
    necessarily going to go to the average consumer. Now, what in
    this legislation is mandated that says that if there are
    savings that go to large banks, fees are going to go down. So
    that all the consumers in this country say, well, this is
    really good; banks are going to save money, therefore my fees
    are going to go down. I am just a regular, average bank
    consumer. I have got $10,000 in the bank; I strongly support
    this legislation.
        Anything in this legislation that you could tell me that
    will guarantee that mandates that those savings will be passed
    on to consumers, rather than take CEOs who today get only $25
    million, maybe they go up to $30 million. Did I miss some
    language in that legislation, Mr. Ferguson?
        Mr. Ferguson. Is this the chance where I can respond?
        Mr. Sanders. Please. You can respond right now, sir.
        Mr. Ferguson. It is always nice to have that opportunity.
        A couple of points I would like to make. No, in America we
    do not mandate necessarily that banks change what they do in
    terms of compensation. However, to be very clear about what I
    believe in this matter, because we have a great deal of
    competition in the financial services sector, and we do, we
    have observed over many, many years that whenever there is any
    advance with respect to technology, consumers get some of the
    benefit. In your State, upstate in St. Albans, which I happen
    to go to every summer, in the far northern part of the United
    States--there are five ATM machines there that charge no
    particular fees that were not there 10 years ago, because banks
    have found that it is in their benefit to provide services to
    customers. There are other opportunities here that may also
    accrue to customers.
        One of the benefits of this, if I may complete my answer--
    --
        Mr. Sanders. We have a very limited amount of time.
        Mr. Ferguson. I realize you do, but I have a point that I
    would like to make to you. One of the benefits here, and that
    is true in your State, in particular rural States, States that
    are affected by bad weather occasionally, is that if you have a
    more electronic check processing system, you are unlikely to
    find that far rural locations, for example, have disadvantages
    from not getting checks delivered on time because of the
    weather, et cetera. So there is a possibility that many
    consumers in all states, including yours, may find some
    benefits because the regularity of check service for them may
    go up. We do not have a major problem with that in this
    country, but there are some parts of the country where it is
    true. There are a number of arrangements.
        Mr. Sanders. If I may please.
        Mr. Ferguson. If I can finish my answer, since you raised
    the question about the issue of compensation.
        Mr. Sanders. The difficulty is we only have five minutes of
    time. That is all.
        Mr. Ferguson. Fine.
        Chairman Bachus. That time is already gone by. I will allow
    him to extend his answer, though.
        Mr. Ferguson. The only other point I would make is I am not
    going to, I do not feel obliged necessarily to, defend CEO
    compensation and other things you have raised. That is an
    important part of your question. I am not going to necessarily
    go down that path. Thank you.
        Mr. Sanders. Let me just in two sentences conclude by
    saying, this will definitely benefit banks, but there is no
    guarantee at all that it will necessarily benefit consumers.
    Some aspects of it may; some may not.
        Chairman Bachus. This witness is testifying on behalf of
    the Federal Reserve, who has taken a position that this
    legislation will benefit the Federal Reserve, and actually the
    cost of your processing, too.
        Mr. Ferguson. We actually, from the standpoint of the
    Federal Reserve, have not yet developed a strong perspective
    here on what this might do for us. We are putting this forward
    because we think it is in the country's interest overall, not
    that it is going to benefit us, but we think it will benefit
    consumers and potentially benefit banks as well.
        Chairman Bachus. Thank you.
        The order of the witnesses is Baker, Tiberi, Hensarling,
    Garrett, Murphy, Barrett, Oxley, Feeney, Bereuter, Biggert and
    Fossella. So we will go to Mr. Hensarling.
        Mr. Hensarling. Thank you, Mr. Chairman.
        Mr. Ferguson, I believe that you testified here that
    nothing included in this bill is going to increase costs on the
    banks and that they will not need to invest in new technology
    in order to process this new particular negotiable instrument.
    Is that correct?
        Mr. Ferguson. That is part of the testimony, yes.
        Mr. Hensarling. Okay. So the Fed is predicting a
    substantial, I assume, system-wide savings by this new
    technology. Correct?
        Mr. Ferguson. If I could be clearer, what we have said is
    this has the potential to do that. Because this is not
    mandatory, but gives an option, part of the question of the
    cost savings depends very much on how much the banks and
    consumers take up this option. So there is some potential for
    savings, for sure. We have not tried to calibrate it because we
    do not know exactly how many banks will use the option, but we
    think there is some potential for cost savings in the whole
    check processing system, yes.
        Mr. Hensarling. But you are not mandating that banks invest
    in new technologies. Correct?
        Mr. Ferguson. No, we are not mandating that banks invest in
    new technology. Some of them may choose to do that because it
    allows for new services, but we are not mandating that.
        Mr. Hensarling. Do you have any estimate of the range of
    savings that might occur?
        Mr. Ferguson. I have seen a broad range of savings, in all
    honesty, and as I have said I have attempted to avoid trying to
    estimate that, in part because it depends very much on what the
    bankers do and what consumers do. I would encourage you to talk
    to some of the people on the second panel, and they may give
    you a perspective on how much they might have saved already or
    what they think might occur here, but we have been pretty
    judicious in not putting a hard and fast number on it.
        Mr. Hensarling. One of my colleagues brought up the concern
    of a customer no longer being able to receive a copy of a paper
    check. Is there anything in this legislation that prevents
    consumers from receiving copies of paper checks?
        Mr. Ferguson. No, there is nothing that prevents a consumer
    from receiving a copy of a check. It is the one that you have
    in front of you, the substitute check, and they simply have to
    request one.
        Mr. Hensarling. Did I also hear in your testimony that in
    the opinion of the Federal Reserve this new legislation will
    mean fewer errors in processing checks?
        Mr. Ferguson. Yes, you did. We believe that the system
    would be more efficient, more cost-effective, and less prone to
    errors.
        Mr. Hensarling. Is there anything in this legislation that
    lessens the liability of financial institutions for negligence
    in handling negotiable instruments or checks?
        Mr. Ferguson. No, there is nothing that lessens their
    liability. In fact, there are two provisions that are new that
    adhere particularly to the substitute check, so there are new
    kinds of responsibilities that would emerge from the
    legislation in lieu of having it lessened.
        Mr. Hensarling. So if I understand the testimony correctly,
    in the opinion of the Federal Reserve this legislation will
    create fewer errors in the check transaction process for
    consumers. This has the potential to have a great cost savings
    within the system. And assuming a competitive marketplace
    within banks, along with the elasticity of demand, we are
    looking at savings to consumers. We are looking at additional
    options for consumers and we are seeing no diminution in
    financial institution liability. Is that correct?
        Mr. Ferguson. That is a fair summary, yes.
        Mr. Hensarling. If so, I frankly cannot conceive of a more
    pro-consumer piece of legislation within this context, and I
    applaud Mr. Ford and Ms. Hart for their leadership in bringing
    this to the committee.
        Mr. Chairman, I yield the balance of my time.
        Chairman Bachus. Thank you.
        We will now hear from the gentleman from Tennessee, Mr.
    Ford.
        Mr. Ford. I thank the Chairman, and thank you again, Vice
    Chair Ferguson.
        Let me ask just one or two very quick questions, to sort of
    walk through what exactly happens, because when some of the
    folks approach Ed Hill and others are approached about this
    issue, it was easier for me to understand when you sort of walk
    through what happens if I wrote a check to, say, a hardware
    store or something like that in my district, on my banking
    account, First Tennessee back in my State. What exactly
    happens? Can you walk through for me, when the hardware store
    deposits my check at the end of the day. What happens to the
    check before the whole process is completed? And two, how will
    this legislation potentially affect and/or improve this
    process?
        Mr. Ferguson. What happens is that your hardware store
    would first endorse the check on the back and take it to their
    bank, which may or may not be your bank. That would be the
    first question. The bank will look at the check and determine,
    first, is this a check that is drawn on that bank, which is
    called ``on us,'' or is it drawn on another bank? They may
    first bundle up all the checks from a branch and send them to a
    processing center to make that determination. So there is a
    first night movement of the check. There will be determination
    of whether that check is drawn on that bank or drawn on another
    bank. If it is drawn on another bank, then the physical check
    currently has to be handled again either through another
    processing center, through an intermediary such as the Federal
    Reserve. It may go into a correspondent bank, which is another
    bank. There may be in Nashville or other places a clearing
    center, a clearinghouse for all checks.
        So then the check gets processed again and it goes to the--
    --
        Mr. Ford. I will overlook the fact you put Nashville above
    Memphis, but go right ahead.
        [Laughter.]
        Mr. Ferguson. This is where my colleague, Sue Biass, who
    used to work at First Tennessee, should have been here. She
    would have known that.
        [Laughter.]
        Then the check then will go to your bank, the bank on which
    it is drawn. They will look at it. They will look at the
    information. They will then debit your account. Now, because
    you are good credit, you have plenty of money in your account.
    If it turns out that someone wrote----
        Mr. Ford. You are making up.
        [Laughter.]
        Mr. Ferguson. Your colleague to your right is supporting
    you completely.
        [Laughter.]
        What may happen then, if in the unlikely event that you did
    not have a sufficient amount of money in your account if there
    were insufficient funds, then that check would have to be
    returned through this process back to the original bank, and
    then your hardware store would be notified that there were
    insufficient funds in the account and the check was not good.
        So what you see in the current process is that the check
    gets handled through two or three different intermediaries--two
    banks, maybe three if there is a correspondent bank; two banks,
    maybe the Federal Reserve if we are providing the check
    clearing process. It is a very, as you can tell, slow,
    cumbersome time and labor-intensive process in which there are
    a number of places where small things could go wrong. As you
    know, the legislation would allow that original deposit to be
    converted to an image, with the information at the bottom
    captured correctly, and have that image be the thing that
    drives the whole check clearing process. It does have the
    potential--I am not sure how it would really work out--but it
    does have the potential to shorten the time.
        Mr. Ford. Shortening the time does not lessen the
    likelihood that mistakes, or I should say increase the
    likelihood that mistakes can be made, does it?
        Mr. Ferguson. No, it does not increase the likelihood that
    mistakes would be made. There is no new increase in that risk
    from the way checks are currently handled, in my judgment.
        Mr. Ford. As a matter of fact, if a mistake is made, this
    process probably will accelerate discovery of that and help to
    remedy that quicker than the former process.
        Mr. Ferguson. There are places where that might occur
    because it would allow the image to have been captured early in
    the process, and electronic images can be shared obviously more
    quickly than going back and trying to find the original piece
    of paper. So indeed you are right. There is a possibility that
    problem resolution times could be somewhat shorter because they
    could be driven off of what is, as you see here, a very
    accurate image of both the front and the back of the check.
        Mr. Ford. Let me switch gears for one moment. We constantly
    point to the tragedy of 9-11 and the anthrax mailings here on
    the Hill as examples of why legislation like this might be
    needed. I believe that to be the case, but I think it is
    convenient at times to point to incredible moments as
    justification for incredible changes. But you have talked a
    little bit in a previous question about why this bill could be
    helpful and how it could lower costs. You began to touch on how
    this may help some of the larger corporate clients do business
    faster and better and cheaper, which could produce greater
    benefits.
        I appreciate the question that Mr. Sanders asked, although
    some of his question is outside the scope of this hearing and
    this bill regarding compensation levels for CEOs of large
    companies, and perhaps that is something we can take up at
    another time. That is not necessarily relevant to this
    conversation or hearing or legislation today. Can you give me,
    outside of 9-11 and anthrax, just one or two, in addition to
    what you just stated, how this new process or this new law
    could impact positively a reduction of costs and increase
    services for consumers?
        Mr. Ferguson. I think you phrased it correctly, which is
    both a reduction in costs for some processing in the system and
    also potentially increase services. I will give you just a
    couple more examples--one physical and one that deals with
    something that went wrong, and then some other benefits that
    may occur.
        The Federal Reserve, as you know, processes about 40
    percent of the checks that are not ``on us.'' We process the
    majority of checks that go through the system that are not
    drawn on the same bank. We have had a couple of experiences in
    banking because of bad weather, planes are grounded. We had an
    unfortunate accident in Montana a year and a half ago in which
    checks were destroyed. The process of then trying to figure out
    which checks were on that particular plane was a very
    cumbersome process, except in the cases where we had images, in
    which case the images were handled in the regular course of
    business, even though the checks had been destroyed. There are
    a number of businesses and households who were depending on a
    check clearing, and we could have through our process checks
    cleared on the regular schedule because the images were
    available. So it is not just terrorist attacks. It is not
    things such as anthrax, but frankly, it is bad weather, for
    example, that might slow down this process.
        It is also true that it is possible, if banks and
    businesses make these investments, that some checks may clear
    even more quickly then they do today, and it is one of the
    things that we obviously have to monitor and be aware of. There
    is a broad range of services. One of the congressmen astutely
    observed that if you have access--I think it was Chairman
    Oxley--if you have access to the image, your image of the
    check, on the Internet very, very quickly, then you can do
    things such as balance your checkbook much more quickly.
        So there are a number of possibilities here that might
    emerge, and it is impossible to identify exactly what all of
    them would be, but I think there is a high likelihood that
    because we live in a very competitive banking environment, that
    banks would have the incentive to hold onto customers by
    providing new products and services and using some of those
    cost savings in that way.
        Mr. Ford. My time is up, but I will say this, thank you,
    Mr. Ferguson, for being here. I know that there is some concern
    on the part of the Fed regarding this expedited re-credit, this
    new consumer protection which I support, and I know that the
    Consumers Union and some of the other organizations have
    expressed concern that perhaps that should be expanded outside
    of the orbit of just substitute checks. I tend to agree with
    that, but maybe that is something this committee and Ms. Hart
    and I, since we developed this good bipartisan flavor here, can
    work on perhaps in the near future to try to address that
    concern.
        Thank you for being here, Mr. Ferguson. I yield back.
        Chairman Bachus. Thank you.
        At this time, Ms. Hart--please?
        Ms. Hart. Thank you, Mr. Chairman.
        Thank you, Mr. Ferguson, for being with us, as well. A
    couple of questions, kind of dovetail into each other a bit,
    but the first question is regarding the creation of a brand new
    negotiable instrument, this substitute check. We have discussed
    how that will expedite the processing and makes it a lot better
    for the consumer as far as access to their money. But is there
    not also an increased likelihood that with both an image of the
    check and a check in the payment system that there could be a
    greater chance of some kind of double-debiting issue or perhaps
    another kind of fraud? How would that be avoided?
        Mr. Ferguson. One, I do not think there is an increased
    likelihood of that, as I indicated. The banks have a very
    strong incentive to avoid that. There are a number of processes
    that are already in place with respect to avoiding double
    debits, and those will stay in place. You also have to
    recognize that once a check has been imaged, it is really just
    the image or the MICR line information and the image that
    travels through the system. The original check is truncated--
    ``truncated'' is a fancy word for saying basically it is safe
    kept someplace and over time may well no longer be available in
    the system. The credit unions, for example, do that already and
    there is no evidence of problems that we have seen or very
    little evidence, and none that has reached a policy concern.
        Ms. Hart. Is it envisioned at all that the check would be
    destroyed?
        Mr. Ferguson. It is a possibility, and you can talk to the
    credit unions about how they handle it, and some other banks do
    as well. But you also have to understand that today, there is a
    range of estimates as to what percentage of checks are
    currently truncated, so the original check may no longer be
    available, but then you obviously would have the substitute
    check. But I do not think that there is a risk of a significant
    increase in double debits because of law that you have
    introduced here.
        Ms. Hart. So the processes that are in place have really
    not experienced that problem as it is?
        Mr. Ferguson. They have not experienced that problem as it
    is, and we already have a world in which there is imaging and
    some truncation that already occurs. So one of the reasons that
    we have some comfort is that, in fact, this is not creating
    something that is totally unheard of, other than the substitute
    check, but the processing behind it has been tested already and
    is understood and seems to be working.
        Ms. Hart. Okay. Thank you. The other concern is regarding
    any other safety or soundness issues that may relate in
    increased electronic check truncation. Are you confident that
    the current technology is adequate to protect the U.S. payment
    system from some unanticipated crisis regarding that? Or is
    there something else that we should put in place?
        Mr. Ferguson. No, I am confident that the confluence of
    technology, law and regulation and natural incentives on the
    part of banks and on the part of customers has all worked to
    create a payment system that I think benefits the consumers and
    serves an $11 trillion economy. So I think the concepts in the
    check truncation act would be a major step forward, without
    question, but I am not sure that we need at this stage any
    further changes, and we are not proposing anything else, other
    than the kind of things that have already been picked up,
    generally speaking, in H.R. 1474.
        Ms. Hart. Would you expect that the Fed will be ready to
    step up to the plate as this would proceed, and make
    suggestions?
        Mr. Ferguson. Absolutely. We will be very vigilant through
    all of our usual methodologies, but I and a number of my
    colleagues are very involved in two or three different
    committees with the purpose of being on the forefront or
    understanding where the forefront of payment systems will be,
    and if we see other needs that emerge over time, we would
    certainly, as we did with our original proposal on check
    truncation, let the Congress know. So we will be vigilant on
    these matters.
        Ms. Hart. Thank you for that, Mr. Ferguson. I yield back.
        Chairman Bachus. Thank you.
        Mr. Davis?
        Mr. Davis. Thank you, Mr. Chairman, and Mr. Ferguson,
    welcome.
        Let me give you a chance to perhaps anticipate some of the
    criticisms that the panel after you may offer for this
    legislation, and let me get the benefit of your expertise in
    analyzing some of it. Recognizing that the Fed does not have a
    terrible stake in the re-credit provision either way, I still
    want to direct a few questions about it to you.
        One of the contentions, as I understand, of the consumer
    groups is that the re-credit provision, while it offers in
    effect a new set of protections to consumers, that the
    provision is triggered by the presentment of a substitute
    check. Their concern, as I understand it, is that for the class
    of consumers who may not have a substitute check in their
    position, for whatever reason--something as basic as losing it
    or something more advertent, such as not seeking it--that they
    are somehow worse off under this legislation than they would be
    under the current regime. Can you address that concern for a
    moment? First of all, do you agree, as a matter of interpreting
    this legislation, that to trigger the re-credit provision that
    one has to have in his or her possession a substitute check--do
    you agree with that?
        Mr. Ferguson. Yes. I think that is correct.
        Mr. Davis. Now, taking that point, can you comment on
    whether that leaves a class of consumers somehow worse off than
    they currently are?
        Mr. Ferguson. No, I do not think it leaves a class of
    consumers worse off than they currently are. I think the scope
    that is here is much more practical to implement, if one is
    going to go down this path towards having a re-credit.
    Consumers that do not receive their canceled checks would have
    really no way to determine which checks they wrote were
    subsequently converted to substitute checks. So if you expanded
    this to more than individuals who did get back their substitute
    check, they would not know when and how to exercise that right.
    So I think you would be creating new confusion in the minds of
    consumers as to exactly which rights apply to them, and they
    would have to try to go back through their bank and figure out,
    gee, was this ever converted to a substitute check or not? I do
    not think that would be very beneficial to consumers.
        Mr. Davis. Let me cut you off and give you one
    hypothetical. Let's say that someone, most banks right now
    provide some service by which you can call a 1-800 number or
    call some other number and find out how much is in your account
    and find out the particular value of a check. Let's say that
    hypothetically I am checking my bank account by telephone and I
    find out that check 2874 shows a $100 check and I think I wrote
    a $10 check to Pizza Hut, and somebody could not read my
    handwriting. Now, in that instance obviously I have not gotten
    a substitute check. Let's say for whatever reason I never get a
    substitute check. Why shouldn't I just be able to call my bank
    and say, look, I called in yesterday on the 1-800 number and
    you all are showing a $100 check and I know that nothing at
    Pizza Hut costs $100. Why shouldn't I be able to do that by
    telephone? Why should I have to have a substitute check?
        Mr. Ferguson. That issue is really much more about current
    check law, because what you are saying is your bank erroneously
    debited your account, and current law already prohibits that
    and gives you the right to have that money put back in your
    account beyond the $10 in your example. Indeed, if it turned
    out that they inadvertently debited your account for $100 when
    they should have debited for $10, under current law if you
    write another check for $90 and they bounce that and you have
    some late fees, et cetera, then they are obliged to make you
    whole for those as well. So the example you have talked about
    is really something that is well covered under current law. As
    I tried to indicate a few other times, we have seen no evidence
    that that current approach under the UCC is not working.
        Let me remind you, we have 40 billion checks written every
    year in this country. So if that had been a systematic problem,
    then I think it would have been recognized. So what you are
    talking about now is current law, and current law covers your
    case very well and seems to cover it efficiently.
        Mr. Davis. Let me quickly address that before I ask you one
    final question. The time is limited. I think that is true in
    the sense that UCC provisions provide a protection for the
    consumer. However, I suspect that what the consumer groups
    would say in response is that someone has got to go out in
    effect and trigger the UCC remedy through getting a small
    claims lawyer and paying the fee for a small claims lawyer.
    Whereas the benefit of the re-credit provision, as I understand
    it, is that it creates an automatic set of rights that do not
    have to trigger through litigation.
        Mr. Ferguson. But one must also understand two things. One
    is that banks have an incentive to do this right. It is a very
    competitive business. They are trying to hold on to consumers.
    Many banks look at the checking account and the checking
    relationship as the anchor of the relationship. What we have
    seen thus far is that the incentives that banks have seem to be
    working very well to get problems resolved quickly.
        Mr. Davis. Let me just make one point--if I could ask
    unanimous consent for about 30 seconds, Mr. Chairman--the point
    that I am making, I suppose, Mr. Ferguson, is that I think you
    are 100 percent correct in terms of the incentives the banks
    have, but those incentives do not create an error-free system.
    I think we agree on that. So the proposition that I am stating
    to you, and I suspect what the consumer groups are saying is
    that if we are going to have a re-credit provision, why
    shouldn't the re-credit provision be universal in its
    applications, as opposed to being limited? If I could just make
    one additional point, I think the argument is there is no
    question that the whole panoply of current State laws, the
    whole panoply of UCC laws do provide a remedy for the consumer,
    but in the spirit of truncation and the spirit of expediting
    the delivery procedure for checks, that it might somehow also
    be worth our while to expedite the challenge procedure, if you
    will. That is the whole thrust of the re-credit provision. If
    we do that, I suppose that their argument would be that we
    ought to have a system that is as simplified as possible and
    one that does not necessarily make it easier for some people
    than others.
        I recognize that my time is also expired.
        Mr. Ferguson. May I please respond to that, because I think
    that----
        Chairman Bachus. In fact, we have two Harvard law school
    graduates debating, and I know that you would never get--five
    minutes would not be long enough
        [Laughter.]
        Mr. Ferguson. I was going to say, this reminds me very much
    of moot court.
        I will give one very uncharacteristically short Harvard
    response to this comment, because I think this is----
        Mr. Sherman. At least, Mr. Chairman, we do not have any
    senators.
        [Laughter.]
        Mr. Davis. Unless we count Mr. Ford, anyway. Is that right?
        [Laughter.]
        Mr. Ford. No.
        [Laughter.]
        Mr. Ferguson. Cut Mr. Davis off right now.
        [Laughter.]
        Chairman Bachus. I am actually enjoying this because it is
    two Harvard law school graduates, and I can actually follow
    what they are saying.
        [Laughter.]
        Mr. Ferguson. But you raise a point that is extremely
    important. I think it is very unwise, it would be unwise for
    Congress, I believe, to expand new capability of this expedited
    re-credit beyond the narrowest way in which it is required. The
    reason is, I believe, you give individuals--all of us are
    consumers--so you give us all as consumers a new right, but you
    do not let us know when we can exercise that right, then I
    think you raise the barriers and create confusion. You do not
    reduce confusion. The second point I would make is that no
    rights come without some costs here. The expedited re-credit
    provision does have some costs on the other side. I realize
    that not all of us are equally concerned about the costs to the
    banks, but I think it is important for you as legislators to be
    aware that nothing is free. If you decide that you are going to
    expand beyond what we had originally proposed and beyond where
    you are on H.R. 1474, you are going to be raising the cost and
    possibly cutting off benefits in other directions.
        The final point I would make is I believe that if the
    federal government is going to legislate in an area, it is
    important to have found that a problem exists or there is a
    high probability of a problem. What I have just tried to
    explain to you is that while this is a major step forward in
    many ways, the risks of new problems, it seems to me, are not
    very high here. And to have the full power of the federal
    government creating some new legislation and some new rights
    when the probability of a problem, I believe, is very, very
    small, it strikes me as at least a question that you want to
    ask yourselves before you go too far down that path.
        So that is one of the reasons why the Board has changed its
    view completely, and says expedited re-credit is not necessary.
    If in the judgment of Congress you think it is necessary, I
    really strongly urge you not to expand it beyond what had been
    originally proposed because I am afraid you would be creating
    new costs, some confusion and federalizing an area of law where
    things are working extremely well today, though obviously we
    are proposing some areas for improvement. So that is my not
    very short Harvard answer back--it would not be based on
    evidence; but that is where I stand, sir. Thank you.
        Chairman Bachus. Thank you very much.
        Mr. Ford. Did you follow that, Bachus? Did you get that?
    Did you understand that?
        [Laughter.]
        Chairman Bachus. Actually, one thing I will follow up as an
    Alabama graduate--but take it a step further--is that we are
    finding ourselves in a global economy. And if we have
    inefficiencies in this country that they do not have in other
    countries, then it is a disadvantage. But if we can create an
    efficiency in this country that they do not have in another
    country, it is an advantage. And this is an inefficiency in our
    present system that by eliminating we can be more competitive
    in a world environment.
        Mr. Ferguson. I agree.
        Chairman Bachus. I think in this case, we would be ahead of
    other countries which we compete with, in eliminating a cost
    that they still have, and they have many cost advantages, labor
    and otherwise, but this would be a great advantage to us as we
    compete in the world arena.
        Mr. Ferguson. I would agree with you, as I put on my
    economics hat, I would say that if we can help keep costs low
    and increase consumer service here in the U.S., then that is an
    advantage for all of us.
        Chairman Bachus. Thank you.
        Mr. Garrett?
        Mr. Garrett. I hope you will bear with me as a Rutgers Law
    School graduate.
        [Laughter.]
        I am intrigued as to the cost efficiencies and the cost
    savings and the potential for the positive result for the
    consumer. As you very nicely walked through my colleague over
    there through the process, under current law, can you just fill
    me in as far as the requirements as far as the waiting period
    while checks are being held, during the float period? Is there
    a divergence as far as that time limit is, as to the nature of
    the check?
        Mr. Ferguson. Well, yes, it is one that is basically non-
    local or local, is the shorthand way to think about it. There
    is a longer period that currently exists. But I want to make a
    quick point here, because there is a period in the law that is
    five days and I think three days, but the major point to
    recognize is that many, many banks are already providing
    services more quickly in that. Again, this makes the point
    about competition, so you should not think about our
    requirements under the Expedited Funds Availability Act as in
    some sense being the limiter here. Banks already in many cases,
    not all, are providing funds more quickly than the timeline
    currently required, the five days currently required. So the
    holds that people think about as being what is in the law may
    or may not be the experience that they have in their individual
    bank account relationships.
        Mr. Garrett. Okay. I just know that I hear from friends and
    neighbors as to why it takes so long. Although there may be
    competition out there, it seems like they are all taking----
        Mr. Ferguson. But can I explain? Part of the reason why we
    have the time frames that we have is this entire process of
    getting a check from the place where you first deposit it, to
    the bank on which it is drawn, and then back. One of the
    reasons that this time frame exists is to help banks reduce the
    amount of fraud that they are subject to, because they have to
    know that there are good funds at the other end, and give some
    time for that to occur. So I do not think people understand
    that is the reason why there is some time that does elapse for
    many, though not all, in the check process; that funds are not
    immediately available because the banks have to make sure that
    whoever it is that gave you the check has sufficient funds.
    That is a multi-day process currently.
        Mr. Garrett. You made a comment before, that percentage
    wise there are a number of checks that go through the Fed--I
    have not got the exact number that you rattled off as a
    percentage. The rest, I assume, then are the checks that could
    be called ``on us'' checks, that are bank affiliations where
    they are all within?
        Mr. Ferguson. No, they are not all ``on us'' checks. Let me
    look at our numbers here. There are three ways that checks are
    handled--or four. One is ``on us'' checks, yes. Then we have
    about 40 percent of those that are not ``on us.'' But the
    others go through either a correspondent bank or a clearing
    house. Correspondent banks are banks that compete with the Fed
    in this area. First Tennessee is one of our strongest
    competitors, but many, many other banks provide that kind of
    service. And then there are within certain cities
    clearinghouses where the banks just clear the checks among
    themselves. And then there is another category which is called
    direct presentment, where a bank just simply has a bilateral
    relationship with another bank, maybe in the same town, and
    they do direct presentment. So this is an area in which, though
    we are active participants, it is very, very competitive. The
    margins are pretty thin, but there are banks that stay in it.
        Mr. Garrett. So for those that are the ones that I am
    thinking of, either ``on us'' or some of those other agreements
    that are in place right now that maybe are already using an
    electronic transmission, are we able to look to them today, or
    have you looked at them today already, to say, well, they are
    out there; they are doing it today; and their costs--this goes
    back to the issue of what is the benefit to the consumer--they
    are already doing it. Their fees are generally lower or their
    cost to the consumers are generally lower, so now if we impose
    it on the other 43 or 44--not impose, but allow it to the other
    40 percent we can see that. Or if not, if that is not the case,
    that the ones that are already doing it electronically within
    themselves--if those fees are not lower than the rest that are
    doing it right now, then you can make the argument that even if
    we do this, the consumer is not going to see the benefit.
        Mr. Ferguson. We have been reluctant to do that or cautious
    about doing it for a couple of reasons. What you have just
    identified, if you will let me put on my economics hat, is a
    very partial equilibrium story. The fact that a bank may have
    done this with one other bank or within a small community, or
    with a subset of its checks, and there are some banks that
    already are doing this on their own and have gotten these
    agreements, does not give you a strong sense of what it would
    look like when it becomes universal. Because the ability to
    increase services, to reduce fees, depends on having a broad
    ability, a broad acceptance of a particular approach, and not a
    narrow one for a small band of some of your checks. So while I
    am firmly convinced that there will be some cost savings and
    some increase in benefits to consumers in new services, I think
    it is important for us to let this go through and then we can
    observe exactly how it occurs once it becomes national law.
    Because you cannot generalize from the few cases that exist
    today, because those are all by definition special
    circumstances that are outside of what the current
    configuration and construction is.
        I know it is sort of a cautionary kind of Federal Reserve
    statement and you would like a firm definitive answer, but I
    have got to be very honest with you. I think there will be cost
    savings, but I have not attempted to multiply up what we see
    now, because I do not think it is necessarily fully reflective
    of what the cost savings could be once this becomes universal.
    I am comfortable, having seen what exists today, that there are
    not a new set of risks that emerge because the technology works
    pretty well. But exactly how banks are going to change their
    behavior and what new services they are going to provide I
    think are important.
        There is somebody on your second panel, if I have read
    their testimony correctly, who can perhaps give you some
    insight into the kinds of new services they are thinking of
    providing if this Act or bill becomes law.
        Mr. Garrett. Thank you very much.
        Chairman Bachus. Thank you.
        Mr. Crowley?
        Mr. Crowley. Thank you, Mr. Chairman.
        Mr. Ferguson, if you can just walk me through this just a
    little bit. Taking a hypothetical approach to it, the 70-year-
    old male in my district who lost his wife five years earlier.
    She did all the books in the house. He now is doing that--and
    this may be a little self-exposing--but he is used to writing
    checks to his local grocery store, for instance. He lives in a
    small town, maybe--not from my district, then. He gets his
    canceled checks back in the mail and has been used to that
    process. There is a dispute at the local grocery as to whether
    or not his check went through or not. Right now, he is able to
    bring a canceled check and say, well, I do not know what the
    problem is; here is my canceled check. The bank has verified
    that I have made this payment; do not make my life any more
    difficult than it is right now; I am done.
        Who knows what happens to the relationship between himself
    and the local grocery store. What does that individual do now.
    In other words, under the truncation process, does he get a
    list of checks on one page, or does he just continue to get
    checks like this? Or does he get a list of truncated--even
    smaller versions of this? And is that a legal replacement for a
    canceled check?
        Mr. Ferguson. The answer is, what he gets depends in some
    sense on what he wants and what his bank offers. He may get
    back checks like this, plus some originals, depending on which
    banks they have gone through. He may, for some banks, get an
    image of this check, front and back, plus an image of other
    checks. That happens to be what my bank delivers. There are
    some banks that offer service where you get your check number
    and the amount that was paid. The important thing, though, is
    that this substitute check would be, if this law goes through,
    the legal equivalent of the original check. So in your story
    the individual would take the substitute check, if that is what
    he got, and would say, here it is. And by the way, this is the
    legal equivalent, and there is--back to my Harvard law friend--
    a best evidence concept. This would be the best evidence
    available and it would suffice. This would be the legal
    equivalent.
        If what the individual had gotten originally was an image
    of the check, then he could call up his bank and get the actual
    check itself, if he needed the legal equivalent, but this would
    be the legal equivalent and it would resolve these problems
    that you have just raised.
        Mr. Crowley. So is it possible that banks will not send
    back an image monthly?
        Mr. Ferguson. It is possible that banks would not send back
    an image. They may simply send back a statement that has your
    check number and the amount. There are a range of practices
    that might emerge, but the image would be available.
        Mr. Crowley. That person would have to go through another
    process then in order to access that canceled check or the
    image of that canceled check.
        Mr. Ferguson. Right. That would be, as one of your
    colleagues said, a phone call away today.
        Mr. Crowley. The onus would be on the person writing the
    check, as opposed to receiving the check--they do that?
        Mr. Ferguson. The person writing the check is the one who
    would have the canceled check, if that is your question, if
    that makes sense. You are looking like I am not answering your
    question.
        Mr. Crowley. He says he paid the check--I paid for the
    bill.
        Mr. Ferguson. Yes.
        Mr. Crowley. The grocer says, well, I did not get your
    money. The man says, well, I do not have a canceled check. I
    have to call my bank now to get the canceled check, to prove
    that I paid with this check. As opposed to in the past, he can
    walk up--I mean, it is just another step to have to go through.
        Mr. Ferguson. Well, it depends on what the services that
    the bank provides. If there is an individual who always wants
    to receive back canceled checks, then that would be the
    arrangement he would want to make with his bank, and the bank
    would send him his canceled checks if that is one of the
    services that they are offering. But all banks would offer the
    service of providing your canceled check or a substitute check,
    if that were required in order to handle this proof
    requirement.
        Mr. Crowley. I am going to yield 30 seconds to my friend
    from Tennessee.
        Mr. Ferguson. Okay.
        Mr. Ford. Real quick, just to follow up, Mr. Ferguson,
    regarding this expedited re-credit. I know we may have a little
    bit of a difference on it. You talked about the need for it in
    Congress, that Congress should assess whether there is a demand
    or need for some kind of remedy here. And you talked about the
    costs associated with this new provision or perhaps this new
    right. I was just curious, what would the cost be, just out of
    curiosity, to the extent you can give me some educated guess as
    to what the costs would be. Because I tend to think it is an
    important part of the legislation; and two, would even be
    willing to support expanding it because the harm done in the
    new bill would be the same harm done for all check writers. So
    I hear your point, and perhaps this is a conversation for
    another time and I would love to pursue it with you. Because I
    ask from this vantage point, I think this is not related to
    this hearing, but I think some of the credit bureaus, the
    formal or standard they use for placing on your report an error
    does not seem to be that tall or high, but the standard to
    remove something from your credit report once you prove there
    is a problem is incredibly high. Sometimes they have made the
    argument in the past that you have to show us where there is a
    real problem; we know that we make mistakes, but we correct
    them.
        In this instance here, I understand your point about costs,
    and there is nothing that can be done in a vacuum. I did not go
    to Harvard, but I do know that there are people who when
    mistakes are made, whether you went to Harvard or Michigan
    where I went, if a mistake is made by a bank, you are $100 or
    $1,000 or $2,500 broker than you were before you wrote the
    check. So I am just curious as to what may be the costs and
    what added burden would that impose on the system that would
    create the kind of confusion or chaos or confusion that you
    mentioned.
        Mr. Ferguson. There are a couple of costs that come to mind
    immediately. One is that if you expand this right beyond
    individuals who receive their substitute checks back, you are
    going to be putting a burden on both the individual and their
    banks to go back through the process to see if there was ever a
    substitute check created. And it may well be that you will have
    a process in which a bank says, I do not want to receive
    substitute checks, but somebody down the line may have created
    a substitute check, and I have now got to go back and research
    through the process I have just laid out with two or three
    other banks, potentially, or a clearinghouse or something of
    that sort. So there is a process of getting information that
    actually would slow things down and would prove to be very
    costly.
        The other side obviously is you increase, I believe--again,
    there are bad people out there--you increase the possibility of
    banks having to worry about fraudulent claims. It is one thing
    if someone already has a substitute check and they can show
    exactly what happened. If there is no substitute check in place
    whatsoever, then you go through this whole process of expedited
    re-credit and one of the reasons that there is a time frame
    associated with it is to make sure that you minimize the risk
    of a fraudulent requirement for re-credit. As soon as you
    expand the universe of individuals for whom that credit may
    apply, you by definition raise another kind of risk that is
    associated with it.
        I also have some concern if you go much further down the
    path beyond what we had originally proposed, that you end up in
    the position where you are now creating a very heavy burden
    with respect to notices and notifications, and trying to
    explain what the rights are and how they might be different,
    and determining where you fall in this process. To be very
    clear, there are some risks for which the cost is worth
    bearing. As I have indicated many times, and you have heard me
    say it here, with a system that can be modernized but does not
    have a lot of these problems, and with the kinds of technology
    that underlay all of this, I do not think the risks are
    suddenly going to get much greater.
        You also have the problem of then having, if you will, two
    kinds of check law. You have the check law for anybody who
    thinks they may have ever had a substitute check, and you have
    the check law for people who never had their check touched by a
    substitute check, and they know that because they get their
    original back. That cannot be, I think, a good use of societal
    resources, to have individuals trying to figure out what is the
    law under which I am now working. If you are going to try to
    create two kinds of check law, I would argue you should try to
    limit that new element of check law to a place where at least
    there is clarity around to whom it applies and when, which is
    what adding, for example, indemnities et cetera with respect to
    the physical substitute check might do. But if you go much
    beyond that, I think you are in an area where the risk of
    confusion goes up and the benefit that you are trying to get,
    if you will, frankly is not commensurate, I think, with the
    kinds of risks and costs that emerge.
        So this has a lot to do with the way one thinks about
    legislation, for sure, but it also has a lot to do with the
    fact that what you are proposing is an important step towards
    improving a system that needs to be improved, but not a step
    that has lots of new inherent risk or takes us into completely
    uncharted territory, because there are institutions that you
    will see are doing some of this kind of thing already.
        Chairman Bachus. Thank you. We have actually gone over five
    minutes. Thank you.
        Mr. Feeney?
        Mr. Feeney. Thank you, Mr. Chairman.
        Mr. Ferguson, I am interested in one of the suggested
    advantages of this piece of legislation to reduce the float. If
    this legislation is enacted successfully and becomes law, I
    suppose that the expectations of check writers out there,
    especially for certain transactions of a larger size where the
    overnight float is meaningful, the expectations will be that
    that float time will be dramatically reduced. Will there be
    some opportunities for mischief that will be legal under this
    legislation if enacted, for financial institutions or the Fed
    or other parties to take advantage of that are not currently
    available to them?
        Mr. Ferguson. I am not sure I get the gist of your
    question. Let me talk about what might happen in the float and
    see if I can get to your point. This law may allow for
    reduction in the float time, it is true.
        Mr. Feeney. I guess my question goes to the fact that use
    of this is permissive and not mandatory.
        Mr. Ferguson. Yes.
        Mr. Feeney. And so if people get a certain level of
    expectations about reducing the float time, financial
    institutions will still have some discretion and will they be
    able to basically take advantage of that discretion, to the
    disadvantage of consumers and check writers?
        Mr. Ferguson. I do not think to the disadvantage of
    consumers or check writers. We have an obligation under the
    Expedited Funds Availability Act to monitor what is happening
    in the world of availability, and to reduce the maximum
    allowable time, according to best market practice. So I think
    we have a role here to make sure that there are no banks that
    are outside of the realm of what appears to be acceptable or
    better practice--consistent again with this issue about checks
    being presented and then returned, which still will take a few
    days.
        So I do not see mischief emerging from banks taking
    advantage of consumers, because as you observed, consumers are
    aware of this. As I have already indicated, there are a number
    of banks even now that offer better funds availability than is
    required, because of competitive pressure, a desire to hold on
    to consumers, because banks think of this area of checks as an
    important linkage to consumers, and for many of them an
    important source of revenue. So I think they have a real
    incentive to play fair, if you will, with consumers and not
    take advantage. We have an obligation under the Expedited Funds
    Availability Act to monitor what is happening and determine
    whether or not there is opportunity to reduce the maximum
    amount of time that one can have as a hold on a check. So I do
    not see new elements of mischief emerging here in that regard.
        Mr. Feeney. Okay. The second advantage of the proposal is
    to reduce transaction costs. Does the Federal Reserve currently
    incorporate the overhead that is used in running check
    transportation between different institutions into the prices
    it charges banks for that transportation service? And would the
    Federal Reserve be opposed to disclosing all of its associated
    costs with transportation or transporting checks?
        Mr. Ferguson. We have a unified service of check clearing,
    which is what I would describe as end to end, if you will. And
    that has all of our operations associated with it; all the
    overhead. With respect to the actual transportation, we do not
    have our own transportation force. We put that out for bid, and
    there are a number of firms that we use to provide that. When
    we do re-pricing, one of the obligations that we have under the
    Monetary Control Act, when we set our overall pricing under the
    Monetary Control Act, we have an obligation to, generally
    speaking, in not every specific service, but in general
    services and broad categories of services, to recover our cost.
    And we often combine costs together.
        So what we do, I think, is one, consistent with the
    Monetary Control Act; two, already relatively quite
    transparent. There is no new disclosure that I would want to
    give. We disclose to the public our check transportation costs,
    for example, to respond to your question. So I do not think
    there is any mystery about either what our cost structure is or
    what our pricing is, and I do not think there is any reason to
    use this Act to try to micro-manage what the Federal Reserve
    does in this area, because we offer already a full range of
    services and we think we offer them quite efficiently.
        Mr. Feeney. So you are not anxious to, in this Act at
    least, disclose specifically the costs associated for
    transporting checks.
        Mr. Ferguson. We already disclose to the public our check
    transportation costs. There is nothing new that we do not
    already disclose. So there is nothing that the Act needs to do
    with respect to transparency of the Federal Reserve in the
    world of check and check clearing.
        Mr. Feeney. Thank you.
        I yield back the balance of my time, Mr. Chairman.
        Chairman Bachus. Thank you.
        The gentlelady from New York?
        Mrs. Maloney. Thank you, Mr. Ferguson, and thank you for
    your work on check truncation and for your testimony today.
        I would like to follow up on some of the questions of Mr.
    Feeney. I have had, as you know, a long time interest in the
    payment system, and especially in the role of the Federal
    Reserve as a provider of services to the industry, and
    simultaneously as a regulator. The 1980 Monetary Control Act
    says the Federal Reserve has to have the revenue to match the
    costs when it competes with the private sector, the idea being
    that the Federal Reserve should not be able to use its status
    as a large governmental entity to undercut private industry. I
    just would like to know, what percentage of the nation's checks
    does the Fed transport today through the air?
        Mr. Ferguson. Through the air?
        Mrs. Maloney. Yes, that you fly.
        Mr. Ferguson. I can tell you the percentage that we clear.
    I cannot respond based on my knowledge--I am not sure the staff
    knows exactly the number we transport through the air as
    opposed to ground transportation?
        Mrs. Maloney. Yes.
        Mr. Ferguson. We transport checks by truck and through the
    air as well.
        Mrs. Maloney. Through the air, with the fleet.
        Mr. Ferguson. Do we know? We will have to get back to you.
    I do not know the exact percent that we transport only through
    the air, as opposed to ground, and there are some checks that
    have both, by definition. Where you put them in a truck, take
    them to an airport, and fly them somewhere. And so to answer
    your specific question----
        Mrs. Maloney. Okay, but if you could get back to me. You
    said earlier that you let it out to bid for the transportation
    of the system. You do not own the planes.
        Mr. Ferguson. No, we do not own the planes.
        Mrs. Maloney. But what about the Check Relay in Atlanta--is
    that a private concern or is that a----
        Mr. Ferguson. Check Relay is the name they give to the
    whole operation, but we do not own a plane. If we did, I would
    not fly.
        [Laughter.]
        Mrs. Maloney. But you competitively bid that.
        Mr. Ferguson. I am sorry?
        Mrs. Maloney. You competitively bid that.
        Mr. Ferguson. We competitively bid it. We bid it in what we
    believe to be the interests of the country, which is that we
    bid it based on every route, and we try to find the best
    provider route by route, and we have managed to do that, and we
    believe it is, one, consistent with the Monetary Control Act;
    and two, in the long term and indeed I would say the day to day
    short term interest of the U.S. economy.
        Mrs. Maloney. And you do not think that you in any way
    undercut the private sector when you do this?
        Mr. Ferguson. Absolutely not. We cannot, because as you
    well know, because you have followed the Monetary Control Act
    quite accurately and quite aggressively, we have got to put in
    not just the recovery of our basic costs, but also as you know
    very well, the so-called PSAF, or private sector adjustment
    factor, which includes the kind of return that an institution
    would get in check, or in their broad operations, since it is
    hard to get the return in check per se, so we look at the
    return for a large number of bank holding companies. So we have
    to mirror what the private sector does by having this profit
    component added in and price towards that. We disclose whenever
    we think about any changes with respect to the PSAF, for
    example. We have a public comment period. GAO has looked at it
    and has commended us for it. They have recommended a few
    changes, which we have undertaken. So there is no way in which
    we are undercutting the private sector. It would be unlawful
    because it would violate the Monetary Control Act. It would be,
    I think, inappropriate in places where we compete, for us to do
    that. And we do not do it.
        Mrs. Maloney. Okay. I would like to read an excerpt from
    testimony in answer to a question from Representative Tiberi,
    from my hearing that we had last year, from Joel Biggerstaff,
    the CEO of AirNet Systems. And he said, and I quote, ``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 services
    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.''
        My question is, what percentage of checks does the Fed
    clear overnight, and given that this bill will facilitate
    increased presentment of checks electronically, at what point
    does the Fed anticipate to no longer operate aircraft through
    bid or whatever form for check clearing and leaving this
    business to the private sector?
        Mr. Ferguson. First, let me be clear, the Federal Reserve
    is the only system that provides national service. If one
    wanted to talk about one very highly utilized route from one
    big city to another, and that is the service you provide, that
    is fine, but we provide national service. To answer your
    question, we clear well over 90 percent of our checks every
    night to remote end-points--up-state New York as well as New
    York City. To my friend from Vermont, I mentioned St. Albans.
    There are banks there and I am sure we clear checks to them as
    well.
        Secondly, we believe it is in the interest of the country
    to have a variety of different approaches for flying checks
    around. We, as I have said, put out our routes for bid. We
    choose the best bidder. There are people who do not win,
    because that is the way competition works. I do not think it is
    very wise to try to micro-manage the Federal Reserve's
    processes here for the benefit of an individual or a company
    that wants to attempt to monopolize something, and we are
    really trying to provide a broad national service. We think we
    do it extremely well. We have an obligation to compete fairly
    under the Monetary Control Act, and we will continue to do
    that. But I do not think you or anyone wants to have the
    Federal Reserve's day to day decisions about to whom we put out
    these contracts----
        Mrs. Maloney. I did not say that, and since my name was
    mentioned, I said competitively bid.
        Mr. Ferguson. We do competitively bid.
        Mrs. Maloney. I think it should be competitively bid. I am
    not promoting any company. I support competitively bidding.
        The second part of my question is electronically--when will
    the Fed move to electronically clearing checks? Is that in your
    plans?
        Mr. Ferguson. We already present--let me get the facts here
    for you. We present electronically 21 percent of the check
    volume that we have. We truncate about 5 percent. We image
    about 8 percent. So I think we are already actively in the
    business of electronically presenting checks. We would like to
    do more. We have introduced a new service with respect to
    imaging, for example. So we are very much in the business of
    electronics, as well as flying paper checks around in the usual
    fashion.
        Mrs. Maloney. So at some point, do you think that
    everything will be done electronically, and therefore there
    will be no need for any check clearing whatsoever with the
    aircraft--that it will be done electronically completely?
        Mr. Ferguson. I cannot say that. I think it depends very
    much on this law, for example, passing, and how it evolves over
    time. I think there will be some individuals who will want
    their paper check, either the substitute check or the original.
    It would not surprise me to see some institutions, some banks
    that arise that focus on that segment. I think we will have
    more electronics, without question, but I do not know at what
    point we will have exclusively electronic, and I do not know if
    there will ever be a point at which we have exclusively
    electronics because there may be individuals that continue to
    want to have either a substitute check or some other form of
    check, but they will be able to get their substitute check.
        Mrs. Maloney. Do you have a sense of how many banks are
    electronically processing checks now? Is it a large percentage
    or just a small percentage?
        Mr. Ferguson. It depends on how you mean ``electronically
    processing.'' All banks are electronically processing in the
    sense that they----
        Mrs. Maloney. Not moving the checks electronically, though.
        Mr. Ferguson. I have an estimate of the percentage of
    checks where there is some form of imaging, and I have seen
    different ranges for that number. All credit unions do that
    now. We estimate that perhaps as many as 20 percent, but I have
    seen banks estimate as many as 30 percent of checks are already
    imaged. So there is a great deal of evidence that this works
    pretty well already.
        Mrs. Maloney. Thank you for your testimony. I will be
    supporting this bill.
        Mr. Ferguson. Thank you very much. We appreciate your
    support.
        Chairman Bachus. Thank you, Ms. Maloney.
        Vice Chairman Ferguson, we have one other question I want
    to ask you for the record, because it was a subject of
    discussion at the Senate hearing. It has not been touched on
    today, and that is the comparative negligence standard that is
    provided in this legislation for indemnification and for other
    claims. Under this comparative negligence standard, how do you
    believe that consumer rights would be affected or altered,
    between the current protections and the protections if this
    legislation became law?
        Mr. Ferguson. I do not believe consumer rights would be
    affected at all. The reason that when we originally proposed
    this we put in a comparative negligence standard was not to
    adjust consumer rights at all, but rather to recognize that we
    put in warranties and indemnity language, and we wanted to make
    sure that the common law, well-established tort concept of
    comparative negligence that exists in the UCC today would also
    apply in exactly the same way to the warranty and indemnity
    provisions here. So I believe that it will keep things
    unchanged and would guarantee that the new obligations,
    warranty and indemnity that are embedded in this bill, would
    exist in a world of comparative negligence, this as the UCC
    currently does, but I see no changes whatsoever.
        Chairman Bachus. Thank you.
        At this time, there are no further questions. Mr. Ferguson,
    you are dismissed.
        Mr. Ferguson. Thank you.
        Chairman Bachus. Our second panel we will call at this
    time. We are not going to take a break at this time. We
    anticipate that at some time there may be votes, and we will
    take our break at that time.
        Ms. Hart is going to chair the beginning of the second
    panel. I have to be on the floor for a speech. She will take
    over the chair at this time.
        Ms. Hart. [Presiding.] Okay, I would like to begin with
    panel two. Beginning with panel two we have six panelists and
    they are all ready, it looks like. Mr. C.R. Cloutier, President
    and CEO of MidSouth Bank, NA, ICBA Chairman on behalf of the
    Independent Community Bankers of America and America's
    Community Bankers. Thank you for joining us. Mr. Grant Cole,
    Senior Vice President and Senior Change Management Executive,
    Transaction Services, Bank of America, on behalf of the
    American Bankers Association, Consumer Bankers Association, the
    Electronic Check Clearing House Organization and the Financial
    Services Roundtable. Thank you for being here. Mr. Dale
    Dentlinger, Director of E*TRADE Access, E*TRADE Bank. Thank you
    for joining us as well. Ms. Janell Mayo Duncan, Legislative and
    Regulatory Counsel for the Consumers Union. And Mr. Joseph
    Kniceley, Vice President, Payment Solutions, for NCR
    Corporation. Thank you. And Ms. Celia Woodham, Director of
    Operations, Chartway FCU, on behalf of the Credit Union
    National Association. Without objection, your written
    statements will be made part of our record. You will each be
    recognized for a five-minute summary of your testimony. And now
    I will begin by recognizing Mr. Cloutier for your statement.

     STATEMENT OF C.R. CLOUTIER, PRESIDENT AND CEO, MIDSOUTH BANK,
     NA, ICBA CHAIRMAN, ON BEHALF OF INDEPENDENT COMMUNITY BANKERS
               OF AMERICA AND AMERICA'S COMMUNITY BANKERS

        Mr. Cloutier. Chairman, Ranking Member Sanders and members
    of the committee, my name is Rusty Cloutier. I am Chairman of
    the Independent Community Bankers of America and President of
    MidSouth Bank, NA, a $394 million community bank located in
    Lafayette, Louisiana. I am pleased to appear today on behalf of
    the Independent Community Bankers of America and America's
    Community Bank to share with you our views on H.R. 1474. We
    strongly support the efforts to increase the efficiency of the
    nation's payment systems. We believe that through the proposed
    legislation Congress can create a significant cost savings and
    efficiencies that will benefit both consumers and financial
    institutions. I would also point out to the committee that the
    financial services trade associations are united in support of
    this legislation, which is a testament to the needs that this
    bill addresses for the entire industry and its consumers. I
    would first like to address the check clearing process in
    today's environment. Research conducted by the Federal Reserve
    Board shows that American consumers make more than 70 billion
    non-cash retail payments each year, and even though the number
    of transitional paper checks has been steady declining since
    the mid-1990s, they remain the non-cash payment of choice in
    the USA today. Processing checks has become extremely costly
    and highly burdensome for the nation's financial institutions.
    Current law generally requires that the original check move
    through the entire clearing process from the bank of first
    deposit to the paying bank. This is a labor intensive process
    of handling, sorting and physically transporting checks. Check
    truncation and electronic processing would significantly reduce
    this cost and burden. However, a major impediment is the legal
    requirement that a bank customer consent to not receiving their
    original check back after it is processed. Currently, the
    paying bank can truncate checks with the consent of its
    customers. However, because the first bank of the first deposit
    does not have a relationship with the paying bank's customer,
    it is prohibited from truncating the customer's check through
    electronic processing and it is forced to incur the cost of
    processing and transporting the paper check to the paying bank.
    This legislation will remove this impediment and facilitate
    check truncation and electronic check processing. Additionally,
    the proposed legislation authorized the use of a substitute
    check, which is a paper reproduction of the original check
    suitable for automated processing.
        We have concerns that the existing definition of substitute
    check, which requires banks to include all MICRA line
    information on the original check, will create a number of
    technological challenges and dramatically slow down the
    implementation of the processing models envisioned under this
    legislation.
        As an alternative, we suggest a requirement that a
    substitute check contain MICRA information as prescribed by
    generally applicable industry standards.
        The imagining technology that will be promoted by this
    legislation will speed processing and improve services to
    customers.
        Many consumers are already enjoying the benefits and
    conveniences associated with check imaging. For example, rather
    than dealing with bundles of canceled checks, consumers receive
    convenient summaries of their transactions.
        It is important to note that this legislation does not
    mandate the processing or receipt of checks in electronic form.
    However, over time an increased number of financial
    institutions will recognize the benefits of electronic
    processing and will see less physical transportation, handling
    and sorting.
        Critics of the legislation have expressed concerns over
    heavy reliance on check imaging. Yet, the experiences of my
    institution and other community banks that offered image check
    statements demonstrate that these concerns are unfounded.
        MidSouth Bank implemented check imaging in June 1999
    because we felt it would streamline the delivery of products
    and services to our customers, keep us competitive and generate
    a return on our investment. The benefits have been enormous.
    For the customer, we have improved the quality of statements,
    we are able to expedite statement delivery, account
    reconciliation has been simplified, and we can respond to
    inquires in minutes instead of hours. For the bank, imaging has
    led to significant cost reductions and we have simplified
    statement preparation, experienced improved productivity in
    item processing. Our customers' response has been
    overwhelmingly positive. But most importantly, since
    implementation, neither my bank nor account holders have been
    caused any losses.
        Consumer groups argue that the consumers need protection
    beyond what is required today because they would be
    disadvantaged if they receive substitute checks rather than
    originals. However, these substitutes they cite in support of
    this argument have existed for years without adverse
    consequences to the consumers. We believe existing laws provide
    adequate protection to consumers for substitute checks
    authorized in the proposed legislation. There have been no
    significant consumer issues relating to the receipt of images
    or electronic representations of returned check items and there
    is no evidence to justify changing the existing law to provide
    for additional check protection.
        Finally, I would like to address the proposed expedited re-
    credit provision, as you heard Vice Chairman Ferguson speak
    about this morning. We believe that the new re-credit
    provisions are complicated and would only serve to confuse
    customers, create an unnecessary burden for banks and expose
    banks to sophisticated fraud schemes.
        In conclusion, we hope the committee will take this
    opportunity to approve the efficiency of the U.S. payment
    system by quick passage of the proposed legislation, which has
    broad support of the banking industry and the Federal Reserve
    Bank.
        Thank you for the opportunity to appear here today. An
    appropriate time I will be happy to answer any questions.
        [The prepared statement of C.R. Cloutier can be found on
    page 68 in the appendix.]
        Ms. Hart. Thank you, Mr. Cloutier.
        Mr. Cole?

       STATEMENT OF GRANT COLE, SENIOR VICE PRESIDENT AND SENIOR
      CHANGE MANAGEMENT EXECUTIVE, TRANSACTION SERVICES, BANK OF
     AMERICA, ON BEHALF OF AMERICAN BANKERS ASSOCIATION, CONSUMER
       BANKERS ASSOCIATION, THE ELECTRONIC CHECK CLEARING HOUSE
          ORGANIZATION, AND THE FINANCIAL SERVICES ROUNDTABLE

        Mr. Cole. Thank you for inviting me to appear today in
    behalf of the Electronic Check Clearing House Organization, the
    Financial Services Roundtable, the American Bankers Association
    and the Community Bankers of America. My name is Grant Cole. I
    am a Senior Vice President at Bank of America in the
    Transaction processing division.
        The organizations I represent thank Representatives Hart,
    Ford and Ferguson for introducing H.R. 1474, the Check Clearing
    for the 21st Century Act. While we would like to see some
    improvements to the Check 21 bill, we believe that this
    legislation will serve as an excellent basis for final check
    modernization legislation that will benefit consumers,
    businesses, financial institutions and the economy as a whole.
        The check payment system relies heavily on an extensive
    network of physical check transportation. The Federal Reserve,
    depository institutions and third party vendors run multiple
    processing facilities throughout the country. This system is
    remarkably efficient given the large volumes and reliance on
    physical transportation of paper documents. However, I believe
    we are at a crossroads. For the 27 million Bank of America
    customers, checks are second only to cash as the most popular
    choice for making payments. However, Federal Reserve data
    indicates that the number of checks being written is declining,
    while the number of electronic payments is increasing. If this
    trend continues without check clearing modernization, it will
    dramatically change the cost structure of payments processing
    as checks will become more expensive to process. Promptly
    passing check modernization legislation is critical to protect
    the check payment system and allow those customers who choose
    to write checks to continue to do so. Substitute checks, which
    are image copies of checks, give customers more information
    than they get from one or two lines of information shown on
    their statements for Reg E type of conversions.
        The legislation will benefit consumers and businesses in
    many ways. First, the legislation will lead to streamlining of
    the collection and return processes. Consumers and businesses
    depositors will have information about fraudulent and NSF
    checks sooner. As a result, depositors will be better
    positioned to reduce the losses that they sometimes experience
    from bad checks.
        With check imaging, customers can view checks just hours
    after the checks enter our banking system. Customers do not
    have to wait until the end of the month to see their paper
    checks, when they are returned to them in the mail. This helps
    customers and bankers identify and combat fraud. I should point
    out that the technology to provide check images to customers
    and to exchange the images between banks is highly secure. We
    use highly sophisticated firewalls and cryptology to deter
    hackers or other unauthorized persons from accessing customers'
    confidential check information. New fraud detection devices are
    being developed which will flag questionable items for further
    review as well.
        This legislation will lead to even better customer service.
    Imaging allows banks to respond to customer inquiries more
    quickly. By providing a new value proposition for imaging, this
    legislation will make imaging more common, which will increase
    the reach of this consumer-friendly technology. Another
    consumer benefit is that customers will have more deposit
    options or extended deposit cut-off hours. For example, a
    greater number of remote ATMs will offer deposit-taking because
    electronic processing will allow banks to wait longer between
    physical pick-ups of those checks. This would be particularly
    beneficial in rural areas where frequent collection of paper
    checks is quite difficult.
        While we support the concepts of H.R. 1474, we would like
    to point out several areas where we think this bill could be
    improved. First, we believe that the special re-credit rights
    included in section six are not necessary. Current check law,
    including regulation CC and the Uniform Commercial Code,
    already provide consumers with appropriate protections in the
    relatively few cases where consumers have problems with their
    checks. In the event that the committee and Congress leave the
    expedited re-credit section in the bill, it could be improved
    by lowering the amount of the re-credit from $2,500 per check
    to $1,500 per day. While most consumer checks are written for
    amounts well below $1,500, persons intending to commit fraud
    would be very aware of the maximum re-credit amount and take
    advantage of that.
        Also, we strongly encourage the committee to change the
    definition of substitute checks to the definition in last
    year's bill. The addition of the language bears a micro-line
    containing all the information appearing on the micro-line of
    the original check would have the unintended effect of making
    it technologically impractical to process substitute checks.
    Our final suggestion would be to shorten the effective date of
    the bill from 18 months to one year. Having an effective date
    that is too long will unnecessarily delay the benefits the Act
    provides.
        Our final suggestion, we strongly oppose expanding the
    scope of the Act to impose protections or requirements on other
    check electronification programs that do not involve substitute
    checks. The special protections for substitute checks in the
    Act should only apply to situations where the customer actually
    receives a substitute check.
        Mr. Chairman and Ranking Member Sanders, thank you for
    inviting me to participate here today and allowing me to share
    my views and those of the views of the associations that I
    represent. Once again, I applaud the work of Representatives
    Hart, Ford and Ferguson and we look forward to working with the
    committee to enact this bill as soon as practical. I look
    forward to answering any questions that the committee may have.
        [The prepared statement of Grant Cole can be found on page
    76 in the appendix.]
        Ms. Hart. Thank you, Mr. Cole.
        Mr. Dentlinger?

    STATEMENT OF DALE DENTLINGER, DIRECTOR, E*TRADE ACCESS, E*TRADE
                                  BANK

        Mr. Dentlinger. Chairman and members of the subcommittee,
    thank you very much for the opportunity to testify on behalf of
    E*TRADE Financial today in support of H.R. 1474, the Check
    Clearing for the 21st Century Act. My name is Dale Dentlinger
    and I am president of E*TRADE Access, Incorporated. E*TRADE
    Access operates an independent network of more than 15,000
    ATMs, making it the second-largest ATM network in the United
    States. E*TRADE Access and its parent, E*TRADE Bank are both
    subsidiaries of E*TRADE Group, Incorporated, a diversified
    financial services company that offers a wide range of
    financial products and services under the brand E*TRADE
    Financial.
        E*TRADE Financial's core strategy is to leverage technology
    to provide customers with superior, value-added, brokerage,
    banking and lending products, delivered primarily through
    electronic delivery channels. While E*TRADE Financial's banking
    group offers a full suite of deposit and lending products, it
    differs from most other banks in that it does not have
    traditional brick and mortar branch offices. Instead, our
    customers transact their banking business with us on the
    telephone, through the Internet, and at any of our many ATMs,
    which are located in all 50 states, including the top 20 major
    metropolitan areas in the U.S. This model allows us to operate
    efficiently and pass savings on to our customers.
        E*TRADE Bank's branchless structure and already-existing
    experience with check truncation and digital imaging give us a
    unique perspective on the Act and its many potential benefits
    to consumers. E*TRADE Financial believes that the Act will
    foster significant increase in the usage by banks of digital
    imaging and other new check processing technologies. By
    removing existing legal barriers to check truncation and
    reducing the payment system's reliance on paper checks, we
    expect the Act will provide a number of significant consumer
    benefits, including the four that I will briefly discuss today.
        Number one, this Act will increase consumer convenience by
    expanding the availability of deposit-taking ATMs. Today, only
    56 or our 15,000 ATMs accept deposits because of the costly
    burden of deposit pickup and processing. Without the expense of
    daily courier pickups, E*TRADE Financial will be able to
    provide consumers many more choices and much greater
    convenience in terms of where, when and how they make bank
    deposits.
        Number two, this Act will increase consumers' confidence
    that checks deposited at ATMs will be accurately credited to
    their accounts. With electronification technology, when a
    customer utilizes an ATM to make a deposit, the check that is
    deposited will be scanned and read, with an image appearing on
    the screen for customer verification and a reduced image
    printed on the receipt. With these additional assurances, we
    expect more consumers will find making deposits at an ATM to be
    a viable time-saving alternative to going to a teller's window
    at a bank's branch office.
        Number three, this Act will give consumers quicker access
    to funds deposited into their accounts. As Vice Chairman
    Ferguson of the Federal Reserve Board and a number of others
    have already observed, enabling banks in the settlement process
    to transmit digital images of checks, rather than the original
    checks, will produce a much more efficient payment system in
    this country. We anticipate that this faster check presentment
    and collection, as well as competitive pressures, will cause
    many banks to further reduce check hold times and give
    consumers even more rapid access to their funds.
        Number four, this Act will provide consumers with new
    cutting edge products and services such as real-time access to
    digital images of third party checks deposited into their
    accounts. Today, E*TRADE Bank customers receive images of their
    checks in their monthly statement, as well as the ability to
    view these images through the bank's Web site. With third party
    checks deposited into an account available as well through
    these same electronic channels, our customers will more easily
    be able to confirm transactions, spot and correct errors, and
    detect possible fraudulent transactions at their convenience.
        E*TRADE Financial strongly supports H.R. 1474, the Check
    Clearing for the 21st Century Act, and commends Representatives
    Hart, Ford and Ferguson for their leadership on this important
    piece of legislation, because it will lead to the widespread
    use of digital imaging and other innovative check truncation
    technologies that will benefit consumers in many important
    ways. This legislation will enable us to better meet the needs
    of our customers by increasing the number of deposit-taking
    ATMs in our network, giving customers quicker access to funds
    deposited in their accounts, and providing them with new value-
    added products and services.
        Thank you again for inviting me to testify. I welcome any
    questions that you or other members of the subcommittee may
    have.
        [The prepared statement of Dale Dentlinger can be found on
    page 91 in the appendix.]
        Ms. Hart. Thank you, Mr. Dentlinger.
        Ms. Duncan?

      STATEMENT OF JANELL MAYO DUNCAN, LEGISLATIVE AND REGULATORY
                        COUNSEL, CONSUMERS UNION

        Ms. Duncan. Good afternoon to the chair and other members
    of the subcommittee. Thank you for providing me the opportunity
    to come before you today. I am Janell Mayo Duncan, Legislative
    and Regulatory Counsel for Consumers Union. My testimony today
    on the Check Clearing Act for the 21st Century Act, H.R. 1474,
    is supported by the Consumer Federation of America, the U.S.
    Public Interest Research Group, and the National Consumer Law
    Center.
        The legislation will create a new negotiable instrument
    called the substitute check. It will authorize a new dual-
    processing of checks, where a check may be converted in and out
    of paper form during processing. The anticipated benefits
    include cost savings for banks and possible enhanced services
    for consumers. The potential risks include the double-
    processing of a single check or errors in reading the amount of
    or account number on a check, possibly resulting in losses to
    consumers.
        I appear before you today to comment on the consumer
    protection provisions in the legislation. First, we commend the
    sponsors of the legislation for including re-credit, a non-
    litigation remedy available to consumers to resolve disputes
    with their banks over funds debited from their account.
    However, we believe that re-credit should be available to all
    consumers because they are identically situated relating to
    potential risks involved in the dual electronic and paper
    processing of the check information.
        Second, consumers unable to seek re-credit from banks are
    covered by state Uniform Commercial Code provisions and
    indemnity and warranty provisions in the legislation. We
    believe these remedies are inadequate because they require a
    lawsuit to enforce. Third, consumer protections in the
    legislation should be strengthened because they are weaker than
    protections that already exist for other types of electronic
    consumer transactions. Finally, the comparative negligence
    provisions should be eliminated because they are broader than
    in the current UCC law and could give banks an unfair ability
    to deter, delay or reduce consumers' claims for damages.
        The bill contains a loophole. Although section six of the
    legislation requires a bank to put up to $2,500 in disputed
    fund back into a consumer's account if the matter is not
    settled within 10 days, it would allow consumers to seek re-
    credit only if they receive a substitute check from their bank.
    Banks could prevent consumers from having the right of re-
    credit simply by not issuing them a substitute check. We
    believe that the re-credit provision should be mandatory and
    extended to all consumers regardless of whether or not he or
    she receives a substitute check.
        Consumers unable to seek re-credit would not be adequately
    protected because they would have to seek redress under weaker
    UCC provisions in State law, which do not require a bank to
    redeposit disputed funds and would require a lawsuit to
    enforce. This is too expensive and time consuming for most
    amounts likely to be at issue. Although the added warranty and
    indemnity provisions provide some protection, they would also
    require a consumer to sue his or her bank. Because consumers,
    all of them, are equally susceptible to harm from processing
    errors, the re-credit loophole in the bill should be closed and
    the right extended to apply in every case.
        Anti-fraud provisions. One argument made against extending
    the re-credit protections to all consumers involves concerns
    that wider availability of re-credit protections increases the
    exposure of banks to fraudulent claims. We believe the strong
    anti-fraud provisions in the legislation should minimize, if
    not eliminate, concerns relating to fraudulent claims. Under
    the legislation, a bank may delay re-credit of funds until it
    confirms that a claim is valid, up to 45 days for new accounts,
    accounts with repeated overdrafts or negative balances, or when
    the bank has a reasonable basis to believe the claim is
    fraudulent. In addition, a bank can remove re-credited funds
    without prior notice if it concludes that a re-credit was made
    unnecessarily.
        Regulation E. Currently, consumers engaging in other
    electronic funds transfers, for example ATM cards or direct
    debits, are protected by Regulation E, which includes a 10-day
    right of re-credit with no dollar limit. We believe that
    protections in the legislation should be expanded and see no
    justification for having protections in the legislation that
    are weaker than those in Regulation E.
        Lastly, comparative negligence provisions. The bill
    contains comparative negligence provisions that would allow
    banks to reduce the amount of damages a consumer can recover by
    asserting that the consumer was somehow at fault. It is
    unlikely that a consumer could contribute to improper check
    processing and this provision could unfairly allow a bank to
    deter or delay a consumer's claim by asserting that the
    consumer was partly responsible. We therefore believe the
    comparative negligence standards should be removed from the
    bill.
        In our view, these are modest improvements that would go a
    long way towards improving and balancing this legislation.
        I thank the Chair and other members of the subcommittee for
    the opportunity to testify, and I look forward to answering any
    questions.
        [The prepared statement of Janell Mayo Duncan can be found
    on page 100 in the appendix.]
        Ms. Hart. Thank you, Ms. Duncan.
        Mr. Kniceley?

         STATEMENT OF JOSEPH KNICELEY, VICE PRESIDENT, PAYMENT
                       SOLUTIONS, NCR CORPORATION

        Mr. Kniceley. Madam Chairwoman and members of the
    subcommittee, my name is Joe Kniceley. I am the Vice President
    of the Americas region for NCR Corporation's payment solution
    business. I thank you for your invitation to offer testimony
    this morning.
        Dayton, Ohio-based NCR Corporation has provided solutions
    to process financial transactions for American consumers since
    our inception in 1884. Our corporate slogan, ``Transforming
    Transactions Into Relationships,'' summarizes the value we
    bring to our clients. We do this by automating financial
    transactions that occur at an ATM, bank branch teller, at the
    retail store point of sale, or by processing a mail check
    payment.
        Madam Chairwoman, NCR is also honored to be part of a
    larger consortium of information technology companies,
    including IBM, Unisys, EMC and EDS. We have worked closely with
    American National Standards Institute to ensure that the check
    image information will be secure and easily shared. ANSI
    Standard X9.37 defines the format and rules for electronic
    exchange of checks. This standard has a provision for applying
    digital signatures with each image being exchanged. This allows
    the receiving bank to validate the signature and determine that
    the image has not been altered. ANSI Standard X9.90 defines the
    image replacement document, and it is clear in its intent to
    maintain a high quality image, even after multiple image
    reproductions. It also requires the original check MICR lines
    to be printed on the image replacement document.
        Our coalition of IT companies can state that we wholly
    support H.R. 1474 without reservation or qualification. We
    believe the bill is well-crafted, providing adequate
    protections for consumers, financial institutions and other
    entities engaged in check acceptance, presentment and clearing.
    As a result, we believe that the nation's end-to-end payment
    systems will be much more efficient and reliable. Today, a
    check that is written at a grocery store or deposited at a bank
    may be handled more than 20 times before it reaches the bank
    upon which it is drawn. If the account has insufficient funds,
    the check has to be returned, repeating the process in reverse.
    This takes several days without the store owner being paid for
    the goods sold.
        This costly, error-prone, fraud-ridden process started
    decades ago and the reengineering and improvement of this
    process has not kept up with advancements in technology. The
    application of H.R. 1474, used in conjunction with proven
    technology, will streamline these key financial transactions to
    benefit all parties involved. With this legislation, funds can
    be transferred within minutes, not days or weeks. Digital
    checks can be archived for seven years, and researched online
    by simply accessing the bank's Internet Web site. The
    elimination of moving paper checks around the country minimizes
    the impact of weather and logistics problems, not to mention
    the unforeseen crisis like the grounding of the nation's
    commercial air fleet during the events of 9-11.
        Consumers stand to benefit in many ways. Business and bank
    branch hours can be expanded when the window for clearing
    checks is not tied to a courier deadline. ATM users who make
    check deposits will be provided superior service by obtaining a
    receipt of their deposits that include a digital picture of
    each deposited check. These electronic deposits will be
    processed quickly, while the paper check still resides in even
    the most remote ATM location. A big benefit to the consumer
    will be the early availability of deposited funds and the
    convenience of having more efficient deposit-taking ATMs on
    every street corner. Imaging technology will allow financial
    institutions to eliminate the constraints of paper, improve
    customer service, lower check fraud losses and significantly
    lower costs associated with physically transporting paper from
    coast to coast.
        Our technology coalition is pleased to inform the committee
    that the IT industry is ready, willing and able to help our
    banking system deal with the realities of coast-to-coast
    consumer transactions. Check imaging was first put in
    production in the late 1980s. Most major banks, credit unions
    and nearly 50 percent of community banks have been using check
    imaging in one or more forms for many years. It is now time to
    bring the check clearing process into the 21st century. Our
    current rules for processing checks in the banking system were
    written at a time when items were cleared across town, not
    across the country. Over the past several years, banks have
    expanded to national scope, creating a paper check clearing
    logistics nightmare. Good business practice and the American
    consumer's ever-increasing demand for convenience, require us
    to free our banking system from the needless constraints of
    paper.
        I would like to commend Governor Ferguson and his staff at
    the Federal Reserve for their efforts on this legislation.
    Through digital imaging technology and the proposed
    legislation, an American institution we call the checking
    account can now provide consumers, businesses and financial
    institutions new and improved benefits not previously enjoyed.
        Madam Chairwoman, thank you for the opportunity to testify
    this morning. I would be happy to answer any questions that you
    have.
        [The prepared statement of Joseph Kniceley can be found on
    page 119 in the appendix.]
        Ms. Hart. Thank you, Mr. Kniceley.
        Ms. Woodham?

    STATEMENT OF CELIA C. WOODHAM, DIRECTOR OF OPERATIONS, CHARTWAY
          FCU, ON BEHALF OF CREDIT UNION NATIONAL ASSOCIATION

        Ms. Woodham. Congresswoman Hart and members of the
    subcommittee, I thank you for the opportunity to provide
    comments on H.R. 1474, the Check Clearing for the 21st Century
    Act, and on how check truncation has been working at credit
    unions for three decades. I am Celia Woodham, director of
    operations at Chartway Federal Credit Union in Virginia Beach,
    Virginia. I am testifying before you today on behalf of the
    Credit Union National Association.
        We would like to share with you information on the
    experience of credit unions' check truncation techniques and
    how it impacts fraud and privacy, and on the affect this
    legislation will have on the payment systems, credit unions and
    consumers.
        Sixty-four percent of credit unions currently offer
    checking accounts. Of those credit unions, 91 percent truncate
    share drafts or checks. Among the credit unions that offer
    checking accounts, 7.1 percent also include images of checks
    within the statements that their members receive. Credit unions
    tend to truncate checks at the last step in the check
    collection process by not returning the original share draft to
    their credit union members.
        Credit unions, like other financial institutions, have seen
    check fraud escalate dramatically in recent years by over 200
    percent. This broad increase in check fraud is not related to
    truncation, but it is more likely related to the ease with
    which people steal and counterfeit paper checks. At Chartway
    Federal Credit Union, most of our check fraud stems from stolen
    checks. At Chartway, we protect our members against check fraud
    by having tellers examine checks and educating our members on
    identify theft.
        There is a concern that double debits could be a result of
    this legislation if a paying financial institution receives a
    substitute check and an electronic file for the same item and
    posts both. Chartway Federal Credit Union has never received an
    electronic check and the paper check from its processing
    Federal Reserve Bank. We are confident that increased
    truncation will not raise the frequency of double debits. If it
    does, it can quickly be resolved by the consumer protection in
    the legislation.
        H.R. 1474 would help the payment system by removing legal
    barriers that currently discourage truncation. A financial
    institution currently cannot send electronic checks to another
    financial institution without a prior agreement. With this
    legislation, financial institutions would be able to send
    electronic checks without prior agreement. As a result, the
    increase in check truncation and electronic check processing
    would likely quicken the collection and return of checks,
    reduce the cost of processing checks, eliminate the need to
    physically transport checks, and reduce the susceptibility of
    our check system to attacks that affect our transportation
    networks.
        Increased truncation will save money for credit unions
    also, but our savings will be passed on to our members as we
    have done in the past. At credit unions, truncation combined
    with check imaging has allowed some credit unions to post
    images online and increase the access their members have to
    their used checks. This allows credit union personnel to
    investigate complaints and resolve disputes more quickly.
        As a result of this bill, consumers would probably not
    receive their original checks back, yet the experience of
    credit unions is that our members rarely request or need
    originals from truncated share drafts or checks. In an informal
    survey in 2001, we found that of 1.1 billion checks, only about
    480,000 requests or .04 percent, were made for an original
    check. In almost all cases, a good quality clear image of the
    check satisfies the member's needs.
        Moreover, H.R. 1474 would provide sufficient consumer
    protections to ensure that consumers are not disadvantaged. The
    bill provides specific expedited re-credit rights for those
    consumers who assert that the bank charged their account
    improperly. The re-credit procedure gives the member's credit
    union 10 days to investigate the claim before being required to
    re-credit the member, and 45 calendar days for certain unique
    circumstances. This section provides sufficient protections for
    consumers and the credit union. It allows a consumer to receive
    a re-credit quickly and it gives the credit union time to
    investigate the consumer's claim to avoid fraud losses.
        In conclusion, most credit unions truncate their share
    drafts or checks and have done so for decades. This legislation
    will increase electronic check processing that produces
    benefits for financial institutions and consumers. We look
    forward to working with the subcommittee, the Federal Reserve,
    and consumers in further strengthening the proposal.
        Thank you for this opportunity to comment, and I will be
    glad to answer any questions.
        [The prepared statement of Celia C. Woodham can be found on
    page 126 in the appendix.]
        Ms. Hart. Thank you, Ms. Woodham. I appreciate your
    testimony as well, and thanks to the entire panel.
        I would like to start questioning with Mr. Cloutier, since
    your institution has had success already with this process of
    check processing and imaging. I am interested in your
    customers, if you have had a reaction from the customers
    specifically regarding this at all. It sounds like they are
    happy with the system. Has there been any problem with losing
    customers or concerns about the technology from your
    customers--concerns about perhaps feeling like they must move
    to online banking or any concerns that have been expressed to
    the management regarding interaction with the institution under
    the new system? Anything like that?
        Mr. Cloutier. Ms. Hart, I will tell you from my personal
    experience with my bank, and believe me I am in a very
    competitive environment--there are about 21 banks in
    Lafayette--we have about six of them that are offering imaging
    checks. We have not lost any customers. They are very excited
    about it. The only problem we had early on was that at first we
    were printing 16 to a page; we went very quickly to eight to a
    page for people, as myself, who do not have great eyesight. We
    made that change very quickly. The customers have been
    extremely happy with it. It also has given them the advantage
    now that they can pull up their checks online. We do Internet
    banking and I know one of the members asked this morning about
    how long does it take to get a copy of the check. In my bank,
    you can pull it up and look at it and print it if you want and
    have it right there and available to you.
        So this technology is not new. As many consumers have told
    me, they appreciate it because they said for years their credit
    card bills, they have not been receiving back their original
    copies. They have been getting either images, as you get with
    American Express, or just the account numbers on Visa and
    whatever. So it has been very well received. To my knowledge,
    and we do a lot of focus groups and a lot of work with our
    customers, and we have not lost anyone due to image checks.
        Ms. Hart. I am glad to hear that. We had a couple of
    meetings with industry groups, some obviously representing you
    or organizations like you. They averred to us the same thing.
    Was the process for you of switching to the system--was it
    cumbersome or did it take a long period of time?
        Mr. Cloutier. It did not really take a long period of time.
    We went through an education process with our consumers who
    asked for it. I will tell you, less than 2 percent came into
    the bank and said, could you explain to me how this works and
    how do I use it. But we had CSRs, customer service
    representatives ready to talk to them and the process took very
    little time to implement. I will tell you, I think most
    people--I know I would personally--would have a great problem
    going back to dealing with paper checks and trying to find
    them. You know, when that bill is disputed, it is always about
    six months after you write the check and it is much quicker to
    get it.
        I would also mention it has been a big help to the
    government in us fulfilling subpoenas that we have gotten, as
    in example, divorce cases. Usually when that comes about, they
    want the records for the last two years and copies of all the
    checks. What used to take us two months to fulfill on the
    subpoena, we now can do in two hours.
        Ms. Hart. It is hard to argue with that.
        I want to get to Ms. Duncan on an issue discussed in your
    testimony. You seek to include provisions related to electronic
    funds transfers as far as the legislation. It deals with
    negotiable instruments that rely heavily on well-settled check
    law. I do not see this legislation as dealing with electronic
    transfer of funds, but rather with the movement of negotiable
    instruments, which is made easier by removing the paper and
    allowing that to be done electronically. You seem to think that
    we are doing more than that, or we should do more than that.
    Why do you think Congress should tamper with the good law that
    relates to checks and check processing? This is very specific.
        Ms. Duncan. Well, what we are looking at is the legislation
    as it is currently drafted. It does include a re-credit
    provision, which is reminiscent of Regulation E. The specific
    point that we were making is re-credit under Regulation E
    applies to all consumers. It is also 10 days. It also has no
    dollar limit, and that is not exactly what we are even speaking
    about or asking for. We are looking at the re-credit provision
    in the legislation and saying that if it is going to apply to
    some, it should apply to all consumers. So that is where that
    perspective comes from.
        Ms. Hart. Okay. So you actually have it just for one
    provision of the law.
        Ms. Duncan. The specific part of Regulation E that I
    referred to was to the re-credit provision and the fact that it
    applies to all consumers, and I did refer that there is no re-
    credit dollar amount limit, but the concern is in the
    legislation, it does not apply to all consumers, and all
    consumers will be similarly situated under the legislation, so
    it should apply to all consumers regardless of whether or not
    they receive a substitute check.
        Ms. Hart. Thank you. I am sorry. I see my time is up.
        Mr. Ford?
        Mr. Ford. Thank you, Ms. Hart.
        Let me ask just a couple of questions also, specifically
    for Mr. Cole and Mr. Cloutier, on this matter. Concerns have
    been raised about consumers who did not receive substitute
    checks, who are not eligible for the new expedited re-credit.
    What does current law say about how soon disputes have to be
    resolved and when funds have to be re-credited? Either of you,
    Mr. Cloutier or Mr. Cole--it does not matter. Anyone on the
    panel can address that. I would be interested in hearing one of
    you.
        Mr. Cole. I will tell you from my experience, I am not a
    Harvard lawyer so I probably do not know the legal answer to
    it, but in my experience the Uniform Commercial Code does not
    require any specific time frame for re-credit to a consumer's
    account. However, that has not been necessary, if you will take
    a look at what our consumers are saying, and the complaints
    that have been included, or the lack of complaints that have
    been included in the testimony that you have heard today and,
    indeed, in our experience at the bank.
        It is a fact that banks are very competitive, and part of
    that competition is in customer service. We pride ourselves in
    reacting very quickly to exceptions.
        Mr. Ford. What is your process for resolving disputes? I
    hope you see where I am trying to go here, because I think some
    of the concerns that are being raised are legitimate ones, but
    I think they are ones that some of them might be addressed
    outside of the context of this hearing. I would appreciate Mr.
    Ferguson responding as he did, and I hope that perhaps we can
    sit and sort of talk through it a bit. But I am curious as to
    what steps do, or what processes did Bank of America have for
    resolving disputes? Are funds usually re-credited to consumers
    when a dispute has been resolved? How long does that ordinarily
    take?
        Mr. Cole. It depends on what the dispute is. On a dispute
    that is as common as, I wrote the check for $10 and it paid for
    $100----
        Mr. Ford. Notwithstanding the fact that my good friend Mr.
    Davis pays too much for pizzas, but I understand what you are
    saying.
        [Laughter.]
        Mr. Cole. We do not know that that check was written for
    pizza until we look at it. That is not part of our database, so
    we do not know that. We do do in our fraud department some
    early detection of checks that are written outside of the
    normal pattern for a consumer. But to answer your question more
    specifically, when a consumer brings that kind of an issue to
    us, historically we went to our microfilm archives and got a
    picture of that item to be able to say, yes indeed, it was an
    error; that error can occur anywhere in the collection process,
    not only at the paying bank. That in the past took anywhere
    from two to five days, to go back in the archives and find a
    microfilm image.
        We are totally image-enabled now, and I am happy to say
    that 70 percent of the calls for information or for error
    resolution that used to require us to go back to the microfilm
    archives can now be handled on a single phone call because we
    are able in our call centers and in our customer service
    centers to be able to pull an image of that check up and verify
    it right on the spot that indeed that check was paid for the
    wrong amount.
        Mr. Ford. There is no explicit right requiring you to do
    that right now. I mean, I understand there is liability on the
    bank's part for mistakes that are made, but there is no law
    requiring that you do that. You do that out of----
        Mr. Cole. There is no law except the law of competition and
    the ability to provide customer service.
        Mr. Ford. Right. That is it exactly.
        Mr. Cole. That is right. But we do not make money that way,
    and so it is in our best interest to be able to return that
    money as well, because if we did not do it as quickly as we
    were able to understand the issue and resolve the problem, the
    liability mounts very quickly.
        Mr. Cloutier. Mr. Ford, I could give you a good example.
    Friday morning I got a call from a district judge in Lafayette
    who claimed that in his election account, his money that he
    runs for every four years----
        Mr. Ford. I am familiar.
        Mr. Cloutier. ----had a deposit in it that he did not make,
    and he was very concerned about that. I will tell you, within
    45 minutes we were able to resolve it. The bank did make a
    mistake. They put money in his account that was incorrectly put
    in there, and we got it moved back out. And you are very
    familiar with it--he wanted a letter stating that the bank made
    an error and then sent it on to the State so that there would
    not be any questions in the future. We have in our bank a
    department that deals with these questions very quickly. It can
    happen both ways. This was an example of a deposit being put in
    an account where it should not be. We do not say we do not make
    mistakes. I think a bank could be wrong in saying that, but we
    deal with them very quickly. It is competitive. But there are
    also good laws on the books now that we have to deal with re-
    crediting, and we do, as quickly as possible.
        Mr. Ford. One last comment--I know that my friend Mr.
    Sanders raised the point about the 80-year-old who is
    accustomed to receiving checks a certain way. I guess one of my
    concerns is that we preserve the ability of people to continue
    writing checks. I think some have commented how it is becoming
    more expensive to process checks. As we make this shift away
    from checks and toward electronic payments, what effect will
    that have on consumers, and particularly that example used by
    my colleague, Mr. Sanders--prolonging the ability to actually
    write checks or to continue making payments in that way?
        Mr. Cole. I think checks are going to be around for a long
    time. People like them a great deal. To the extent that we can
    keep them from getting more expensive than the other payment
    mechanisms, those people that choose to use them I think will
    be able to use them for a long time to come. In terms of what
    our customers will see on the back end of this, the reason I
    believe that we did not suggest or that the Federal Reserve did
    not suggest that we just mandate check electronification was to
    be able to provide a piece of paper to a customer who wants to
    have it. Our bank provides that opportunity right now. With the
    electronification of some of those items under Regulation E,
    there is no paper returned. I would think that would be a
    bigger problem because the consumer still believes that they
    wrote a check. In the check truncation scenario or the
    transaction under this bill, the consumer can require that that
    bank in that account send them back that piece of paper that
    shows them a picture that has all the information on that piece
    of paper that was on the original item when they wrote it.
        Mr. Cloutier. Mr. Ford and Ms. Hart, I would just like to
    mention, you all asked me a question about our response from
    our consumers--customers that we dealt with when we put in the
    imaging. It was not the senior citizens who had a problem. I
    was amazed at how technologically advanced they are. It was the
    younger people who had more of a problem of understanding the
    substitute checks. So that is just kind of an interesting
    little footnote. I was amazed--75, 80, 85 year-old people, how
    well they do on the Internet.
        Ms. Hart. There is intransigent youth for you.
        Thank you, Mr. Ford.
        Mr. Ford. Thank you, Ms. Hart.
        Ms. Hart. Mr. Davis?
        Mr. Davis. Thank you, Ms. Hart.
        Ms. Cloutier, I am tempted to say that only in Louisiana do
    judges check their campaign accounts every few days to note
    that kind of thing.
        [Laughter.]
        I do not have any constituents in Louisiana.
        Let me try to make sure that I understand Ms. Duncan's
    argument and the points that she was making earlier. Ms.
    Duncan, is it your concern that under the re-credit provision
    that is currently drafted that the only way the provision can
    be triggered is if someone has a substitute check, ergo, if you
    do not have a substitute check in your possession, you cannot
    take advantage of it? Is that your concern in a nutshell?
        Ms. Duncan. Yes, that is our concern in a nutshell.
        Mr. Davis. All right. Now, I guess what I am trying to get
    a sense of, I would be probably a little bit more persuaded by
    that concern if there were a predictable kinds of bias that
    were built into the system in terms of some classes of
    consumers being more likely to have substitute checks, and
    other classes of consumers being less likely to have them. Is
    it your theory that there are some kinds of consumers who are
    typically disadvantaged and that they do not have access to
    substitute checks? Or would you think it is just more of a
    random thing in terms of who gets them and who does not?
        Ms. Duncan. Well, actually our focus really more is on what
    the protections are and who they apply to, and is there a good
    justification for not letting them apply to everyone. I mean,
    if we talk about the whole system--we are talking about the
    future. We have heard a lot of talk today about the present and
    imaging technology. When we look toward the future and the
    increased electronification of consumer check information, we
    also have to look towards the changes that banks might make in
    the electronic processing of information. There may be problems
    in those electronic transfers. So we are not looking to a
    specific class of consumer who might be more likely to get the
    substitute check. Instead, we are looking at the entire class
    of all consumers whose information will begin to be processed
    more in electronic form.
        Mr. Davis. Let me tell you what I suspect that your
    colleagues on the panel would probably say in response to that.
    I assume that they would say that the whole thrust of the re-
    credit provision is that it catches up with the technology, in
    effect. Now that we have these substitute checks, the re-credit
    provision takes advantage of their ready access to enable
    people to resolve a dispute with their bank in terms of how a
    check was cut. So therefore, if the substitute check is not
    part of the process, if somebody does not have the substitute
    check in their hand, you really do not have that kind of an
    issue.
        Second of all, without the substitute check, you have
    really lost about the only verification means that you would
    have. As I guess someone pointed out earlier, if you typically
    call your bank and you say, I just called the 1-800 number and
    they are saying I wrote a check for $2,500 and I only wrote a
    check for $250, I would imagine there might be some scenarios
    in which your bank would say, Okay, that is fine; we will fix
    it if you are related to the bank president, or something like
    that. But absent that scenario, they are going to ask you for
    some verification. They are going to want something written
    from you, and the best evidence will obviously be ultimately
    that canceled check.
        So given that likelihood, I guess I am trying to get a
    sense of how this works in the real world. If you do not have a
    substitute check to facilitate resolution of the dispute, how
    can we expect the bank really to act within the 10-day period
    anyway?
        Ms. Duncan. We would expect the bank to use whatever best
    evidence they have of the transaction that takes place. I would
    say that if banks are not keeping track of the transactions
    that are taking place, it would be a very big problem.
        Mr. Davis. If that is the case, though, presumably again
    the substitute check--the fact that the provision requires
    people to have a substitute check in their hands--I am trying
    to get a sense of whether they are really bests-off or worse-
    off under this scenario. Because if they have to have a
    substitute check in their hands, is your concern that somehow
    they would be able to get something quicker if they did not
    have to have the substitute check? Is that the heart of your
    concern? Because if your theory is that they could simply call
    the bank and they could simply say to the bank, go check this,
    look at your microfilm, and the bank would say we have looked
    at our microfilm and you are right--I am trying to get a sense
    of how the substitute check fits into this. For example, are
    you suggesting that under this statute that if someone called a
    bank and said, I do not have a substitute check, but would you
    go and check your system to see if this check appears to be
    written for this amount, and they did that, and they agreed
    with you--are not suggesting that a bank would say, no, until
    we get that substitute check, we are not going to fix it. Or
    are you suggesting that a bank might say that?
        Ms. Duncan. Well, what I am suggesting is that there are
    some very positive things in the re-credit provision and we
    would like them to apply to all consumers. So regardless of
    whether you have a substitute check, if you have a problem you
    go and you trigger a 10-day period in which the bank needs to
    start checking.
        Mr. Davis. Well, let me just quickly in the limited time--
    we have got to ask some other people on the panel for reaction
    to that. Those of you who run banks, if someone called you
    under this statute and said, look, I do not have a substitute
    check, but would you please look in your microfiche or your
    database, whatever you want to look in, and look at this
    amount. You made that kind of an inquiry; you agreed with the
    consumer. Would any one of you suggest that you would not honor
    the consumer's request at that point? Would any one of you
    stand on the requirement of a substitute check?
        Mr. Dentlinger. Certainly not. You would be out of
    business.
        Mr. Davis. Pretty quickly, I would think.
        Ms. Duncan. I would like to make a quick point, and that
    would be, one of the issues here is, we are talking about the
    best evidence. Sometimes if we are talking about the
    reconversion of checks in and out of paper form, that bank will
    not have the best evidence. That is what the indemnity and
    warranty provisions are. They are going to have to go back up
    the process to see if they can find the best copy of that check
    in order to solve the consumer's problem. So that would be the
    difference under this scenario. The bank will not just look in
    their own records. They might have to go back further to find
    it out. This would just place the burden on the bank, not the
    consumer.
        Mr. Davis. Is there any best evidence superior to the
    substitute check in this kind of a scenario though?
        Ms. Duncan. If the original check has been kept, that would
    be best evidence. But what we are also talking about is if you
    are reconverting a check from electronic form to paper form--I
    will just do an analogy. Say you are printing it out--I mean,
    maybe somebody down here did not do such a good job and it is
    not quite as clear. So if you look at the warranty provisions,
    it also establishes between banks that if I come back looking
    for my better evidence or my better copy of the check, you need
    to provide it to me. So that is what we are talking about--that
    time delay that you might have moreso than you have under the
    current system.
        Ms. Hart. The gentleman's time has expired.
        Mr. Ford, do you have additional questions?
        Mr. Ford. I want to ask as follow-up, but let me yield to
    my friend Mr. Davis.
        Ms. Hart. I will. I just want to give you an opportunity to
    ask questions.
        Mr. Ford. Sure. Just to follow-up, I see where my colleague
    is going. I guess this might be something we can discuss
    afterwards, because after listening to Vice Chair Ferguson, he
    raised the two points of whether or not there is a need here
    and whether or not we create more confusion with what we are
    doing. And based on what some of the witnesses have said, I am
    sensitive to what Ms. Duncan is proposing here, but it sounds
    as if there are few laws that sort of work to prevent this.
    Number one, most prevailing would probably be the power of the
    law of competition. And two, the notion of confusion being
    created here I think is a powerful point. After thinking long
    and hard about it, I see why earlier on I was not more adamant
    about the idea of making this apply to everyone, and not just
    on the substitute check side.
        That being the case, it might be an opportunity for us to
    deal with this outside of the context of this legislation. It
    might be important to figure out how, if it is important to
    actually create an explicit new set of rights here, and if so
    perhaps work with the banks and financial institutions, because
    I am not persuaded that creating a new set of rights will
    actually solve the problem. Part of what I was asking--how many
    complaints have you gotten over, say, the last five years, Mr.
    Cole, that would be affected by this provision of the bill in
    terms of disputed funds? Because according to Ferguson, there
    have not been many over the last several years. So what are we
    talking about in terms of need and solving a problem a here?
        Mr. Cole. In terms of not responding to a request for a re-
    credit to a customer on a mis-encoded item or an item that was
    double-posted, we have not had any complaints that I am aware
    of that we took too long to resolve the problem. Obviously, we
    do not use substituted documents today, but in terms of problem
    resolution, there has been no testimony or any evidence that I
    have seen in the last two years presented to say that there is
    a problem here. In my 32 years of banking, I have never heard
    that complaint--that we did not comply with re-crediting a
    customer on an item that was posted twice, or one that was mis-
    encoded.
        Mr. Ford. In fact, do you think under the new legislation
    that we might discover faster if there is a problem, and
    actually adopt a problem solution strategy much quicker than we
    would under current law?
        Mr. Cole. To the extent that this makes imaging of checks
    more ubiquitous in our industry, the ability to----
        Mr. Ford. That is a Harvard word, I might add--ubiquitous.
        [Laughter.]
        Mr. Cole. Thank you.
        To that extent, it provides great access to those images
    much more quickly. As I said, we can take a look at a
    customer's check and indeed the customer can, sometimes hours
    after it enters into the system. Whereas if I have to go find
    the original--we process 9.5 billion checks a year, so there
    are a lot of checks out there--and finding the original or
    going back to the old antiquated microfilm takes five times as
    long, at least.
        Mr. Ford. I yield to my colleague, Mr. Davis.
        Mr. Davis. Thank you, Mr. Ford.
        Let me follow-up, Mr. Cole, on what I think Ms. Duncan is
    getting at. Let me ask you a fairly basic question. Do you or
    Mr. Cloutier or anybody else on the panel think that the
    substitute check is an important instrument in resolving a
    dispute between a consumer and the bank, or resolving some
    issue as to the amount of how much a check was written for? Do
    any of you think that a substitute check is a necessary part or
    even a very helpful part in getting to the bottom of that kind
    of a question?
        Mr. Cole. Only to the extent that that is what is presented
    to our bank--if that is the evidence that we have. Now, we will
    also have that on microfilm, so it is very unimportant,
    actually. We will be using the records.
        Mr. Davis. So presumably what Ms. Duncan is saying is that
    obviously if someone walks in with a substitute check, that is
    a very strong argument in their quiver. But if they do not walk
    in with a substitute check, there are any number of other means
    for determining a dispute. That is presumably what she is
    saying. Now, given that, why isn't she correct? If the
    substitute check is not necessary to get to the bottom of a
    dispute between a consumer or customer and the bank, why should
    we differentiate between people who have a substitute check and
    those who do not with respect to the re-credit provisions?
        Mr. Cloutier. Mr. Davis, I would add that we already do a
    lot of business electronically. We ACH a lot of payrolls. We do
    a lot of ACH work. We do a lot of stuff that is--let me give
    you a good example. If you ever went to the store and they just
    took your check and handed it back to you--they took the MICR
    off of it and gave it back to you, and turned that into an
    electronic document. Banks do a very good job of tracking
    things. We are in the business of tracking money. We watch it
    very carefully. So I can tell you that we will be very
    forthright in watching what we do and looking into this.
    Sometimes when the customer comes in with a dispute, I have a
    very large audit department that works these things very
    carefully, because we want to make sure that we do not have an
    internal problem within our bank also. So these things get very
    high coverage very quickly, and re-crediting to figure out
    where the money went or did not go becomes very important to us
    very, very quickly. So I would tell you that we will work very
    hard to make it work.
        Mr. Davis. Right. But I guess, given that that is the case,
    Mr. Cloutier, why isn't Ms. Duncan right? If banks have any
    number of capacities to get to the bottom of this kind of
    dispute almost instantaneously, why should there be any
    distinction in the re-credit provision whatsoever between
    someone who has got one of these things in his or her hand and
    someone who does not?
        Mr. Cole. I would like to say that I agree with you--there
    should not be any difference, and the current law takes care of
    the problem.
        Mr. Davis. Okay.
        Mr. Cloutier. We agree with that.
        Mr. Davis. Just to make one final point, if I could, Ms.
    Hart. Current law takes care of the problem, but I suppose Ms.
    Duncan's response to that would probably be you have got to go
    out and file some kind of a claim under current law to take
    advantage of it if your bank is recalcitrant; whereas the re-
    credit provision creates a non-litigative remedy that enables
    you to immediately get to the bottom of it. Is that your
    position, Ms. Duncan?
        Ms. Duncan. That is our position, yes.
        Mr. Davis. Okay. All right. I do not have anything else.
        Ms. Hart. All right. I thank the gentleman.
        The chair notes that some members may have additional
    questions for the panel, including the members here, which they
    may wish to submit in writing.
        Mr. Ford. Madam Chair, can we make a point to try to work
    with Ms. Duncan, perhaps the three of us in particular, or at
    least the two, and I imagine Mr. Davis is interested, if his
    comments are any indication. Perhaps we can work to try to,
    outside of the context of this hearing and this legislation, to
    try to address some of the concerns to the extent they can be
    addressed. Maybe even work with Mr. Cole and Mr. Cloutier and
    some of the others, because I think they are legitimate points.
        Ms. Duncan. We would welcome the opportunity.
        Ms. Hart. That would be fine, Mr. Ford.
        Mr. Ford. Thank you, Ms. Hart.
        Ms. Hart. Other members who are not present may also wish
    to submit questions. Without objection, the hearing record will
    remain open for 30 days, so that members can submit written
    questions to these witnesses and to place their responses on
    the record.
        I would like to thank the panel.
        This hearing is adjourned.
        [Whereupon, at 1:00 p.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                 April 8, 2003

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