[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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