[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
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
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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
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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
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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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