[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]





                  IMPLEMENTATION OF THE CHECK CLEARING
                          FOR THE 21st CENTURY

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
               FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 20, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-20


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  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 Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          HAROLD E. FORD, Jr., Tennessee
    Carolina                         RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
VITO FOSSELLA, New York              STEVE ISRAEL, New York
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio              JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
TOM FEENEY, Florida                  STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   AL GREEN, Texas
KATHERINE HARRIS, Florida            EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas               
TOM PRICE, Georgia                   BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina

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

                   SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, Jr., North          BERNARD SANDERS, Vermont
    Carolina, Vice Chairman          CAROLYN B. MALONEY, New York
RICHARD H. BAKER, Louisiana          MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware          GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio                PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas                     MAXINE WATERS, California
STEVEN C. LaTOURETTE, Ohio           DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
VITO FOSSELLA, New York              HAROLD E. FORD, Jr., Tennessee
GARY G. MILLER, California           RUBEN HINOJOSA, Texas
PATRICK J. TIBERI, Ohio              JOSEPH CROWLEY, New York
TOM FEENEY, Florida                  STEVE ISRAEL, New York
JEB HENSARLING, Texas                CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey            JOE BACA, California
GINNY BROWN-WAITE, Florida           AL GREEN, Texas
J. GRESHAM BARRETT, South Carolina   GWEN MOORE, Wisconsin
RICK RENZI, Arizona                  WM. LACY CLAY, Missouri
STEVAN PEARCE, New Mexico            JIM MATHESON, Utah
RANDY NEUGEBAUER, Texas              BARNEY FRANK, Massachusetts
TOM PRICE, Georgia
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 20, 2005...............................................     1
Appendix:
    April 20, 2005...............................................    45

                               WITNESSES
                       Wednesday, April 20, 2005

Budnitz, Mark, Professor, Georgia State University College of Law    25
Duke, Elizabeth A., Chairman, American Bankers Association.......    23
Hayes, David, Chairman, Independent Community Bankers of America.    27
McEntee, Elliott, President and CEO, Nacha--The Electronic 
  Payments Association...........................................    28
Roseman, Louise, Director, Division of Reserve Bank Operations 
  and Payment Systems............................................     6

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    46
    Bachus, Hon. Spencer.........................................    48
    Hinojosa, Hon. Ruben.........................................    52
    Budnitz, Mark................................................    53
    Duke, Elizabeth A............................................    60
    Hayes, David.................................................    70
    McEntee, Elliott.............................................    78
    Roseman, Louise..............................................    84

              Additional Material Submitted for the Record

Bachus, Hon. Spencer:
    America's Community Bankers, prepared statement..............   100
Roseman, Louise:
    Written response to questions from Hon. Carolyn McCarthy.....   103
Credit Union National Association, Inc., prepared statement......   105

 
                  IMPLEMENTATION OF THE CHECK CLEARING
                          FOR THE 21st CENTURY

                              ----------                              


                       Wednesday, April 20, 2005

             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 2:15 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the subcommittee] Presiding.
    Present: Representatives Bachus, Tiberi, Feeney, 
Hensarling, Neugebauer, Price, Sanders, Maloney, Watt, Waters, 
Ford, McCarthy, and Baca.
    Chairman Bachus. Good afternoon. The subcommittee will come 
to order.
    Today we are focused on the implementation of Check 21, 
which facilitates the movement of checks through the payment 
system by making it easier to transport check images 
electronically between banks.
    This legislation passed the House of Representatives on 
June the 5th of 2003. It was called the Check Clearing For the 
21st Century Act, or as we refer to, Check 21, and it actually 
passed by a vote of 405 to 0. It was signed in the law by the 
President October 28th of that year. So it has been coming up 
on 2 years, or a year and a half, but actually only became 
effective, I think, 6 months ago. So today's hearing was 
requested by Representative Frank, Representative Sanders and 
Representative Maloney, and a host of others, but primarily the 
three of you all. And it also is a priority of Chairman Oxley 
and myself, because we are all concerned about--because of 
issues which have been raised since the passage of Check 21.
    Check 21, I believe, is an innovative measure which aims to 
modernize the Nation's check transportation system by providing 
an interim step toward the electronic movement of checks. 
Although the goals of Check 21 are significant, the Act itself 
has a relatively narrow focus, making substitute checks legally 
equivalent to original checks, thereby facilitating electronic 
check presentment.
    This change in law was necessary because most banks, aside 
from some of the larger ones, didn't have the resources to 
accept electronic check images. These banks will now be able to 
request that a substitute check be created in lieu of 
electronic image, which can then be processed like a 
traditional paper check.
    Over 36 billion checks are processed annually through the 
payment system in the United States. The vast majority of these 
checks are physically transported from one bank to another for 
payment. This system has historically relied on the steady flow 
of air and ground transportation in order to ensure that the 
checks are presented to paying banks in a timely manner. That 
way of doing business has been in practice for more than a 
hundred years, and the technology that is being used today 
dates to the 1950s.
    Perhaps the most dramatic example of the need for this 
legislation was demonstrated in the aftermath of September 
11th. As everyone remembers, for approximately one week, planes 
were not allowed to fly. This prohibition extended the flights 
carrying checks through the payment system. Over the course of 
that week, billions of dollars afloat built up in the system, 
and the Federal Reserve was forced to come up with alternative 
methods for transporting checks. One of the primary goals for 
Check 21 was to ensure that if there were future problems with 
the Nation's transportation system, the financial system and 
the payment system within it would continue to function.
    It is important to note that the consumer protections under 
current check law continue to apply under Check 21, in fact, 
Check 21 goes further, and in that legislation, we granted 
additional protections through an expedited recredit if a 
customer asserts that an electronic check or substitute check 
was improperly charged against their bank account. In addition, 
the legislation requires banks to provide warrantees for 
substitute checks, and to indemnify customers for losses 
resulting from the receipt of a substitute check rather than 
the original one.
    Since the enactment of Check 21, there has been some 
confusion--and this is probably the most important part of my 
statement right here--since the enactment of Check 21 there has 
been some confusion as to the impact this law has had on 
consumer accounts. The reality is that Check 21 is still in its 
infancy. Of the 50 million checks processed by the Federal 
Reserve every day, there are only about 400,000 digital image 
or substitute checks being handled daily. In fact, I think, 
Director Roseman, you give a number in your testimony that 
matches pretty much that figure. So less than 1 percent of our 
checks are being electronically cleared today, or about 1 
percent.
    The vast majority of those checks are still physically 
transported from one bank to another for payment.
    This is less than 1 percent of all checks. What has 
occurred--and this is where the confusion comes in--what has 
occurred at about the same time is an increase in ACH 
transactions appearing on consumer bank accounts at a time when 
the publicity surrounding Check 21's enactment was at its peak. 
The result was that many consumers believed that the ACH 
transaction on their statement is actually a Check 21-related 
transaction. It has nothing to do with Check 21, it is ACH. I 
hope today we can clear up some of the confusion of what Check 
21 does and does not do, as well as learn more about ACH 
transactions and whether we have a problem there.
    Because there has not been widespread adoption of Check 21 
to date, there has not been a significant reduction in the time 
it takes to clear checks. The Federal Reserve expects Check 21 
to become widely used by the private sector by 2008. In 
addition, Federal Reserve is required, under Check 21, to study 
the impact of the new law on the U.S. Payment systems to 
determine if there are reductions in the time periods that it 
takes to clear a check.
    If the Federal Reserve finds that the time period for 
clearing checks is reduced, then it must also reduce the 
permitted hold times that banks may place on checks. Chairman 
Oxley and I have been concerned that banks would reduce check 
processing times without reducing hold times. Accordingly, 
Chairman Oxley, Congressman Hart and Congressman Tiberi and I 
have sent a letter to the Banking Trade Associations urging 
them to provide customers timely access to their funds as check 
processing times are reduced.
    As the time period for transportation of checks are reduced 
by greater electronic processing, simple fairness would seem to 
dictate that consumers should also realize the benefits of 
quicker credit for their deposits.
    Let me close by saying what we said in our letter to the 
Trade Association. Holding a deposit to ensure its safety and 
soundness is reasonable, but holding a deposit in order to 
profit from the interest is completely unacceptable. The latter 
practice prevents consumers from realizing the benefits of 
their own assets while creating an illegitimate revenues 
straining for financial institutions. It unfairly penalizes 
consumers, and should be eliminated from the U.S. Payment 
system.
    With having said that, I see no evidence that we are seeing 
that today. What I do see is that people are having ACH 
payments deducted, and that is causing a problem because it is 
reaching their account quicker than their customary experience.
    The chairman now recognizes Mr. Sanders, the ranking member 
of the subcommittee, for any opening statement that he would 
like to make. And I did hear today that Senator Jeffords is 
retiring, so I really didn't expect him to be here, I thought 
he would be up in Vermont. We welcome you to the hearing.
    Mr. Sanders. Thank you. And Mr. Bachus, thanks very much 
for holding this hearing, we appreciate your listening to 
people on this side of the aisle.
    And this hearing is dealing some major problems that have 
arisen as a result of the passage of the Check Clearing Act for 
the 21st Century.
    As a result of Check 21, banks are now able to process 
checks electronically, reducing to minutes or hours the time it 
takes for the money to be deducted from the check writer's 
account. This will allow banks to save an estimated $2 billion 
each and every year in paper processing costs.
    Mr. Chairman, as you may recall, when we were considering 
this bill, I and some other members expressed major concerns 
that there were absolutely no requirements in that legislation 
for banks to pass along those savings to consumers in terms of 
lower fees; but it gets worse. Not only will consumers see no 
savings as a result of Check 21, but according to the consumers 
union at the Consumer Federation of America, as a result of 
Check 21, consumers will bounce an estimated seven million more 
checks a month and pay an additional 170 million in monthly 
bounced check fees. That is because they did not require--we 
did not, as a Congress, require banks to change the length of 
time the banks can hold deposited checks before making the 
funds available to consumers, up to 2 days for local checks, 5 
days for non-local checks, and 11 days for checks over $5,000.
    For example, if consumers deposit their paychecks on 
Friday, they can't safely write checks for this money until the 
following Tuesday without the possibility of having their check 
bounce. If consumers deposit checks late in the day on Friday, 
banks can make them wait until Wednesday to use the money to 
pay their bills. If their paycheck comes from a nonlocal bank, 
their bank can make them wait a full week, 5 business days plus 
one weekend. Banks can even make consumers wait through two 
weekends if they deposit checks on a Friday after the bank's 
cutoff time. This is unfair. To correct these problems, I am a 
proud co-sponsor of the Consumer Checking Account Fairness Act, 
which was introduced by Congresswoman Maloney, and I am sure in 
a moment she will be talking about some provisions in that 
legislation.
    Mr. Chairman, the bottom line is that consumers should be 
entitled to the same advantages as banks when it comes to check 
clearing. But Mr. Chairman, this is just one of a myriad of 
predatory lending tactics being perpetrated by the banking 
industry. The unfortunate fact of the matter is that today's 
modern day loan sharks are no longer lurking on street corners, 
but they are taking advantage of consumers in many, many other 
respects. So we have a problem here. And I thank you very much 
for your willingness to call this hearing, and I return the 
microphone to you.
    And I apologize for stepping out, but you mentioned the 
reason why, and I will be back later.
    Chairman Bachus. Thank you.
    And Ms. Maloney.
    Mrs. Maloney. Thank you so much, Chairman Bachus, for 
holding this hearing, which we requested, and I am glad that we 
are holding it to address the issue arising from the evolution 
towards electronic funds transfer in the banking and financial 
services industry.
    According to the Federal Reserve study, over 55 percent of 
all transactions are now electronic. Last year Congress gave 
that trend a boost by passing the Check 21 Act, which allows 
banks to clear checks electronically without meeting a prior 
agreement with the other banks involved. Banks and the Fed 
argued that this bill will enable them to realize efficiencies 
of cost and speed, and improve on cost to consumers. This 
committee fully supported that goal. The United States is way 
behind much of the developed world in terms of the speed and 
efficiency of our banking system.
    However, I am concerned that while withdrawals by paper 
checks and increasingly electronically are becoming 
instantaneous, deposits including cash, paper checks and 
electronic transactions are still subject to long deposit holds 
set by the Fed about a quarter of a century ago and was 
outlined by Congressman Sanders. This creates a structural 
imbalance which disfavors consumers and is not good public 
policy.
    I have introduced a bill, and I have also written to the 
Fed, along with my colleagues on this issue. My bill is H.R. 
719, the Consumer Checking Fairness Act, to address this 
imbalance, and I hope this committee will move this legislation 
forward. But I also hope that financial institutions and banks 
themselves will take steps to address the issues created by the 
rapidly increasing move to electronic funds transfer, and 
invest willingly on their part in the technology necessary to 
speed up deposits as well as checks.
    And I hope to hear from our witnesses that banks are taking 
steps to address these problems. And I welcome the speakers 
today, and thank you for having the hearing.
    Chairman Bachus. Thank you. Ms. McCarthy or Mr. Baca. 
Either of you wish to make an opening statement?
    Mr. Baca. Yes.
    Chairman Bachus. Mr. Baca, you are recognized, the 
gentleman from California.
    Mr. Baca. Thank you very much, Mr. Chairman. I would also 
like to thank the witness for being here today to testify in 
the implementation of Check 21, and let us know what the status 
and how it is implemented and how it works, and then also look 
at any flaws, if there are any flaws, and what flaws need to be 
corrected as well.
    I was proud to vote for Check Clearing 21 Century Act in 
year 2003. Congress realizes that this legislation would 
provide a way for banks and consumers--and I will state for 
banks and consumers--to take advantage of new technology for 
the purpose of convenience, while also assuring stability of 
our payment system. By enacting this law, we are accepting the 
fact that times are changing. We all have to realize that one 
day, future generations may never learn what a paper check is, 
although we need cross and balance.
    Early into the 21st century, we will also discover that 
there are growing pains--and those are the pains that we need 
to answer and questions that we hopefully will address--in 
accepting new and more convenient ways of banking. As we work 
through the implementation of Check 21, I hope the Congress 
will do what it can to limit the negative--and I state the 
negative effects these growing pains may have on our consumers. 
And that is a concern for all of us, and that is the reason for 
having this hearing.
    Check 21 allows checks to clear faster, which may be 
positive, may be negative, which also is convenient for banks, 
merchants and creditors, but we have not yet perfected allowing 
consumers to benefit from the same convenience. We must look at 
whether banks should adjust the amount of time they hold on 
check deposits--which is something I hope we will consider--and 
how soon it can be done. We must learn how to decrease the 
effects that our country's shift towards electronic payments 
may have on our poorest consumer, and who must count every 
penny to make ends meet.
    A lot of times, many of them live paycheck to paycheck, 
they don't balance their checks on time, and sometimes when it 
clears and the effects it has on them, so hopefully we can look 
at this.
    Until the electronic conveniences of Check 21, these 
consumers will rely on the float period for all of the 
transaction. The poor may be the most affected by the 
possibility of dual debits where a check is presented twice for 
payment, and sometimes these families cannot afford them, and 
then what additional charges will be done with them as well is 
very much our concern.
    I hope to hear these and other concerns addressed during 
the testimony today. I look forward to the discussion today on 
how to improve the implementation of Check 21 and provide 
convenience and benefits equally to all who may enjoy them.
    Thank you very much, Mr. Chairman. I yield back the balance 
of my time and look forward to our hearing.
    Chairman Bachus. I am told no other member has an opening 
statement, so at this time, we welcome Ms. Louise Roseman, 
Director of the Reserve Bank Operations and Payments Systems 
with the Federal Reserve Board of the United States. We welcome 
you, Ms. Roseman, for an opening statement.

STATEMENT OF LOUISE ROSEMAN, DIRECTOR, DIVISION OF RESERVE BANK 
                 OPERATIONS AND PAYMENT SYSTEMS

    Ms. Roseman. Thank you, Mr. Chairman.
    Mr. Chairman, members of the subcommittee, I appreciate 
this opportunity to discuss the initial implementation of Check 
21.
    As background, I thought it would be helpful to first 
review the trends and the use of checks and electronic 
payments. It was only 2 years ago, for the first time ever, 
that businesses and consumers began making more payments 
electronically than by check. In the past decade, the number of 
check payments in the United States has declined by more than 
25 percent, from roughly 50 billion in 1995 to less than 37 
billion in 2003, and the rate of decline has been accelerating 
in recent years.
    In contrast, electronic payments have tripled during the 
same period. This is a dramatic shift in the way payments are 
made in this country, and is resulting in a less costly payment 
system. The declining use of checks is only part of the story. 
Although Americans will continue to write checks for many years 
to come, the way these checks are collected will evolve 
substantially as a result of Check 21.
    This very important law, which was enacted with the strong 
leadership of this committee, is laying the foundation for 
substantial improvements in the check collection system. Like 
other significant operational or technological changes, the 
adoption of electronics in the check system will be gradual. 
The check collection system did not change materially last 
October 28th when Check 21 took effect. To date, relatively few 
banks have begun to take advantage of the opportunities it 
provides. The Federal Reserve Banks have been among the 
industry leaders in making use of the Check 21 authorities, but 
thus far, as the chairman mentioned, their Check 21-related 
volumes are relatively small, less than 1 percent of the 50 
million checks the Reserve Banks process each day. Clearly, 
this is an evolutionary, not a revolutionary process.
    For the banking industry to fully leverage the efficiencies 
Check 21 makes possible, additional steps must be taken. For 
example, banks must invest in new technologies and adjust their 
operations to make best use of them. They must also ensure that 
their systems work with those of other banks. As banks improve 
these capabilities, they can reduce their reliance on air and 
ground transportation, and on paper check processing, thereby 
reducing their operating expenses.
    While the pace at which these changes will occur is not 
certain, I believe that a decade or so from now our check 
collection system will look much different than what it does 
today. Though we will likely still be writing checks, I expect 
that their number will be substantially lower, and that most of 
them be will be collected electronically.
    Turning to the issue of check holds, the Federal Reserve 
Board has been monitoring these ongoing developments in our 
check collection system to determine when changes to the funds 
availability policies may be appropriate.
    The Expedited Funds Availability Act, which Congress 
enacted back in 1987, sets the maximum permissible holds that 
banks can place on check deposits based on two factors; one, 
the desirability of providing customers with timely access to 
their funds, and two, the need for banks to manage their risk 
of check fraud.
    In the Expedited Funds Availability Act Congress directed 
the Federal Reserve Board to reduce the maximum check holds for 
a category of checks, for example, nonlocal checks, based on 
when banks can reasonably expect to learn of the nonpayment of 
most of those checks. We take these responsibilities very 
seriously. While we have not yet seen sufficient improvements 
to justify reducing the hold period, the Board will reduce the 
availability schedules when we find that there has been 
sufficient improvement in the check collection and return 
times.
    It is important to recognize, however, that many banks 
routinely provide faster availability to their customers than 
the law requires. Moreover, many consumers have also been 
getting faster access to funds over the last several years as a 
result of the Federal Reserve Banks' initiative to reduce their 
check processing infrastructure in the face of declining check 
volumes.
    When Congress passed the Expedited Funds Availability Act, 
it defined local checks as checks where the bank of first 
deposit and the paying bank are both located in the same 
Federal Reserve check processing region. Therefore, as the 
Reserve banks combine some of their check processing regions, 
some checks that were once considered non local are now or will 
in the future be defined as local, subject to the shorter 2-day 
holds.
    Turning to consumer issues more generally, the Federal 
Reserve is actively working to provide accurate information 
about the changing way payments are made, including Check 21, 
as well as another different process, electronic check 
conversion, which is often confused with Check 21. We have 
published several consumer brochures and placed additional 
information on our public Web site that explains what Check 21, 
substitute checks, and electronic check conversion are all 
about.
    I would like to conclude by stressing how important Check 
21 is to the future of the U.S. Check system. I believe this 
law will prove to be a catalyst for major change. Ultimately 
Check 21, as well as electronic check conversion, will 
facilitate the move to a more efficient and more electronic 
U.S. Payment system.
    In a competitive banking system such as ours, bank 
customers share in the benefits resulting from efficiency 
gains, and we expect that bank customers will likewise share in 
the gains that will accrue over time from the implementation of 
Check 21. And as warranted by improvements in the check system, 
the Federal Reserve Board is committed to reducing the maximum 
holds banks can place on check deposits for the further benefit 
of consumers.
    I would be pleased to answer any questions that you may 
have. Thank you.
    Chairman Bachus. Thank you, Ms. Roseman.
    [The prepared statement of Louise Roseman can be found on 
page 84 in the appendix.]
    Chairman Bachus. Let me first go to Mr. Neugebauer.
    Mr. Neugebauer. I assumed the chairman was going to ask his 
questions first.
    Chairman Bachus. I apologize. I was going to let some of 
the members--I will ask one question, and then I will yield to 
you.
    Mr. Neugebauer. Thank you.
    Chairman Bachus. Some have claimed that by reducing float 
in the check processing system, Check 21 will lead to sharp 
increases on the number of checks drawn on insufficient funds, 
allowing banks to collect large overdraft protection fees from 
consumers. Is this a legitimate concern in your view?
    Ms. Roseman. We haven't seen any evidence that that has 
happened. Actually, experience to date has shown that most 
checks that are being collected differently, due to the Check 
21 authorities, are typically checks that don't involve 
consumer accounts. For example, within the Federal Reserve 
Banks, when I mentioned that less than 1 percent of the checks 
collected rely on the Check 21-related authorities, the average 
size of those checks is about $14,000. So we are talking mostly 
about business checks here so far. That is going to change in 
the future.
    One of the things that we have tried to do with our 
consumer education effects is to emphasize the point that 
consumers should have the money in their account when they 
write checks. When you write a check, that check is payable on 
demand. So you shouldn't be able to rely on the fact that there 
is a certain delay between the time you write a check and the 
time that it is posted to your account. This is something that 
I think is important for consumers to recognize. But as we 
reduce the float in the payment system, we are also increasing 
the efficiency of the payment system.
    Chairman Bachus. Okay. Mr. Neugebauer.
    Mr. Neugebauer. Thank you. You stated in your testimony 
that you all have been reviewing the hold times and have not 
found any evidence that there is a need to reduce any of those 
at this time; is that correct?
    Ms. Roseman. That is true at this time. I expect that that 
will not always be true in the future. I think as the 
implementation of Check 21 really picks up speed, hopefully we 
will see sufficient improvements to warrant reducing the holds, 
but that has not happened yet.
    Mr. Neugebauer. Is the reason that you have not made a 
decision to reduce those hold times is that you believe that 
these current minimums are at a level that you are protecting 
the bank's ability to protect themselves against overdraft or 
insufficient checks?
    Ms. Roseman. That is true. That is what Congress was 
looking at when they legislated check holds, and really the 
standard that they asked the Federal Reserve Board to look at 
in determining whether it was appropriate to reduce the maximum 
hold periods. We only have authority to reduce those holds when 
we find for a particular category of checks, the bank of first 
deposit will learn of the return of most of those checks in a 
shorter period of time. We don't have the authority to reduce 
check holds unless that standard is met, and thus far it hasn't 
been, but hopefully in the future it will be.
    Mr. Neugebauer. I was really surprised by the tremendous 
drop in just a relatively short period of time in the number of 
checks that are in the system because I remember in my old 
banking days, back in the--whatever--that, you know, that was a 
big part of the bank's operation, the checks clearing. Do you 
attribute a lot of that to--is that coming from online banking, 
or is that coming--where is the reduction? I guess credit cards 
would be another, but what do you think the largest contributor 
to that is?
    Ms. Roseman. I would say that within the last decade, the 
largest contributor has been the explosive growth of debit 
cards; they have replaced a great number of check transactions.
    Also, as you mentioned, credit cards have been growing at a 
slower, but still strong rate. And ACH transactions have also 
been growing at double digit rates each year. So increasingly a 
lot of consumers are not only getting their payroll deposited 
directly, but also they are having recurring payments like 
their mortgage payments or utility payments or insurance 
payments withdrawn from their account automatically through the 
ACH systems. So all of those contribute to the decline in check 
volume.
    Mr. Neugebauer. And you mentioned the future of Check 21 
was an evolutionary process. I remember another evolutionary 
process that was initiated back in the 1970s, and it was called 
an ATM card, and it took a little while for that to catch on. 
Do you feel like things are progressing? Is there some things 
that could be done to encourage more of the financial 
institutions to get involved in Check 21?
    Ms. Roseman. Actually, I think that the banking industry 
has been paying a great deal of attention and investing a lot 
of money in building up the capabilities to be able to use the 
Check 21 authorities. But as we learned with the Federal 
Reserve Banks, the software needed to do this is pretty 
complex, it requires a lot of testing with their 
counterparties. So there are some things that you need a period 
of time to be able to implement and have run smoothly. But I 
don't think it is a lack of interest or preparatory work on the 
part of the banking industry, I think within the next year or 
two, we will see a lot greater use of Check 21 authority than 
we do right now.
    Mr. Neugebauer. Is the technology getting better? Are there 
more companies involved in developing the technology, or is it 
just one or two?
    Ms. Roseman. Many third-party vendors that provide software 
to banking industry have been developing capabilities within 
their software to be able to leverage the Check 21 authorities. 
So once an increasing number of vendors have completed that 
software work and made that software available to their banking 
customers, I think we will see a big increase in usage.
    Mr. Neugebauer. Does the Federal Reserve have to certify 
any of those vendors for compatibility? Is there a process 
for----
    Ms. Roseman. There is a testing process that the Federal 
Reserve Banks use before they will accept electronic files from 
a bank depositing checks with us with check images 
electronically. We do testing with them just to make sure that 
the way they are providing the file to us is appropriate and in 
a way that we can read before they start doing it live. And we 
have discovered that there are some banks that think they are 
totally ready, but when we test, we realize there may be some 
further work to do or some glitches in their software they need 
to work out. But it is something that just takes a bit of time, 
and then they come up and running and start using it and doing 
it well.
    Mr. Neugebauer. Thank you. Thank you, Mr. Chairman.
    Chairman Bachus. Ms. Maloney, do you want me to give you 
the additional 2 minutes?
    Mrs. Maloney. Thank you.
    You indicated in your comments that deposit hold periods 
should be shortened only when two-thirds of paper checks are 
clearing faster, correct?
    Ms. Roseman. Well, I said that that was the standard that 
Congress suggested in the legislative history to the Expedited 
Funds Availability Act, so it is not something that the Federal 
Reserve Board made up as a standard, we are just relying on 
what the legislative history for the Expedited Funds 
Availability Act suggested.
    Mrs. Maloney. Well, I have serious questions as to whether 
this is good public policy in the present environment when 
check clearing is absolutely immediate.
    And it appears that financial institutions really don't 
have much incentive to speed up deposit holds to match check 
clearing. And shouldn't we, meaning Congress and the Fed, be 
encouraging them to invest in new technology that would enable 
real-time deposit clearing to match real-time check clearing?
    Ms. Roseman. Actually, surveys that have been done in the 
past showed that in this particular instance, I think the 
competitive marketplace is working very well, that many, and I 
believe most banks provide customers availability faster than 
what is required by law. So this is something that is fairly 
pervasive in the banking industry now.
    Mrs. Maloney. Well, that is good news because deposit holds 
now apply to cash and electronic transfers as well, and at 
least for these, there is absolutely no reason not to reduce 
holds. And you are saying industry is doing that on their own; 
is that correct?
    Ms. Roseman. Yes. And for electronic credits and for cash, 
that must be made available on the next day following deposit. 
And the only reason that Congress had said that that was a next 
day availability is that when you make funds available for 
withdrawal, you have to make it available for withdrawal as of 
the start of business on that day. So if I deposit cash in my 
checking account at one o'clock in the afternoon there is no 
way that the bank can make it available from the start of 
business, so it must be available tomorrow morning.
    Mrs. Maloney. And with Congress saying that the Fed will 
only take action when banks have decided to clear two-thirds of 
paper checks faster, aren't we, in effect, shackling regulation 
to the slowest and most inefficient segment? Just 
mathematically, as the segment of transactions and paper checks 
continue to shrink, two-thirds of that number gets smaller and 
smaller until a tiny number of paper checks holds up the whole 
system.
    Ms. Roseman. When the expedited Expedited Funds 
Availability Act was working its way through Congress, and 
Congress was debating what theory to use for check holds, as 
you may remember before that time, many banks had very long 
holds on customer deposits, up to a month or so; and what they 
were doing is they were looking at how long it takes checks to 
get returned unpaid. And generally, it is a curve with a very 
long tail. And what Congress said is, we are not going to try 
to set the holds to ensure that every single check that may be 
returned is returned before you have to give the funds up, but 
we want to make sure that you at least have a reasonable 
opportunity to learn if most checks. And so they basically cut 
off that long tail at the end, but said that we don't want to 
have someone who wants to commit check fraud to have a high 
degree of probability that they would be able to withdraw the 
funds before their bank learned that the check that they 
deposited was bad. But if Congress----
    Mrs. Maloney. Why not shorten holds when checks are being 
processed more quickly these days?
    Ms. Roseman. One of the things--when you look at why 
Congress set the holds that it did, it wasn't looking at how 
quickly it takes to clear checks, but how quickly the bank of 
first deposit will learn of a check if it comes back return 
unpaid. And the way the check system works, it works basically 
on a no-news-is-good-news kind of basis, that banks don't get 
any affirmative notice if a check has been paid, it only learns 
by the ultimate return of the check if it hasn't been paid. And 
so it has to wait a period of time to see whether the check 
comes back bad in order to protect itself in some cases where 
they consider higher risk situations before giving the funds--
making them available for withdrawal. So that was the theory 
behind the law that we are implementing.
    Mrs. Maloney. You keep mentioning what Congress said in 
Check 21, and I strongly supported that legislation. Are you 
saying that the Feds should not set standards in this area? I 
know that a number of us have written the Fed and have 
requested that the Fed come forward with standards, are you 
saying that this is an area that the Fed should not speak or 
have any input?
    Ms. Roseman. No. I think this is an important 
responsibility of the Fed, but what we are doing is exercising 
the authority that Congress gave us. And Congress gave us the 
authority to reduce check holds if a certain test is met. So 
when that test is met, we would certainly reduce the holds, but 
we would not have the authority to do so unless that test is 
met.
    Mrs. Maloney. But under that test, aren't you saying that 
until financial institutions or banks have decided to move that 
very last check faster, even while all other transactions are 
electronic, they won't have to do anything about deposits?
    Ms. Roseman. No. We are not basing the holds based on when 
the last check gets back, we are doing it based on when most 
checks are returned to the bank of first deposit.
    You know, one of the things that also--that I mentioned in 
the testimony that is really I think acting as a newer term 
impetus to really improve consumer availability is redefining 
what is local and nonlocal, because local checks must be made 
available no later than two business days after deposit. Over 
time, as the number of Federal Reserve checks processing 
regions decline, the number of checks that are considered local 
will continue to grow.
    Back in the beginning of 2003, the Fed had 45 check 
processing regions, by early next year, they will have 23, 
about half of that number, and the number is only going to 
decline after that. So in increasingly large area for any 
consumer account, that they could have checks drawn on banks in 
a larger area and still have them considered local subject to 
the shorter hold.
    So I think that will probably have more dramatic near-term 
impact for consumers.
    Mrs. Maloney. Well, my time is up, and thank you for 
testimony.
    Ms. Roseman. Thank you.
    Chairman Bachus. Thank you.
    Mr. Feeney.
    Mr. Feeney. Thank you, Mr. Chairman, and thank you for your 
testimony.
    Could you tell us in your opinion--this is fairly new, but 
with respect to Check 21 and the electronic check conversion, 
are there some new opportunities for fraud, for criminals to 
take advantage of the system that didn't exist, either in the 
credit card system or the check cashing system, which you are 
familiar with?
    Ms. Roseman. I think on net, Check 21, over time, will 
reduce the opportunities for check fraud, because over the 
longer term what our expectation is, is that Check 21 will 
encourage more electronics in check clearing, and that 
ultimately we will have faster collection and return times so 
that banks will learn sooner than they do today of checks that 
are coming back unpaid.
    Now, as an offset to that, there have been some 
organizations that have been somewhat concerned with moving to 
Check 21 because they currently have security features on the 
physical checks that they have, they may have microprinting on 
the signature line, they may have water marks on the check, 
those particular security features don't withstand imaging of 
that check. So if they rely in looking at that in order to pay 
or not pay a check, those security features may not be 
available to them in this new world.
    But what the industry is doing now is they are looking at a 
new generation of security features that would go on checks 
that would withstand the image process. So it would be more 
electronic features that would be built into checks that you 
would be able to determine whether the check is genuine or not. 
So that is something that is currently being pursued by the 
industry.
    Mr. Feeney. Are there folks in the industry that are paying 
attention to the biometric requirements we are engaging in for 
new passports that are issued by the 26 visa waiver countries 
in terms of identifying who you are dealing with, and is that 
an opportunity to reduce fraud, both in the debit card, credit 
card and ultimately in the electronic check cashing field?
    Ms. Roseman. I have not heard of using that particular 
technology, but that may be a question to pose to the banking 
industry witnesses later.
    Mr. Feeney. And I am interested, if you can predict in the 
future, where we are going, we know we have more electronic 
payments, we know we have got more debit cards, we know we have 
got less checks, both locally and that go through the Federal 
Reserve if they are nonlocal. It occurs to me that as we 
streamline this, one day I ought to be able to do everything I 
need by a home computer or a carried computer, or with one 
basic card, and that card--tell me if this animal exists today 
, a combination debit card and credit card. I sent $10,000 to 
whoever is the card issuer, and in addition, I have a $10,000 
line of credit. Are there such things as a combination debit 
credit card in existence today?
    Ms. Roseman. Frankly, I am not sure if there is or not. I 
think technologically that would certainly be possible. But I 
don't know whether banks have issued joint cards or--you know, 
one way that gets a little close to that is if you have a debit 
card where your checking account has an overdraft line of 
credit, you can have debit and credit features on the same 
card, and once you exhaust your account balance, you would be 
tapping your credit line. But I think you are talking about a 
situation that on a transaction-by-transaction basis, you make 
the decision of whether to use the card as a debit card or 
credit card. I think typically people have two cards in their 
wallets, but I don't know that that is essential that they do 
so.
    Mr. Feeney. Well, some people have 22, but it would be nice 
to have one.
    Does the Federal Reserve have any jurisdiction over things 
like gift cards, other payroll devices? I mean, we have got 
prepaid phone cards, department stores now are issuing these 
things. Do you have any--your entity deals with check clearing 
or credit clearing, do you have any regulatory authority over 
those folks?
    Ms. Roseman. As part of our authority to implement the 
Electronic Fund Transfer Act, we have been looking at the 
applicability of that act to certain types of prepaid cards, 
and for example, we currently have a proposal that had gone out 
for comment, the board has not yet taken final action, looking 
specifically at payroll cards and how Regulation E should apply 
to those cards.
    Mr. Feeney. Well, I ask you to do that. I hope that if you 
have time you can respond; but I hope you will take a look at 
the issue of slippage. I just recently came across a 4-year-old 
gift card for a hundred dollar restaurant, of course, it 
expires after a year. And you know, I am confident that people 
lose these cards, that they forget to use them. What happens--
there is a huge advantage to the retailer or the merchant if 
they issue a hundred dollars worth of prepaid credit and then 
there is a big slippage in the system; and as you move to this, 
I hope it is something that if you have jurisdiction, you will 
take a look at.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. And what we are doing is going 
in the order that the members came.
    I have Ms. McCarthy next.
    Mrs. McCarthy. Thank you, Mr. Chairman.
    I want to ask one question. With brokerage firms, now that 
basically offer checking accounts within the whole package, are 
they covered also under Check 21? Being that you would have a 
checking account with that particular brokerage firm?
    Ms. Roseman. The Check 21 authorities apply to banks; but, 
for example, a brokerage firm, if you have a CMA type account 
where you can write checks against your money market account, 
those checks are drawn on a bank. That bank could then truncate 
those checks and process them electronically. Also, brokerage 
firms have been interested in Check 21 authority for the checks 
that they accept for deposits. You think of a lot of brokerages 
which have offices all around the country, they have bank 
accounts locally because they take in check deposits at their 
local offices, they don't take cash, but they do take checks, 
so they have to manage a large number of local bank accounts.
    What some of them have been talking about is putting image 
technology in each local office so when their customers bring 
in a check, it would be imaged and sent directly to whatever 
their central bank account is to then be collected. And they 
would be able to do that if the bank they deposit it in agrees 
to accept it from them and the bank agrees to accept the 
warrantees that they would be providing when they put it into 
the check collection system. Under Check 21, only the banks 
would be providing the warranties, but they could extend it to 
their customers by agreement and take the risk.
    Mrs. McCarthy. So in other words--and I did support Check 
21, and I still do support it--with that being said, I guess 
what I am trying to find out is then whose responsibility would 
it be to get a copy of the check from, or to have even the 
image of the check sent back to the consumer, me? The brokerage 
firm or the bank that they are dealing with?
    Ms. Roseman. That is something I think I would need to get 
back with you on in writing just to make sure I give you the 
right answer on that.
    Mrs. McCarthy. Okay. Thank you.
    Ms. Roseman. Thank you.
    Mrs. McCarthy. The other thing I wanted to ask, there is an 
awful lot of information on checks, and obviously--I know from 
reading the testimony on the second panel we are going to be 
talking a little bit more about fraud, but why do they do it? 
But people still apparently put their Social Security number on 
checks--hopefully we can get that message out that they should 
never do that in my opinion--or their full credit card number. 
Is the chance of ID theft greater with substitute checks than 
with cancelled payment checks in the consumer's home? And I am 
wondering if you have had any feedback from any of the groups 
that that was happening?
    Ms. Roseman. No, I don't think that the risk of fraud would 
be any greater. If anything, when you truncate the original 
check, to the extent that you are processing it electronically, 
there is fewer eyes that could look at the actual check and be 
able to copy off a Social Security number or a credit card.
    I have not heard of instances where that has increased any 
risks that would already be there with a paper check, or that 
information is in the clear at that point.
    Mrs. McCarthy. We start talking about identity theft all 
the time, I will be very honest with you, whether it is my 
telephone bill or anything, I won't put my account number on 
any of my checks anymore, and it is probably causing them a 
problem on the other end, but I just think it is, you know--we 
don't know anymore who is looking at the checks.
    Mr. Baca. I have my account number on it.
    Mrs. McCarthy. Do you carry checks with you? Thank you very 
much.
    Chairman Bachus. Thank you. Mr. Hensarling.
    Mr. Hensarling. Thanks, Mr. Chairman.
    I am glad to hear from your testimony that apparently 
Congress did some good in the Check 21 Act. It is unusual that 
we passed it 405 to 0, because we usually can't get that 
unanimity of opinion to change the name of a post office on a 
Tuesday night. Be that as it may, actually, my colleague, Mr. 
Feeney, covered most of the ground I wanted to cover, but I 
would like to get a sense from you of kind of the scope of 
economies of scale that can be achieved as we move increasingly 
into our non-cash payment transactions.
    In your testimony I think I read, let's see, today the 
Reserve bank's cost to process an ACH transaction is less than 
one-fifth of the cost of processing a check. And we have 80 
billion non-cash payment transactions annually.
    Can you just give me some sense of what this might mean 
ultimately to the consumer, this savings?
    Ms. Roseman. Well, first, you are right, there are a lot of 
economies of scale when you look at electronic payments because 
you are relying there on computers and telecommunications 
networks, and a lot of that is fixed cost. When you think about 
paper-based payments like checks, you need people running them 
through automated sorters, you need a lot more manual 
intervention. Even though we have reduced the number of staff 
within the Federal Reserve Banks that handle check 
transactions, I believe still one out of every 4 or 5 Federal 
Reserve Bank employees processes checks. But we have very few 
employees who need to process ACH or Fed wire transactions.
    So over time, as checks continue to decline, electronic 
payments grow, I think it will significantly reduce the cost in 
the payment system. But I think there is something also very 
important. With Check 21, for the checks that are written and 
banks invest in image technology, that image technology, they 
are also going to be able to leverage to improve the services 
that they provide their customers.
    So, for example, for my bank I can now go on line and see a 
copy of all the checks that I have written. As soon as they 
have cleared the bank, even before my monthly statement posts, 
I can look it up on line. Or if I call my bank to inquire about 
an issue about a particular check, they can call the image up 
on line and resolve my question a lot more timely than they 
could have a couple of years ago.
    So I think that these kind of things that the banks are 
investing in, they are going to leverage both to improve 
interbank clearing, but they are also going to use it to 
leverage to provide better services to their customers.
    I know a number of banks are talking about putting image 
technology in their branch networks, so to the extent that they 
do that, and take in check deposits at a branch, they may be 
able to have a later in the day cut-off hour for that deposit. 
So if you deposit a check at 3 or 4 in the afternoon, it will 
then be considered today's deposit rather than tomorrow's 
deposit, which speeds everything up.
    Mr. Hensarling. The very limited number of constituents I 
have that are even aware of the Check 21 Act would tend to have 
a few concerns. Number one, ultimately is this going to save me 
money or cost me money, and we have covered that subject to 
some extent. Another, does this heighten or lessen the chances 
for identity theft, and we have covered a fair amount of that 
ground. And then a number are under the impression that 
Congress has told their banks they can no longer give them 
cancelled copies of their checks.
    In your testimony, you talk about some education efforts of 
the Fed. I would like to know what are you doing to help 
educate the constituents of the 5th Congressional District of 
Texas that I didn't vote for a law that prevents them from 
getting copies of cancelled checks.
    Ms. Roseman. Well, that is something we have always heard, 
and we have, as part of our education material, several 
frequently asked questions and answers relating specifically to 
the fact that because Check 21 passed, that does not mean that 
you wouldn't get your checks back if you otherwise would; that 
is something totally independent, that is part of the agreement 
between the bank and their customer, but is not influenced by 
this new law.
    I have not seen any bank put that in writing, but I do 
suspect that some customers, when they call their banks saying 
why aren't I getting my checks back anymore, the customer 
service rep may use it as an excuse at times because we have 
gotten some feedback in that regard, and that is why we have 
added information on our Web site specifically on that issue.
    Mr. Hensarling. Thank you, Mr. Chairman, I yield back.
    Chairman Bachus. Thank you. Mr. Baca.
    Mr. Baca. Thank you very much, Mr. Chairman.
    I guess one of the questions that Ms. McCarthy asked--I am 
still very puzzled because I do have on my checking account, I 
do have my account number. And it is puzzling because now I 
start looking at, in terms of security identity theft and 
others, when you don't know who that person is when you 
transfer that particular check, if they can take your account; 
and hopefully it is a better process and we can look at that.
    But let me ask a question in reference to Check 21. Right 
now it does not require banks to shorten the hold period they 
place on deposit even though the checks are clearing faster; is 
that true, yes or no?
    Ms. Roseman. Check 21 did not require that because there 
was already a law on the books that did require us to reduce 
check holds, so there was no need to reiterate the same 
requirement in Check 21.
    Mr. Baca. And the reason I state that, for example, a 
consumer's check may pay his power bill online, may clear 
immediately, but a payment check he wants to deposit may take 2 
to 5 business days to show up in his account. Also, the 
consumer may be uneasy now that they have less time to cancel 
the check before it is debited for their account. And as you 
know, the Federal Reserve is required to study within 2 years 
the impact of Check 21 on the U.S. Payment system to see if 
there are any reductions in time periods that it takes to clear 
a check.
    Do you believe that there will be a requirement change in 
hold time following the 2-year study? That is question number 
one.
    Ms. Roseman. Frankly--oh, go ahead.
    Mr. Baca. And then do you believe that 2 years is necessary 
to gather the information needed to make that decision on hold 
time?
    Ms. Roseman. Actually, given the very limited use of Check 
21 to date, I think that it would not benefit consumers to try 
to speed up the time in that study because the sooner we do the 
study, the fewer improvements would have been made due to Check 
21 that we would be able to discern from the survey results. So 
you would want to give Check 21 enough time to play out in the 
marketplace so that you could see some noticeable improvements 
because of it. If we did the survey today, we wouldn't see 
those noticeable improvements.
    So what we are trying to do is move the study late enough 
that there may be some improvements, but frankly, I am not sure 
if the studies that Congress required, that this initial study 
will see sufficient improvements because we will be doing that 
next year. And I suspect it may be----
    Mr. Baca. What do we have to do to see significant 
improvements? Is there any changes that need to be done?
    Ms. Roseman. It needs--the way Check 21 was developed, it 
authorized, but did not require banks to use new authorities 
that the law provided. So the theory was that as banks had a 
business case to invest in the technologies and the equipment 
needed to leverage the authority, they would do so. And a lot 
of banks are doing so. But there is, frankly, a fairly long 
lead time involved in that.
    So I think that we will see noticeable improvements--
personally, and this is just a personal guess--I think that 
those improvements we will start seeing more significant 
improvements in the 2007, 2008 time frame. I don't know whether 
the improvements will be significant enough when we do our 
survey next year to at that time reduce the holds, but I think 
a couple years out from there we would see.
    Mr. Baca. Okay. Thank you. The next question I have is the 
implementation of Check 21 has created some confusion among 
consumers. There is confusion among the hold time of their 
checks and the difference between Check 21 and account 
receivable conversions. It appears to me that perhaps there 
should be a greater, as stated before, education of consumers 
to know about how to adjust and shift electronic payments. Does 
the Federal Reserve play a role in providing such educational 
programs? If so, how and when and where will they be 
implemented?
    Ms. Roseman. Well, we have come up with information. We 
have consumer brochures talking about electronic check 
conversion, about Check 21. We have other information on our 
Web site. We have talked to--because there was lot of press 
coverage around the time this law became effective, and we 
talked to a lot of reporters and others developing stories. 
They did not quite get it right, even after having talked to 
them in many cases.
    But we have been trying to disseminate information. We have 
been relying on, leveraging our Consumer Advisory Council and 
thinking about educational efforts in this regard. But there 
are a number of things on our Web site that we refer consumers 
to, media to. So that has been the primary vehicle that we have 
used.
    Mr. Baca. Is any of your material bilingual?
    Ms. Roseman. There are some in Spanish as well as English, 
yes.
    Mr. Baca. And what about Korean or Asian or any other 
foreign language or----
    Ms. Roseman. I believe, I can correct in writing if I am 
wrong, but I believe at this time it is just Spanish and 
English.
    Mr. Baca. Okay, well, hopefully, we can develop other 
languages, too, as well as we want more consumers to 
participate and utilize the system. Thank you very much.
    I yield back the balance of my time if there is any
    Chairman Bachus. Thank you. Ms. Roseman, let me--I have 
got--we have had people, other Congressmen or even one or two 
constituents that have called us because of a lot of publicity 
with Check 21, and they have given us various scenarios. And so 
I want to kind of ask you an extended question with fact 
scenarios and let you kind of clarify whether or not Check 21 
is involved in this or not involved. I think I know the answer, 
but I just want to hear it from you. And basically, I think 
that there is a lot of misinformation on what Check 21 does and 
what it does not do, what it authorizes and causes and what it 
does not authorize or cause. And have you--have you all had 
some of the same confusion that we have had?
    Ms. Roseman. Yes, and a lot of it was prompted, I believe, 
by a lot of media reports last fall. There is confusion between 
Check 21 and electronic check conversion as we discussed. There 
is confusion regarding, if you no longer get your checks back 
with your account statement, is that due to Check 21? It is 
not. So there have been some issues along those lines, yes.
    Chairman Bachus. Yeah. Let me give you some examples of 
what we have found when we looked into these matters. Now, one 
is this--and that is, I think, a valid complaint that people 
have. And I--maybe you can tell me where you would fix this. 
People will say, they will look on their bank statements, and 
there will be a debit, a debit to their account where you have 
authorized a direct debit. And they really cannot tell from 
that debit much about the transaction. I have actually seen 
examples--they have sent me some of these. And it may 
actually--I saw one recently, where a cable company deducted on 
a direct deposit, and the only thing that appeared on that was 
the name of the city.
    Ms. Roseman. I am sorry. The name of----
    Chairman Bachus. Was the name of the city.
    Ms. Roseman. Well, under the--I believe, under the 
Electronic Fund Transfer Act and the Federal Reserve Boards' 
Regulation E on periodic statements, if you are--you know, if a 
consumer has an electronic payment, it has to include the name 
of the payee. So, for example, most of the bills I pay, I pay 
through the ACH. It just automatically debits my account, but 
it will say, Comcast or Verizon or the name of the mortgage 
company, as part of the information that appears on my 
statement. That is required by law.
    Chairman Bachus. Well, this one, they sent to us--it 
actually did not. And it was a large cable company. It had the 
name of the city.
    We have also seen another one that someone sent to us and 
it just had numbers. Now, what that was, and let me just move 
down. This is another one. We have the direct debits, and then 
you have where you go into a store, you hand them a check, they 
run it through some process, and they give you your check back.
    Ms. Roseman. Right.
    Chairman Bachus. In that situation, what is required? The 
merchant can then immediately go and debit your account; is 
that correct?
    Ms. Roseman. What typically happens in that case is the 
merchant will use the information at the bottom of the check to 
create an ACH transaction that will----
    Chairman Bachus. An ARC transaction basically?
    Ms. Roseman. Well, there are two different types. ARC 
transactions are for payments that you send in to pay a bill.
    Chairman Bachus. Okay.
    Ms. Roseman. There is another transaction code but it is 
the same concept.
    Chairman Bachus. And what is it called when they do it in 
the store?
    Ms. Roseman. POP, point of purchase. I knew it was POP; I 
just could not remember what it stood for. And that is just 
another code for a different but similar type of ACH 
transaction. But in that case, on the statement, they should be 
getting the name of the store along with the other information, 
you know, date of the purchase and the amount of the purchase. 
That should appear there, similar to the way, if you use a 
debit card or credit card, that information would show up.
    Chairman Bachus. And so when you get your statement, it 
should have all that information.
    Ms. Roseman. It should. Under the law, it should.
    Chairman Bachus. And I think, maybe this is a transitionary 
period, but you know, we are seeing, in these, you know, cases 
where the information does not appear, they are getting that 
kind of information. The third one, as you mentioned--I think 
you mentioned it--is where you mail your payment in. And we are 
getting--with the utilities. You mail it in, and what is 
happening is, it goes into a lock box as I understand.
    Ms. Roseman. Right.
    Chairman Bachus. That check is destroyed, and it goes--they 
immediately have access to your account. Now, you are agreeing 
to that apparently.
    Ms. Roseman. Well, when you say, immediately, what they 
will do, the lock box processor will get in all the checks for 
your credit card or mortgage or whatever, and they will again 
use the information at the bottom of the check to create ACH 
transactions that they will put into the ACH system. It would 
typically be the next day that it would settle on your account.
    Chairman Bachus. Now, none of those have anything to do 
with Check 21 do they?
    Ms. Roseman. Not at all.
    Chairman Bachus. Okay.
    Ms. Roseman. The main thing they have in common is they 
both came about in the same general time frame which is, I 
think, why they got so confused with each other.
    Chairman Bachus. Do you see any of those cases? I think, 
when this happens to a member of Congress or his constituents, 
they turn around and call me because I am subcommittee chair, 
send it over to me, and we call them. But, you know, I think 
the main complaint that we are hearing is, when they get their 
account or they call their account up on the Internet, they 
really cannot get enough information, or, many times, it says 
that--I wish I had brought one of them in here because I have 
got four or five--that transaction is not available; electronic 
image of that transaction is not available. And I think mostly 
those are on those lock box things. But are they supposed to be 
available?
    Ms. Roseman. Generally, what happens for the lock boxes is 
they will take an image of your check for their records when 
they--before they initiate the ACH. So in the event the ACH 
transaction comes back bad, they have more information about 
who you are to be able to pursue you. And sometimes, they may 
end up then over time creating a substitute check from that 
information to collect it as a check if for some reason it did 
not clear as an ACH transaction.
    Chairman Bachus. But I guess my question is, are they 
required to--is there a requirement by the Federal Reserve 
that, on your statement, where you go on to the Internet and 
you can get--go in and electronically call up an image, is 
there some requirement that you will be able to do that?
    Ms. Roseman. Yes. There are requirements for what appears 
on your periodic statement, what information about an 
electronic payment must be there. And it would have to include 
the name of the person that you are paying.
    Chairman Bachus. Are you getting the same complaints that 
we are?
    Ms. Roseman. I am not aware of complaints along those lines 
in particular.
    Chairman Bachus. Okay. But none of those complaints would 
be, as you say, are Check 21. They are really more to do with 
either the Expedited Funds Availability Act or deposits.
    Well, another example is this. This is my fourth example. 
And I have heard this from time to time. And I think this has 
been happening for years, but people, now with Check 21--they 
call and say this is Check 21. A person has someone working at 
their home, painting or, you know, cutting the grass or 
whatever. And they give them a check. And they go down to the 
bank and deposit it. I mean--I am sorry, they give them the 
check, to XYZ bank. They realize, oh, you know, I do not have 
the money to cover that. So they go down to the bank at the 
same time, you know, usually 3:00 or 4:00 in the afternoon, and 
they deposit money to cover that check. And it could be that 
the person that they gave the check to walks into one branch, 
and they walk into the other branch about the same time, or 
even an hour apart. What we are hearing is the person is able 
to cash the check and when they do, they will overdraft because 
there is overdraft protection, and then they will go in and put 
a check in, you know, between 3:00 and 5:00 of the same day, 
and they do not get credit for it. Now, they complain that that 
is part of Check 21.
    Ms. Roseman. No. That is totally independent of Check 21. I 
think the circumstance that you raise often is the case. If you 
give a check to a handyman, and your check happens to be drawn 
on a bank that is local, he may go directly to that bank and, 
you know, cash that check over the counter because they want 
their money right away.
    Chairman Bachus. And that is what has happened in several 
cases. In fact, they leave the house. They go down to the book 
and they cash the check. You are following them in the car, and 
30 minutes later, you deposit a check.
    Ms. Roseman. But I think it is important to have further 
education for consumers to make them understand that when you 
write a check, that check is payable on demand. So you should 
have the money in your account to cover the value of that check 
at the time you write it and give it to somebody.
    Chairman Bachus. I will not go any further with that. They 
do have another complaint about when they get two or three 
issued worthless checks they sort of think that, you know, and 
the bank ought to probably not take the biggest one first, 
biggest check and run it through first. They ought to take the 
little ones, which would have gone. But then, I had a 
constituent who called and said they bounced my mortgage 
payment because they took that one first. I guess it is hard to 
know which one they ought to take first, right?
    Mrs. Maloney.
    Mrs. Maloney. No questions.
    Chairman Bachus. All right. No further questions of this 
panel. But--so we will dismiss our panel one, or Ms. Roseman, 
and call our panel two.
    And Mr. Ford is going to introduce one of our witnesses to 
the second panel.
    Mrs. Maloney, I know that you are friends with Mrs. Duke, 
and so I do not know if--you have introduced her in the past. I 
did not know if you wanted to do it today. We welcome our 
second panel. And at this time, I am going to recognize Mrs. 
Maloney to introduce one of our panelists.
    Mrs. Maloney. Okay. Thank you so much.
    And it is my great honor to introduce Betsy Duke who is the 
Chair of the ABA. And she is the first woman in history to hold 
this position. So I am always supporting women when they break 
that glass ceiling and become trail blazers, make the road 
easier for other woman. But it is an extraordinary achievement, 
and we are very proud of this achievement. She is also a former 
president of the Bank of Tidewater. And this position, 
likewise, was the first time that a woman held this position. 
And she hails from the great State of Virginia, and my hometown 
of Virginia Beach, Virginia. And every time I come home, 
everybody talks about Betsy Duke.
    So your hometown is extremely proud of you.
    And she also happens to be the personal banker to my 
family.
    And they are very fond of you and send their regards and 
thank you for everything you do and for being--thank you. What 
can I say?
    And she is really a vice president now of Wachovia and my 
good friend, Mel Watt, is very proud of that position in the 
bank that hails from the great State of North Carolina.
    Mr. Watt. I just told her not to try to steal my 
constituent while she was making the introduction, Mr. 
Chairman.
    Do not try to steal Wachovia for Wall Street, you know. We 
are delighted to have her here, and we were arguing about who 
got to introduce her, so we just split it. That is what happens 
when you are so popular. Everybody wants to introduce you. 
Thank you for being here.
    Chairman Bachus. Mr. Watt, you have from time to time 
talked about larger institutions gobbling up smaller 
institutions, and as Mrs. Maloney----
    Mr. Watt. But Charlotte is bigger than Wall Street.
    Chairman Bachus. Mrs. Maloney used to be employed by South 
Trust Bank in Birmingham, and in fact, South Trust was gobbled 
up by a Charlotte bank, Wachovia, which is a very fine bank. 
And we are still proud to have her with us now kind of 
tentative----
    Mr. Watt. I told you everybody wanted to introduce you. I 
mean, what can you say? When you are on a roll--anybody else 
want to get in on this introduction?
    Chairman Bachus. We believe that actually that is probably 
the reason for that. They were actually trying to get a 
chairman of the American Banking Association. They had to buy a 
bank to get one, so--and then Mr. Ford is going to introduce 
the gentleman from Tennessee.
    Mr. Ford. I feel bad. Hayes is not going to get the kind of 
intro that Ms. Duke got. I am delighted to see you, too, Madam 
Chairlady and to Chairman Bachus and all the members of the 
committee. I feel bad for the professor and for Mr. McEntee, 
that they are not going to get these glorious introductions.
    But welcome to you, as well, to the committee. I am 
delighted that a fellow Tennessean, although not from my 
congressional district, but someone whose organization, 
independent community bankers I have leaned on greatly over the 
last few years in my service on the committee to learn more 
about issues confronting not only bankers but certainly their 
customers throughout my state. Mr. Hayes hails from the 
Security Bank of Dyersburg and, as stated, is the chair of this 
great organization.
    And today, Chairman Bachus, he will bring a perspective 
that I know has been shared or is shared by many on this 
committee. And as one who was active in the passage of this 
great act that we talk about today, Check 21, for many, many 
reasons, the fact that it reduces fraud and makes it--reduces 
costs for banks and customers alike--it is interesting to hear 
the perspective of community bankers, really institutions that 
are at the forefront and on the front line of providing capital 
to families and farmers and small business people.
    Oftentimes, as Mrs. Maloney and Mr. Watt know, we brag in 
this institution about the great job growth over the last 10 
years. And sometimes we forget--as easy as it is to point to 
large operations, and we have one the largest in my district 
called FedEx--it was really small businesses that lead the job 
creation engine in this country. And it is community bankers 
like Mr. Hayes and many of his colleagues within his 
organization that have provided fuel for that wonderful fire 
over the last several years.
    He will bring a set of recommendations today, Chairman 
Bachus, that I hope this committee not only listens to but 
heeds, in many ways, as we do our best to implement what is a 
positive act. And I applaud you, Chairman, for having the good 
sense to allow an assessment of where we are and how this bill 
will be implemented, how this law will be implemented. But I 
hope we pay close attention as we talk about the deployment of 
technologies and the resources needed to ensure that banks in 
his organization and his peers within his association are able 
to bring not only this law to reality but bring the good 
benefits to their many customers.
    So with that, I welcome you, Chairman Hayes, and welcome 
the other members of the panel as well.
    And, Ms. Duke, I look forward to getting to know you 
because all these folks love you. You must be doing some great 
things. And you have got a good man siting right behind you in 
Floyd so keep him on board.
    And with that, I yield back the balance of my time.
    Chairman Bachus. Thank you. Our two other panelists are 
friendless. They are both--I will note, that I do not know if 
that is because you are the two Democratic witnesses, but I 
welcome both of you. Professor Mark Budnitz from Georgia State 
University College of Law. I can tell you that Georgia State is 
a fine institution, has a tremendous School of Business and 
known for its economics and now its law and other fields, and a 
very good school, right in the top 20 and top 30 in several 
fields. So I am very aware of them. And it is a fine 
institution.
    So despite what your testimony may be, you come from a fine 
institution. But, no, we very much welcome you. Mr. Hayes and 
Ms. Duke have been here on other occasions, and so we have not 
mistreated them. They have come back. That may tell you 
something about this committee.
    And Mr. Elliott McEntee, president and CEO of NACHA, which 
is the Electronic Payments Association. And what a fine 
association.
    We welcome you to our panel.
    So without further ado, we welcome your testimony, and we 
will start from my left with Ms. Duke.

  STATEMENT OF ELIZABETH A. DUKE, CHAIRMAN, AMERICAN BANKERS 
                          ASSOCIATION

    Ms. Duke. Good morning, Mr. Chairman, and members of the 
committee. Thank you for that introduction. I am not sure 
anybody has ever been as warmly welcomed as I have been here 
today. When it started out--it reduced my nerves. Perhaps as it 
went on, it maybe increased them. I will try not to disappoint 
anyone.
    My name is Betsy Duke. I am chairman of the American 
Bankers Association and an executive vice president with 
Wachovia Bank. I am pleased to be here today to discuss Check 
Clearing For the 21st Century, or Check 21. Prior to Check 21, 
every single check that was deposited in the United States had 
to be physically transported to the bank on which it was drawn. 
And now, banks will be able to use 21st century technology to 
transport those checks electronically in the same way that most 
of us today use e-mail rather than mailing physical letters. So 
no longer will there be tons of paper checks having to move 
around on trucks and planes subject to damage, delay by 
weather, accident or vandalism. Customers will retain the 
convenience of a check but will also have the efficiency of an 
electronic payment. Funds will be collected faster, making them 
available sooner and reducing fraud. And check transport will 
be more predictable and more secure.
    But all of this will not happen overnight. The initial cost 
that enables the bank to be able to send and receive electronic 
checks is very high, and any new process needs testing and 
refinement. My bank, Wachovia, is a leading-edge electronic 
processor, but despite these capabilities, we expect to process 
only 2 to 3 percent of our checks through electronic image 
exchange by year end.
    Nationally, the Federal Reserve, as you have heard, reports 
that less than 1 percent of the checks that it processes are 
done electronically. So the adoption will be gradual, and 
significant volume is certainly not expected until some time in 
2007.
    Now, in spite of a concerted effort to educate the public 
about Check 21, we continue to hear predictions of dire 
consequences of the law, none of which has any basis in fact. 
For example, some consumer activists reported that 7 million 
checks would begin to bounce each month as a result of the new 
law. Nothing like this has occurred nor is it expected to 
occur. Moreover, the length of the float time has been 
declining for decades as banks and companies find more 
efficient ways to collect their payments. Electronic 
presentment is simply one other efficiency method. And those 
who use the float quickly adjust just as they have for many 
decades of innovations in check processing.
    We have also seen stories claiming that banks will place 
extra holds on checks in order to avoid paying interest. This 
is simply untrue. By law, banks must begin paying interest as 
soon as the institution itself receives credit for the deposit. 
Check holds are extremely important to preventing fraud. Banks 
need enough time to allow the paying bank to return the check 
to discover insufficient funds or fraud. The Federal Reserve by 
law has established schedules for funds availability and is 
required to adjust those schedules as average clearing times 
change. As more checks clear electronically and as normal times 
speed up, the Federal Reserve is required to change the 
availability schedules.
    However, the funds availability schedules should not be 
shortened until the actual time to process the checks has 
speeded up. It is important to note that most banks do make 
funds available sooner than the mandated availability 
schedules, especially in cases where the risk of fraud is low. 
An ABA survey has shown that between 72 and 87 percent of banks 
provide funds for local checks before the law requires; for 
nonlocal checks, between 72 and 82 percent do so.
    Mr. Chairman, the ABA and our member banks are committed to 
providing the most efficient cost-effective check processing 
possible for our customers. Check 21 will speed funds 
availability and reduce fraud for all of our customers. We are 
excited about the potential, and we look forward to providing 
the benefit, and I appreciate the opportunity to testify on the 
progress of Check 21 to date and to clear up some 
misconceptions. I will be happy to answer any questions.
    [The prepared statement of Elizabeth A. Duke can be found 
on page 60 in the appendix.]
    Chairman Bachus. Professor Budnitz.

    STATEMENT OF MARK E. BUDNITZ, PROFESSOR, GEORGIA STATE 
                   UNIVERSITY COLLEGE OF LAW

    Mr. Budnitz. Good afternoon, Mr. Chairman, members of the 
subcommittee.
    Congress passed the Check 21 Act with the best of 
intentions. It is a good act. It enables banks to process 
checks in a more efficient manner, reduces costs, increases the 
speed with which checks clear.
    However, Check 21 made a really complicated situation even 
more complicated and more confusing for consumers than it 
already was. Several of you have mentioned consumer education. 
You asked Ms. Roseman what efforts the Fed is making to educate 
consumers. Well, they have a tough job to do, because the law 
is based on matters completely beyond the control of the 
consumer.
    Let's just take one example. There are lots and lots, but 
just take one that has been mentioned this afternoon. That is 
why I picked it. The credit card company sends me a statement. 
I put a check in the mail to pay the credit card company. The 
credit card company gets that check--and I have two credit card 
companies who do it this way myself--and they can do one of two 
things. They can process the check the regular way, just 
deposit the check into their bank, their depository bank, the 
bank of first deposit, or they can process it electronically. 
Two entirely different legal regimes apply. Now, even if you 
have a credit card company that deals with this in the 
traditional way, they take my check, and they deposit the check 
into their bank. The banks now start processing the checks. And 
they can do it one of two ways. There is the usual way, or now 
with Check 21, they can go and use electronic check imaging, 
and eventually the check will be changed into a substitute 
check. Again, different rules, different responsibilities, 
different rights, different deadlines, four different sets of 
rules.
    And I have not even mentioned the NACHA rules which also 
affect the electronic payments. And so, it is a very difficult 
situation for consumers to grasp. What I am suggesting today is 
that you take a look at the entire spectrum of the legal 
context in which these things take place and see if you can 
introduce some uniformity into the system, because if there is 
a problem, for example, if it is an electronic transfer, then 
there is the Electronic Fund Transfer Act and Regulation E, and 
the consumer is entitled to disclosures, the consumer has 60 
days from after the bank sends a bank statement to notify the 
bank of errors. If it is a transaction, however, that was 
processed through checks and Check 21 kicked in, entirely 
different legal regime, entirely different rules, different 
deadlines. The consumer, in order to submit a claim under Check 
21, if the consumer thinks something went wrong, has to provide 
information to the bank that I can hardly even understand, and 
I have written law review articles, I am revising my book on 
this subject and so forth. Somehow the consumer has to know 
what a warranty claim is under Check 21 in order to--or 
otherwise explain why, I need to have the original check in 
order to understand why, when I got the substitute check, 
something went wrong. A very complicated regime in contrast to 
Regulation E. And if the check is just processed the usual way, 
no Check 21 kicking in, no substitute check, then the Uniform 
Commercial Code applies. Entirely different rules. Under the 
Uniform Commercial Code, the bank has no duty to investigate, 
has no duty if it cannot figure out what went wrong, to 
recredit the consumer's account. The consumer's only remedy is 
to go to court and file a lawsuit. But there is probably an 
arbitration clause in the bank agreement that does not even 
allow that to happen.
    This is just one little tiny slice of the pie. There are 
all kinds of other things going on. And let me just mention one 
other, and that is the bank statement. We have already talked 
about the confusion between electronic check conversion, the 
ARC situation, and Check 21 with consumers being very confused 
about the two and not understanding the difference between 
them, that two entirely different rules apply. In addition, 
there are so many other things going into and out of the 
consumer's account. It is right, and it sounds just fine to 
say, before the consumer writes that check, the consumer better 
make sure there is enough money in the account. Right? Direct 
Deposit, pre-authorized payments, online bill payments, account 
aggregation, debit card payments, lots of transactions going in 
and out of that account at all times. So it is very hard to 
keep track.
    Very briefly, what I recommend is that the committee take a 
look at the entire situation, use the Electronic Fund Transfer 
Act as a model. It has served well the test of time. Congress 
did a fantastic job with that. Also look at the NACHA rules. 
NACHA has some very fine rules that have been worked out in 
conjunction with the business community, the banking community, 
and incorporate some of those into the law so that we make sure 
that those are a definite permanent part of the law.
    In terms of funds availability, one thing I would mention 
is that Mrs. Maloney's bill includes a lot more than making the 
funds available quickly. There is a lot of other stuff in 
there, quite apart from whether it is time now to go and reduce 
the waiting period. And so I would urge the committee to look 
at those other aspects of the bill as well and consider them 
seriously. Thank you.
    [The prepared statement of Mark Budnitz can be found on 
page 53 in the appendix.]
    Chairman Bachus. Thank you. Mr. Hayes.

   STATEMENT OF DAVID HAYES, CHAIRMAN, INDEPENDENT COMMUNITY 
                       BANKERS OF AMERICA

    Mr. Hayes. Thank you.
    Congressman Ford, thank you for the kind introduction and 
my second day here in Washington in front of the chairman from 
Alabama, in both cases, so I look forward to the fall, sir.
    I am honored to be here with so many former bankers. I 
mean, it certainly makes my life much easier. You know, it is 
my honor to be here today to represent the 5,000 community 
banks that belong to the Independent Community Banker 
Association of America, and to be here representing my own 
institution which is a $135 million asset organization and 70 
employees. So I am a small business person by occupation. Check 
21 became a law approximately 6 months ago, and by authorizing 
the creation of the substitute checks, the new law has opened 
the door to wide scale electronic check processing. 
Implementation will not happen overnight. It is very much an 
evolutionary process. Therefore, until the necessary technology 
investments are made, relatively little change will occur for 
community banks and our customers.
    My bank began offering image statements to our customers in 
1999, and today, we have invested a half a million dollars in 
the technology. Yet, like many community banks, in the 6 months 
since Check 21 became effective, we have made very few changes 
to our processing environment. Instead, we are waiting to move 
to full electronic check clearing without the need for 
substitute checks. Earlier this month, the ICBA surveyed its 
members on Check 21 implementation and its impact on our 
customers. Almost 400 community banks of all asset sizes 
responded; 86 percent are not currently using image technology 
to present and clear checks but are waiting for their 
intermediaries like software providers to develop the software 
and complete testing of the end-to-end image exchange. Of the 
banks that are using image technology for check clearing, none 
have engaged in full check image clearing. Image-based clearing 
is not yet the dominant form of check clearing, and it is 
important to note that the new law does not mandate that banks 
process or receive checks in electronic format. Analysts have 
predicted that it will be several years before digital images 
are used to clear most checks. And our survey results support 
this prediction. Therefore, it is premature to conclude that 
checks are clearing faster since the enactment of Check 21.
    We also appreciate the members of this committee have 
acknowledged the importance of check holds in the prevention of 
fraud against bank and depositor losses. This is too often 
overlooked. I am reminded of a situation of a small community 
bank where a customer's check kiting scheme almost caused the 
bank to fail in a matter of hours. The kite depleted nearly all 
of the bank's capital, and the bank was close to being unable 
to honor the local public school payroll. Today, we have a 
major problem with fraudulent cashier's checks. So you see, for 
community banks especially, the impact of check fraud can go 
well beyond the institution and have real consequences for the 
community.
    We also recognize concerns that some processing practices 
could increase the likelihood of overdraft fees for consumers. 
However, nearly 90 percent of ICBA survey respondents post 
deposits and other credits before checks and debits. Therefore, 
contrary to the claims of consumer groups and others, most 
check processing practices are not yielding an illegitimate 
revenue stream for banks. I must also point out in the interest 
of good customer service, many of our member banks make funds 
available to customers earlier than required but still have the 
legal and regulatory authority to place holds where needed in 
specific cases: twenty-eight percent of our survey respondents 
provided same business day availability on items that qualify 
for next day availability; 91 percent provide same or next 
business day availability for items that qualify for two-day 
availability; and 86 percent provide faster availability for 
checks that qualify for 5 business day availability.
    ICBA is concerned that with only 6 months since Check 21 
became law, preemptive legislation or regulatory efforts to 
reduce check hold periods without a proven history of faster 
check clearing and settlement times will leave banks and our 
customers exposed to serious losses and sophisticated fraud 
schemes. Current law requires the Federal Reserve Board to 
reduce check hold periods whenever check processing times 
improve. The Fed must also study availability practices and 
existing funds availability requirements and make 
recommendations for legislative action. We urge Congress to 
give the Federal Reserve a chance to do its job. In conclusion, 
broad and appreciable reduction in check clearing times will 
only occur over time. The majority of the financial 
institutions must determine that there is a business case for 
making significant capital investments and major operational 
changes to support full electronic check clearing. Wide scale 
electronic check clearing will only be as effective and 
efficient as the number of banks that participate.
    Mr. Chairman, thank you for the invitation to appear today, 
and I will be happy to answer any questions later.
    [The prepared statement of David Hayes can be found on page 
70 in the appendix.]
    Chairman Bachus. Thanks.
    And Mr. McEntee.

STATEMENT OF ELLIOTT C. MCENTEE, PRESIDENT AND CEO, NACHA--THE 
                ELECTRONIC PAYMENTS ASSOCIATION

    Mr. McEntee. Mr. Chairman and distinguished members of the 
subcommittee, I appreciate the invitation to testify on a type 
of electronic processing known as check conversion.
    In check conversion, a check that a consumer mails to pay a 
bill is processed electronically using the same payment network 
that is used to process Direct Deposit of payroll payments. 
Using an electronic payment network to process checks enables 
the payment to be processed more efficiently. It also provides 
the consumer with more protection than if the check was 
processed in the traditional manner.
    Before I discuss check conversion in more detail I just 
want to give you a brief overview of the organization I work 
for. NACHA is a not-for-profit association that develops and 
maintains the operating rules that govern the processing of ACH 
payments. The NACHA rules spell out the rights and 
responsibilities of financial institutions and businesses that 
process ACH payments. And they also contain several provisions 
dealing with consumer protection. The public and private 
sectors have been working since the late 1970s to use 
electronic payment networks to clear and settle billions of 
checks that are written each year in the United States.
    Earlier efforts were not successful, mostly due to the lack 
of a clear legal framework dealing with the relationship 
between checks and electronic payments. Working very closely 
with the Federal Reserve, a legal framework was developed in 
2001. That legal framework treats a check that has been 
converted as if it was always an electronic payment. With that 
legal framework, consumers have the protection of Regulation E 
and the NACHA rules even when they are writing a check to pay a 
bill. The interest in using electronic networks to collect 
checks increased dramatically because of the grounding of all 
commercial flights after 9/11. Today, check conversion is used 
by the Federal Government, several State and local governments 
and hundreds of billers.
    Every biller that is going to convert checks must provide 
clear and conspicuous notice to consumers prior to the receipt 
of every check. The notice must state that receipt of the check 
authorizes an electronic debit to the consumer's account. 
Billers must have reasonable procedures for the consumer to opt 
out. In other words, if the consumer does not want their check 
converted and notifies the biller, the biller may not convert 
any checks received from that consumer. Billers must provide 
consumers with a copy of the check upon request. As with any 
ACH payment to a consumer's account, the NACHA rules require a 
consumer's financial institution to recredit the consumers 
account if the consumer reports within a certain time frame 
that a transaction was not authorized.
    But what are the benefits of check conversion? For 
consumers, check conversion preserves the choice for consumers 
who want to continue to pay their bills by check. Consumers 
gain the protection of Regulation E and the NACHA rules, which 
provide more protection than when checks are processed in the 
traditional way. When checks are converted, consumers receive 
more detailed information on their monthly statements, 
including the name of the company that they are paying and the 
check number that the consumer wrote. For companies, the main 
benefit is gaining the efficiencies and cost-effectiveness of 
electronic processing while still offering consumers the choice 
of paying by check.
    In 2004, there were about 1.25 billion checks converted by 
billers. The consumer opt out rate is typically less than a 
half a percent. A recent survey conducted for NACHA found that 
69 percent of consumers surveyed responded that they are 
familiar with the check conversion process. The survey also 
found that 55 percent of the consumers, when given the open-
ended opportunity to say anything, expressed no concerns about 
check conversion. Most of the concerns that they did express 
were about privacy and security issues. And as was pointed out 
by Ms. Roseman in her presentation, electronic check processing 
does offer more privacy protection and security for both 
consumers and the banking industry and businesses.
    In the surveys that we have conducted, consumers did not 
express concerns about checks being cleared more quickly. And 
we do have statistics that I would like to share with the 
subcommittee on this issue. Our data shows that the 
insufficient funds rate for check conversion payments is .3 
percent. That is .3 percent of the ACH transactions that have 
been converted from paper checks are returned because of 
insufficient funds. And that is a lower rate than in the 
traditional check collection system, suggesting that check 
conversion is not causing more checks to bounce. The rate at 
which consumers claim that check conversion payments are 
unauthorized is much lower, .0045 percent, which means 45 out 
of every 1 million checks that are converted a consumer claims 
that the transaction was unauthorized, showing that there is no 
significant problem with proper authorization or with fraud.
    However, we are aware, as some of the subcommittee members 
have pointed out, that there are some problems with check 
conversion, and some consumers are clearly confused with how 
the system works. The first problem is when the billing company 
does a poor job of informing its customers that the check is 
going to be processed electronically. To address this 
situation, NACHA organized an industry effort consisting of 
many banks and billers to develop consumer education materials 
that billing companies and financial institutions can use at no 
cost to educate customers about check conversion. The second is 
that there are a small number of consumers that do not want 
anything done differently to their checks. NACHA revised its 
rules to require billing companies to have reasonable 
procedures to allow consumers to opt out.
    In conclusion, check conversion is being adopted very 
rapidly in the market place. Check conversion is an example of 
a true win-win innovation, providing consumers with more 
protection and more information and providing businesses and 
financial institutions the ability to collect checks more 
efficiently. That concludes my remarks, and I will be glad to 
try to answer any questions.
    [The prepared statement of Elliott C. McEntee can be found 
on page 78 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Tiberi.
    Mr. Tiberi. Thank you, Mr. Chairman.
    Thank you all for testifying today.
    Ms. Duke, there has been some confusion, misperceptions, 
over what Check 21 does and does not do, from what I have heard 
over the last several months. Have you heard, either as a 
banker yourself or speaking on behalf of the American Bankers, 
some of the confusion? And can you tell us a little bit about 
how you all are dealing with it?
    Ms. Duke. Some of the biggest confusion just simply has to 
do with, are banks going to be required to convert all checks 
to electronic, and are customers no longer going to be able to 
get their checks back? And yes, we are doing everything we can 
to communicate what Check 21 does and does not do.
    The ABA has offered news stories to media outlets. It has 
written columns for print outlets, all trying to explain what 
is happening. In addition, we have fielded thousands and 
thousands of calls. Wachovia Bank has sent out all of the 
disclosures and as well spent a lot of time training our 
employees. Probably training our employees is the biggest piece 
of Check 21.
    But as far as where the confusion comes from, I am not so 
sure that there is not more confusion being created about 
things that might possibly happen as a result of Check 21, 
which are in fact not happening. Again, back to the example of 
these millions of checks bouncing. That is just simply not 
happening. But when you create the expectation that it will and 
the fear that it will, I am afraid it may be raising the 
anxiety on Check 21 much more than this should
    Mr. Tiberi. Do you think there has been an organized effort 
to purposely confuse consumers in hopes of creating maybe an 
opportunity to have us come back and do something?
    Ms. Duke. I really could not say whether it has been 
purposeful or not. Like I said, we have not found that, once 
Check 21 came into effect, that we have had really any negative 
feedback about anything that actually has to do with Check 21. 
So, hopefully, this is a storm that will pass.
    Mr. Tiberi. Okay.
    Mr. Budnitz?
    Mr. Budnitz. Yes.
    Mr. Tiberi. Professor, speaking of confusion, I am very 
confused with something you said, a couple of things that you 
said, and I tried to write one of them down. You said that with 
debits and Direct Deposit and other things, it is hard to keep 
track of a checking account for a consumer. If your 
responsibility is to have a checking account, aren't you 
responsible for making sure there is enough money in that 
account when there is a debit or when you write a check? I am 
kind of confused.
    Mr. Budnitz. Consumers are using a debit card to pay for so 
many items. Money comes out right away. They have to make sure 
that they have written it down in their check register.
    Mr. Tiberi. I understand. I am a consumer.
    Mr. Budnitz. They have to keep careful track every time 
they right a check, of course. Also, money is coming into the 
account in terms of payroll checks, and so forth, maybe child 
support, government benefits. Also, there are pre-authorized 
payments. I pre-authorize the utility company to take money out 
of my account.
    Mr. Tiberi. I have to authorize that though.
    Mr. Budnitz. Pardon me?
    Mr. Tiberi. As a consumer, I have to authorize that. And I 
do that. I have--American Electric Power takes a monthly--my 
bill out of the checking account.
    Mr. Budnitz. Also, consumers get calls from telemarketers, 
and telemarketers often will withdraw the money through a pre-
authorized draft, another way of taking money out of the 
consumer's account.
    Mr. Tiberi. But I have not authorized that.
    Mr. Budnitz. Yes. Although there are lots of complaints and 
also some NACHA rules to try to ensure the integrity of 
telephone ACH withdrawals because of concern about problems, 
and the Federal Trade Commission has lots of rules about 
telemarketing. The point is that, sure, the consumer is 
responsible. The consumer has to keep track.
    My point was, it is not easy to keep track of it. And then 
when you get your monthly statement, it is not easy to 
understand everything that is on that monthly statement because 
of the way things are--there is no standardization in terms of 
the format and how things are identified. And so what I am 
suggesting is that it is not an easy task. I was not saying the 
consumer did not authorize it, although sometimes they did not. 
What happens sometimes is the consumer authorized one 
withdrawal, and then it keeps happening month after month. And 
they keep making phone calls saying, wait a minute, I only 
authorized one withdrawal, or too much is withdrawn and so 
forth. There are a lot of complaints about mistaken 
withdrawals. There are lots of withdrawals where no problems 
occur at all. All I am saying is it is not an easy matter to 
keep track of it all.
    Mr. Tiberi. Well, I would love to continue this debate. 
Unfortunately, my time has expired.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    Mr. Hayes, I am trying to be clear on whether you think, on 
balance, Check 21 increases the likelihood of fraud or 
decreases the likelihood of fraud?
    Mr. Hayes. Check 21----
    Mr. Watt. I mean, once it gets implemented out, going 
forward.
    Mr. Hayes. Being a person that has spent a lot of time in 
technology over my career, I believe that Check 21 in fact will 
reduce fraud, and that is that we are able to ultimately clear 
items quicker and determine whether or not that is a valid 
item. Once we have those electronic clearing systems in place, 
then I think we put more and more fraud detection systems in 
place, and ultimately, that benefits the whole. So over the 
long term, as it evolves, I think it is in fact reducing fraud.
    But still, we are dealing with a paper-based item today 
that someone presents to you, you being our staff, and you 
know, we are seeing increases in that area.
    Mr. Watt. And Ms. Duke, Mr. Hayes and Mr. McEntee, what say 
you about the suggestion that the professor has that we should 
try to make all of the legal constructs around paper, Check 21, 
whatever mechanisms we are using, the same? I mean, I am just 
trying to get reactions to--that you had to the professor's 
bottom line suggestion. I think that was his bottom line 
suggestion.
    Ms. Duke. I think we all are in favor of simplicity. The 
difficulty is that each of the channels that checks can travel 
or that payments can travel have their own particular 
considerations, and so it is not necessarily possible to make 
the rules for checks exactly like the rules for electronic 
payments. At the end of the day, though, I am not quite sure it 
would even be necessary because I am not aware of any 
situations where consumers are being held responsible for 
payments that they did not authorize, regardless of the 
difference in the time frames and the procedures for making 
those objections. Typically what happens is the consumer goes 
to or contacts the bank and says, I did not authorize this, and 
that starts the process of finding out exactly what happened. 
And so I do not think there is really a risk there of consumers 
being charged for payments they did not authorize.
    Mr. Hayes. I concur. I mean, I think if a consumer calls 
our staff and says, you know, this is not an item I have 
authorized, I mean, we are going to immediately respond. We 
operate under a sunset rule. We get a customer inquiry relative 
to that, and we will move on that. I think we provide consumers 
multiple access points for information on their accounts. You 
know, being able to come into our lobbies and talk to our 
people to being able to call into an audio response system and 
see what items have cleared, and today, with online banking, 
really the availability of that information to them online 
wherever they are. So you know, at this point, I think, you 
know, the system is working well, and I think we respond well 
to our consumers. That is our business, service and response.
    Mr. McEntee. I think this concept, what the professor said, 
really makes a lot of sense. It would be great if you had a 
uniform set of rules that dealt with all types of payments, and 
actually, there were a group of professors and lawyers that 
attempted to do that quite a few years ago where they attempted 
to develop new provisions under the Uniform Commercial Code 
that all the States would agree to follow that would basically 
try to marry check law and electronic payments law together. It 
was a very, very complex task, and it ended up not succeeding.
    There is quite a bit of difference between a paper check 
and an electronic payment. There are a lot of things that you 
could do with electronic payments where you can offer more 
protection to the consumer that you cannot do with a piece of 
paper that is moving through the physical check collection 
system. So, in theory, I would like to go down the path that 
the professor is suggesting. But I think, in reality, it would 
be very, very difficult to do.
    Mr. Watt. One final question. Most of us, some of us on the 
committee were supporters of this Check 21 process because we 
thought, ultimately, it would lead to efficiency, reduce fraud, 
reduce errors, and speed up the processing time which, all of 
which would be to the benefit, ultimately, of customers.
    Ms. Duke, I heard your testimony saying, do not rush to the 
speeding up of the processing time before you get this in 
place. But first of all, how long do you think it will be 
before we get to that ultimate objective of saving processing 
time so that customers have the money in their accounts quicker 
and we can get to that? I am not trying to rush us there, I am 
just trying to get a good estimate. And ultimately, what do you 
see as the real--the totality of cost savings? What part of you 
all's bankers' dollars were actually being spent on processing 
paper checks, and what is the potential savings, looking way 
out, once all of this is implemented and the equipment is in 
place?
    Ms. Duke. To begin with, as far as how quickly this is 
likely to happen, it is almost a chicken and the egg thing. 
When you are right at the very beginning, we have very few 
items being processed and so actually any item that is 
processed electronically today is very expensive because you 
have this huge investment to process a very small number of 
items. The second piece is a lot of items are being processed 
partially electronically. But then if you take a check and you 
convert it to an electronic image and then later on convert it 
back to a paper check and then process that piece of paper, you 
actually have a transaction that is more expensive than if you 
had simply processed the original check. The third piece is you 
need to have more than one or two banks able to accept these 
electronic items. And so there is that process.
    It seems to me that the vendors who supply the community 
banks are really well along on the game on this, and there is a 
process right now of putting everything in place to do it. I 
would say it is probably going to be very slow for the next 
year or so, but there is all of a sudden going to come some 
tipping point where all of a sudden a lot of volume moves very 
quickly to electronic processing. I am hopeful that this will 
happen somewhere around 2007, but there are so many pieces that 
have to come together at the same time, it is difficult to say.
    As to the question of reducing hold times before these 
checks are actually moving faster, the danger you have there is 
not just to the banks but also to the consumers themselves. 
There is nobody who studies the funds availability schedules 
and the actual processing times that it takes checks to move 
better than the criminals who are out to perpetrate fraud. And 
the newest of the consumer scams right now is a consumer will 
have something for sale, say on the Internet, and are contacted 
by a purported buyer who says, you know, I cannot get there 
right now, but I have somebody who owes me some money. They 
will send you a cashier's check, and then, you know, we will 
pay for the item, and then you could wire me the difference, 
which is the money that they owe me. The cashier's check is 
required to be credited within 1 day. It turns out to be 
counterfeit, and so the customer has actually lost both the 
item they were selling and the money that they have wired out. 
So that is the real risk when you shorten the availability 
times. Customers do get confused and believe that if the 
deposit is available in their account that it has been finally 
collected from the other bank, and that is not necessarily the 
case. And I think--did I answer all of that question? Thank 
you.
    Mr. Watt. Thank you. I yield back.
    Chairman Bachus. Thank you. Mr. Ford.
    Mr. Ford. Thank you. Really quickly, first of all, I 
thank--I recognize Stoner over there. I want to also recognize 
you have got good people. Walter Price is good, and Joy 
Sheffield is pretty doggone good, too. David Hayes.
    But the question that I have to all of you and that ties 
into what the first panel--although I was not in the committee 
room; I was in the back and I watched portions of it. And 
Professor, you raised part of this as you talked about 
financial education. And I am curious, three questions very 
quickly. And I hate--I am going to have to leave, Hayes, right 
when we finish the questioning, so I want to apologize in 
advance. One, in your testimony, you cite through specific 
things that as you talk about, in order to move to a check 
image exchange platform, we must have three critical components 
in place--the new software, the intermediaries must have the 
capability to send and receive check images, and there must be 
widespread acceptance of common interbank image exchange rules. 
What can we do specifically? It sounds like the first one, 
maybe, is there some resources that we need to look at 
providing here through the Congress? And if not, can you give 
me how we can help affect those three steps?
    Mr. Ford. The second is financial literacy. I am as big a 
supporter of anyone and profess and believe that at the end of 
the day that is the answer to much of the problem in Congress. 
We do all this big talk about it, but we provide no money for 
it.
    And I applaud this chairman, Chairman Bachus, because he 
has been more willing not only to talk about this, but to act 
on this than many people on this committee. And I can only hope 
that--you are not the only witness. Witness after witness, 
panel after panel, come before this committee urging us to do 
this. And we talk a good game, but we do very little.
    So I guess my question is, what kind of financial education 
has been given to current and new account holders with regard 
to Check 21? And what more can we in the Congress do to help 
provide not only on Check 21, but really the broader 
enlightenment that needs to occur, even the younger level, the 
middle--elementary, middle and high school, I would argue as 
well.
    So specifically, Mr. Hayes, what can we do on the first 
three, and what has been done to help people understand how 
this Check 21 will work?
    Mr. Hayes. To answer the questions, Congressman, I think we 
are in that process. As any movement of change, especially as 
it relates to technology, there is a learning curve and there 
is an implementation curve, and as we sit here today we are so 
early in this process.
    I have viewed Check 21 since day one as really somewhat of 
drawing of a line in the sand that says we can move to this new 
frontier, but for a period of time the transaction balance 
between physical items and electronic items will gradually 
change. We have seen that in history as it relates to ATM 
usage, as it relates to debit card usage. You go back, and it 
is almost as though the older we get, the less we are likely to 
change; and our young people, as we teach them the tools, they 
adapt that technology, and as they become our age, the movement 
is there
    So I think we have done that. I think the leadership that 
this committee and the members have in setting Check 21 really 
will move us forward.
    Now, I am a guy that goes back to the mid-1960s and we are 
still processing checks the way we did in the mid 1960s, and so 
Check 21 is the vehicle that allows us to look to the future. 
And I think we are there, it is just now time. And I can't 
particularly say anything that there needs to be, that this 
Congress or this committee needs to recommend, because I think 
we have the tools. It is now time and education.
    I will be glad to answer the financial literacy because you 
recognize where I am from in west Tennessee, and we have a 
challenge of financial literacy. And I think it is the 
responsibility of government and the private sector and our 
leaders in education to start education at the very lowest 
level, and explaining that here is a dollar, a dollar will buy 
you this; you don't have 1.25, you have a dollar. So we have 
got to teach the basics, and it has to start early, and it has 
to be reinforced by, you know, the government, the teachers and 
the private sector.
    Mr. Budnitz. I fully agree with everything that Mr. Hayes 
has just said. My problem as an educator is that, as I said in 
the beginning, it is just so complicated now to try to even 
explain these things because of the present legal structure 
that it is a formidable task. And it is important to start 
early.
    And what can the Congress do? Well, unfortunately, I think 
the answer is if there were money available to provide 
incentives so that materials could be developed and teachers 
could be trained and so forth, that is the way to go.
    If I could respond to one aspect, though, that is related 
to consumer education and how uniformity would help. You can't 
have one law that is going to be exactly the same for every 
payment system, but if we could teach consumers that well, once 
you get that bank statement, you have X number of days to look 
at that, and then you have to tell the bank if there is 
something wrong. Now it is not that way. If it is certain kinds 
of transfers, it is 60 days; if it is a Check 21 problem it is 
40 days; if it is a regular kind of a check, the traditional 
check processing, it is up to the bank and the customer's 
agreement, which often says 2 weeks.
    Consumer education is so much more feasible if we just 
could say to consumers, you have 60 days to get back to the 
bank and tell them what is wrong.
    Mr. Hayes. May I add something, Congressman? I think as we 
look at our role as bankers, our role is to be there for our 
customers. And when there is customer confusion, a customer 
question, I mean, it is our responsibility, and we take it 
seriously. And we do advise customers of their rights, because 
at the end of the day, service is what we deliver and trust.
    And therefore, I think we move to that next level of always 
being there for that customer and trying to advise them of 
their rights. And at the end of the day, we are there for our 
customer.
    Mr. McEntee. If I could just add a couple of points. One 
is, even though the time frames are different, depending on the 
type of transaction that is involved, I think if we can 
communicate to consumers that it is important to look at your 
financial statements as quickly as possible; if you see a 
problem, contact the financial institution or the company that 
initiated the transaction.
    I think the key to the consumer is to look at the statement 
as quickly as they get the statement, and if there is a 
problem, point that problem out right away, because there is 
plenty of procedures and regulations in place for the consumer 
to have that problem addressed.
    And Congressman Ford, when you mentioned about education, I 
have two teenage daughters, and they think money all revolves 
around my wallet. So I think--it would help me personally, but 
I think it is really important for consumers to understand what 
a checking account is, what a credit card is, what a debit card 
is, even while they are in elementary school, middle school, 
and high school. And I think anything that Congress can do to 
help out in that area would be a tremendous benefit to 
consumers.
    Mr. Ford. Thank you, Chairman, I yield back. Thank you.
    Chairman Bachus. Ms. Maloney.
    Mrs. Maloney. Thank you, Mr. Chairman.
    And I thank all of the panelists, and particularly I 
appreciate your kind comments, Professor, about my bill. And I 
invite you to elaborate on the provisions that you think are 
particularly fair and appropriate.
    But I would like to ask the panel about their views on two 
provisions of my bill which were literally raised by 
constituents who brought them to my attention, and they felt 
that they were unfair. And I invite anyone to comment on them, 
and I would like to start first with the professor, since he 
said such nice things about the bill.
    Anyway, the first one, it would require banks to process 
credits before debits; in other words, to add deposits before 
deducting checks, and this would reduce the number of bounced 
checks. And this practice--the reverse of this practice has 
happened to some of my constituents, and they have complained 
to me about it; they thought it was unfair. So I invite anyone 
on the panel to comment on this provision.
    And the second provision that I invite anyone to comment 
on, if they support it or oppose it or think it is fair, or 
whatever, is to count Saturdays as one of the business days 
towards the check-hold period if the bank takes the money out 
of consumer accounts on Saturdays. So, a reciprocity of 
treatment on Saturdays.
    And I have got to tell you that even in New York, in the 
great city of New York that is so advanced, I get many, many 
concerns about the long hold on checks. I just relay that to my 
good friends.
    Anyway, Professor.
    Mr. Budnitz. In terms of the long holds and the problems 
that banks have with the risk of fraud--and there certainly is 
a lot of fraud. I wanted to point out that in the Federal law 
the availability schedules have important exceptions for new 
accounts. There is an exception for a customer that has 
frequent overdrafts, and there is an exception if the bank has 
reasonable cause to doubt the collectibility of the check, 
language to that effect.
    And so Congress has already recognized the fact that there 
is a risk of fraud, there are certain circumstances under which 
that risk is greater, and allow the banks to provide 
accordingly. And that has been in the law for a long time in 
the Expedited Funds Availability Act; it is also in Check 21.
    In regard to the order of posting and counting Saturday as 
a business day under certain circumstances, to me it just 
sounds like that is fair. And beyond that, as Mr. Hayes was 
pointing out, it is really important for a bank to have a 
customer that trusts the bank, that has confidence in the bank, 
and so responsible bankers really take that seriously.
    When I talk to consumers, part of consumers' anger is that 
what they are doing in terms of the funds and the posting and 
so forth just doesn't seem fair, and that engenders a distrust 
in the institution, which is not good for the bankers but also 
not good for consumers. We don't want to be scaring consumers 
away from the banking system. We want to encourage them to use 
the traditional banking system and not be running to these 
marginal fringe operators.
    Mrs. Maloney. Any comments?
    Mr. Hayes. I would address--well, I think that the majority 
of the banks post credits first, no question, and that is fair. 
And the consumer has--they have a decision of who to do 
business with. And you know, quite honestly, if someone is not 
posting their credits first and the bank down the street is, 
then there is a decision.
    Number two, on Saturdays. Having spent a lifetime in the 
processing side of the business, I mean, you know, if Saturday 
is a business day, Saturday is a business day all over the 
organization because you know, the bottom line is debits have 
to equal credits. And so posting checks and not posting 
credits, you know, to me is just foreign. And I think that the 
bankers take that seriously, and I would not see that as 
something that engenders trust in our customers.
    Mrs. Maloney. Thank you. Thank you for the comments.
    Mr. McEntee. I would like to respond to the concern about 
hold policies. I know quite a few of the subcommittee members 
had expressed some concern about funds' availability practice 
of banks. I just want to point out that there is an alternative 
that consumers have for payroll payments, retirement payments, 
interest and dividend payments, and that is direct deposit. 
About 71 percent of the consumers are now being paid by direct 
deposit. Over 75 percent of Social Security recipients are now 
being paid by direct deposit. My guess is everyone in this room 
today is being paid by direct deposit. And one of the big 
benefits of direct deposit is that financial institution must 
make the funds available at the opening of business on pay day. 
That is a NACHA rule. The NACHA rule is even stronger than the 
Regulation E requirement. So if the consumer has the 
opportunity to get any income payment by direct deposit, we 
urge them to do that. Then they wouldn't have to worry about 
any hold policy that a financial institution might have.
    Mrs. Maloney. Well, thank you. My time is up, and I 
appreciate all of your testimony today. It is great to see you 
again, Betsy.
    Chairman Bachus. Thank you. I reserved my questions until 
the end because I knew members had other hearings to go to, so 
I am going to ask one or two.
    But Ms. Duke, there have been a lot of recent revelations 
about data security breaches. ID theft is on everybody's mind, 
fraud prevention. Some people have talked about immediately 
across-the-board reductions in deposit hold times. What effect 
would that have--would that make it more difficult for banks to 
detect and prevent frauds?
    Ms. Duke. Well, across-the-board reduction in hold times 
without any similar improvement in the times where checks are 
actually collected would make things a whole lot easier for 
those who wanted to perpetrate bank fraud, because they are the 
ones that really study and test what the actual clearing 
systems are, and their best friend is the difference between 
the fund ability schedule and the actual clearing times.
    Chairman Bachus. And I think you have alluded to that 
earlier, or mentioned that, but if we do consider reducing 
those hold times, we run the risk of playing into the hands 
of----
    Ms. Duke. Actually, I think if you reduce them below the 
actual clearing times, you have the worst of both worlds 
because you have consumers who don't have access to their funds 
as early as they might like, and yet depriving them of that 
period of access hadn't helped anybody in terms of preventing 
any fraud. So I think that would be absolutely the worst thing 
we could do.
    Chairman Bachus. Do any of the panelists disagree with 
that?
    All right. Professor, in your testimony you say that 
consumers who have agreed to have their checks truncated or 
exposed to the risk of new errors in fraud but do not get Check 
21's protections, who were you referring to there?
    Mr. Budnitz. Yes. Check 21 makes a major distinction. If 
you are among the 40 percent of customers who get your checks 
back every month, your canceled checks along with your 
statement, then you will be provided with substitute checks, if 
what is happening with your check includes imaging, and your 
right to your re-credit and indemnity rights kick in. And this 
is an important protection. However, if you are among the other 
60 percent of customers who have already agreed not to get your 
canceled checks at the end of the month, then you do not get 
those protections unless the bank decides to provide you with 
substitute checks anyway out of the goodness of their heart.
    But they do not have to, under the law, provide them to the 
customer, because the customer has already previously agreed 
not to get the original canceled checks and therefore does not 
have any right to get substitute checks. One of the things that 
concerned me is that I received a notice from one of my banks 
just a couple of months before Check 21 went into effect, 
urging me to sign up for check truncation, urging me not to get 
my canceled checks, and not alerting me to the fact that on 
October 28, 2004, when Check 21 goes into effect, if you do 
agree not to get your canceled checks, tough luck; you are 
going to lose the protections that Check 21 would give you--
you, the customer who does get his canceled checks back at the 
end of the month.
    So Check 21 made this very fundamental division, giving 
some important rights to consumers who did not agree to 
truncation, who still get their original checks, but depriving 
the others of those protections.
    I do a survey----
    Chairman Bachus. Did it take the protections away or does 
the period, the 40-day period start to run? Or do they just 
take the protections away altogether?
    Mr. Budnitz. The consumer who is not provided a substitute 
check has no right to claim an expedited recredit, and 
consumers who have agreed to truncate their checks have no 
right under the law.
    Chairman Bachus. Other than the underlying UCC; right?
    Mr. Budnitz. The bank may choose to give those customers 
substitute checks anyway, in which case the protections would 
kick in, but the bank does not have to.
    Chairman Bachus. But I would think the underlying UCC 
provisions would still be in effect.
    Mr. Budnitz. Yes, absolutely. The UCC, however, in article 
4 of the Uniform Commercial Code, the Uniform Commercial Code 
does not require the bank to engage in an investigation if a 
consumer complains.
    Now, as Mr. Hayes is saying, a responsible bank does it 
anyway, but they are not required to; and they are not 
required, as under Check 21 and the Electronic Fund Transfer 
Act, to recredit the consumer's account if they can't figure 
out in 10 days what the problem is. If it is true that banks 
all investigate anyway and will recredit within a reasonable 
time anyway, then what is the harm of just putting that into 
the law? It just codifies what the banks are doing anyway, if 
they are doing it.
    Chairman Bachus. Mr. Hayes, now the professor, he has 
recommended that we amend the Expedited Funds Availability Act 
to require banks to give consumers access to their funds more 
promptly. How would that affect community banks and their 
customers?
    Mr. Hayes. Number one, as I stated earlier, a majority of 
our member banks, and my bank in particular, gives our 
customers, you know, availability, unless we have some reason 
as allowed under the law to question the item. If we knew the 
item being presented was always a valid and nonfraudulent item, 
we wouldn't be having this conversation. But there is nothing 
out there that gives us that protection, so we are in the risk 
management business. But at end of the day, our customers--we 
look at that relationship and we try and move forward.
    So until we can fix the fraud side, I don't think we can 
expedite, you know, the clearing; because we are speeding the 
process up over time and I think that will pass, you know, to 
the consumer and those institutions. But to say that we have to 
do that where we sit today, I do not see that.
    Chairman Bachus. Professor, back to you. Check 21 requires 
the Federal Reserve Board to make recommendations to us for 
legislative action by April of 2007. And I think they can 
reduce--I don't know if you can reduce check-holding times now 
by regulation. Do you think other than if check holding times--
if check processing speeds up, they have a right to go ahead 
and reduce check holding times? Do you think that is sufficient 
or do you think we ought to go further with additional 
legislation?
    Mr. Budnitz. I think you need to gather as much data as you 
can so that you know what the present situation is to see if it 
is justified to shorten those times. And also I think you need 
to take a careful look at where the problem areas are.
    Ms. Duke was talking about this scam using cashiers checks. 
I have received a lot of complaints about that recently. I get 
the complaints from lawyers who are representing customers, who 
then come to me for help in terms of what can we do under the 
law. And this is an area that I would urge the committee to 
take a very serious look at to see what it is possible to do to 
protect consumers who are subject to this cashier's check 
fraud. So it is a complicated situation. There are lots of 
different kinds of risks that banks take, some more than 
others.
    But just one final point. Bankers keep saying, we are 
giving consumers much faster credits on almost all the checks 
than we are required to anyway, and so there is sort of a 
disconnect. If you are doing it anyway, what is the harm in 
shortening the time periods? At least as long as we carefully 
define the situations under which the bank can say, wait a 
minute, we need to have a special rule here, like with new 
accounts and overdrafts, and reasonable cause to doubt 
collectibility. That is in the present law.
    So I am not giving a simple answer because it is not a 
simple situation. There may be special cases which need special 
kinds of rules where the bank does not have to give the money 
as quickly; in other situations where there is little risk and 
the banks are doing it now anyway.
    Chairman Bachus. I have heard a lot of cases where people 
buy a car with a forged cashier's check. And we do hear that 
from time to time, and it turns out that it is a fraudulent 
check. Oftentimes, I think it is stolen from the banks. But in 
that situation, it seems to me that reducing the hold time, 
once a consumer, he goes down, and once it is credited through 
his account, he probably lets the car go. But he probably holds 
it until that check clears. So it almost seems to me in that 
case it might make it easier for someone that is trying to pass 
a cashier's check.
    Mr. Budnitz. Well, as I indicated, I urged the committee to 
take a specific look at the cashier's check problem and see 
just what, if anything, would be a legislative solution to that 
particular problem. But there may be other areas where there 
just are not problems where the availability could be made 
quicker.
    Chairman Bachus. Okay. All right.
    And Check 21 does have that. And what we are going to do is 
basically what you are saying; we are going to gather 
information, and by that date they are going to make 
recommendations to us. And they are free to make 
recommendations before that date. It is simply by that date.
    My last question, one thing--and I do see your point about 
truncated checks, Professor. I am not sure that consumers do 
realize that if they agree to that, that they fall back into a 
different category. I don't know how, unless we--it does seem 
like we could have maybe more uniformity. I am not sure that it 
is possible. But----
    Mr. Budnitz. As I suggested.----
    Chairman Bachus. Have you known of any instances where 
someone has come back to their bank, say, after a month and 
said this is a fraudulent account--other than the cashier 
checks maybe--and their bank--that is actually a deposit, but a 
case where their bank account has been charged and they have 
come to their bank after 3 or 4 weeks and their bank said too 
late?
    Mr. Budnitz. Well, let me just suggest one other element 
that came up earlier, just to make your job even harder. Mr. 
Feeney was asking Ms. Roseman about other kinds of cards and 
Ms. Roseman was talking about payroll cards. The thrust of much 
of my remarks today has been that you can't just look at Check 
21 very narrowly. It is part of a much larger picture, because 
as Ms. Roseman was indicating, the Federal Reserve Board has 
proposed to treat payroll cards under Regulation E.
    Now, payroll cards come within the category of stored value 
cards and they have not been regulated at all by Federal 
statutes or by most States. And I think it is good to bring the 
payroll card under the regulatory umbrella as well. But this is 
a moving target and that is why the whole situation becomes so 
confusing to consumers. Lawyers, businesspeople--I try to 
educate businesspeople and they are very confused as well.
    So I am not making your job any easier but I am saying you 
need to take a look at all the different things going on.
    Chairman Bachus. But even--and I realize you are pointing 
these problems out, but I don't think Check 21 precipitated any 
of these problems or made them worse; is that correct?
    Mr. Budnitz. I believe it made it worse in the sense that 
it makes things even more confusing, as I think everybody this 
afternoon has agreed. Consumers can't figure out the difference 
between ARC or electronic check conversion at the lockbox and 
Check 21. They are confused about that. So that is an area 
where----
    Chairman Bachus. I guess I am saying it did not take any 
rights away from them.
    Mr. Budnitz. Yes, you are right. You are correct.
    Chairman Bachus. Mr. McEntee, it seems to me there is a lot 
of confusion surrounding Check 21 that has come from the fact--
and I said this earlier to the director of the Federal Reserve, 
Ms. Roseman--that there has been a sharp increase in the number 
of ARC or ARH?
    Mr. McEntee. ARC.
    Chairman Bachus. ARC transactions, and little or no 
awareness by the consumers. You say your associations work to 
make them more aware of what is happening. But how would you 
respond to that? Do you see there is some confusion there?
    Mr. McEntee. We definitely think there is confusion there. 
Actually, I think part of the confusion is that, although the 
rules for ARC were approved before Check 21 legislation was 
implemented, what happened was a number of large billers 
started to convert checks around the same time that Check 21 
regulations went into effect, and there was a tremendous amount 
of media coverage around Check 21, but a lot of the coverage, I 
think, really conveyed a confusing story to the consumer. They 
got Check 21 and check conversion all mixed up together, and 
that led to a lot of confusion and phone calls--a lot of phone 
calls to billers. And I know Congress has gotten a number of 
letters and phone calls as well.
    We hope that that confusion has been greatly reduced 
because we do know that the biller community and the banking 
community are doing a much better job now disclosing the 
information. I have seen quite a few brochures and pamphlets 
that banks have provided that really explain very carefully the 
difference between check conversion and Check 21. So our belief 
is and our hope is that the confusion that was out there 5 or 6 
months ago has been greatly diminished.
    Chairman Bachus. I can tell you that in every case--and I 
bet there were 30 cases where we had referrals from other 
Members of Congress--in every case when we tracked it down, it 
was not Check 21. It was another existing problem.
    But my final question is this. And I will say that this is 
not a problem that has gone away. Is really--does not have 
anything to do with this hearing because this hearing is on 
Check 21. But it does have something to do with customers 
having the right to know what is going on in their accounts and 
whether or not these checks drawn on their account are 
legitimate transactions or not.
    In hearing all of these complaints and hearing people talk, 
I still believe there are situations where people's bank 
accounts do not contain enough information about various 
transactions. I think a lot of them are direct deposits. It is 
hard to figure out for a while whether it is a direct deposit 
or what it is. You just see there is a withdrawal from an 
account and sometimes it takes us 2 or 3 weeks trying to figure 
out, talking to whoever is making the deduction.
    But I think surely at least some threshold of information 
should be in there. And you said you require that?
    Mr. McEntee. Yes. Our rules require that the financial 
institution display the name of the payee, and our rules also 
require the company that converts the check to list their name 
in the electronic record as well as the check number. So that 
information should be provided to the consumer.
    We do know that some banks have done a great job in 
modernizing their statements. Others are still in the process 
of making changes to their statements. But our belief is that 
if the consumer looks at their complete statement, they will 
have an easier time reconciling that statement than when checks 
are processed in the traditional way, the name of the payee and 
the check number.
    We also know that some of the billers, at least initially, 
were not doing a very good job disclosing the information about 
the possibility that the check could be converted to an ACH 
transaction. I don't want to be too critical of lawyers, but in 
some cases the lawyers got ahold of very carefully crafted 
language by the marketing and customer service people, and they 
turned it into absolute gobbledygook and buried the information 
on the back of the statement.
    When that kind of problem is pointed out to us we will 
contact the biller, explain the problem that the biller is 
causing, and strongly urge the biller and their bank to come up 
with a better disclosure and to get the information on the 
statement so that the consumer can readily understand what 
possibly could happen to that check.
    Chairman Bachus. All right. Anybody else want to comment on 
anything? No? Any final comments? This is open mike time.
    Mr. Hayes. I think at the end of the day, you know, you go 
through transitions. And I cannot recall a situation where 
Check 21 has been a problem, where there is an issue--problem 
with a consumer and the check and our image statements. Because 
I think at end of the day, as I said earlier, you call me or 
you call my staff, we are going to research it, because the 
customer is why we are there. And if we do not serve them 
properly, we are not going to have them tomorrow.
    And so you got regulation and you got relationship, and we 
are in the relationship business. And I am proud to say if a 
customer calls us, we are going to be on top of it and help 
educate if there is a question.
    Chairman Bachus. I said this when we started considering 
Check 21--I think we had 14,000 airplanes in the air and over 
100,000 vehicles. And most of them have not been eliminated 
now, but they will be; and with gas prices at $2.40 a gallon 
and us importing 65 percent of our energy today, this goes a 
long way towards making a more efficient system when we really 
do not have gas to burn or waste.
    And the other countries that we compete with have already 
gone to this model. So you know, we are certainly making our 
financial system more competitive with our global competition. 
And that is one reason why we need to make this work and not 
abandon it and not confuse other problems with Check 21.
    But I appreciate all of your suggestions and your testimony 
here today. Thank you.
    [Whereupon, at 4:47 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                             April 20, 2005


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