[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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23-737 WASHINGTON : 2005
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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
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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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