Critics wish to bounce 'Check 21'
By Jay MacDonald • Bankrate.com

"Check 21" -- the federal legislation that cut bank float from a week or more down to 48 hours or less -- is not a big hit with consumer advocates.

Banks pushed for the legislation, which virtually eliminates the "grace" period that many consumers previously had depended on when paying bills.

However, while customers lost their float time, Check 21 did not mandate that banks speed up "hold times" -- the processing of paychecks and other deposits.

That's fundamentally unfair, according to Gail Hillebrand, senior attorney at Consumers Union.

"This is a real economic issue for families, especially when times are tight, and this is one that hurts people who are trying to do everything right," Hillebrand says. "You deposit your paycheck before you pay your bills, but it could take a week for your paycheck to be available."

Consumers Union opposed Check 21 and fought unsuccessfully to have banks waive overdraft fees for consumers suddenly caught short for want of the float. CU now focuses its efforts on reciprocity -- faster clearance of checks deposited by consumers.

Liz Pulliam Weston, author of "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," also believes that Check 21 sometimes promotes a double standard.

"They narrowed the float for the consumer, but if you try to deposit a check, you still have the same hold period to wait before it clears," she says. "The banks will say that there is more check fraud going on and this is just dealing with the risks, but it does kind of stack the deck against the consumer."

Hillebrand says the situation is even worse for large check amounts.

"One of the complaints I get from consumers involves a withdrawal from an IRA to buy a car or a transfer of money to pay a child's college tuition," she says. "Because deposits over $5,000 on any one day are subject to an extra five or six business days of hold, that's 11 business days; you're into the third week now."

Susan Stawick, spokeswoman for the Federal Reserve Board, says that while Check 21 sets maximum hold times -- two days for local checks (within one Federal Reserve district), five days for nonlocal checks (between two Fed districts) -- a mandated follow-up study by the Fed released in April 2007 found that banks were voluntarily shortening those hold times.

"For local checks, while they are all required to make funds available within two days, 92 percent of commercial banks make them available the next day," Stawick says. "And of those, 24 percent of commercial banks and 71 percent of credit unions make (funds) available the same day.

"The trends are similar with nonlocal checks. They have up to five days, but 69 percent of commercial banks make them available the next day."

Stawick says the Fed is trying to help consumers by consolidating its own check operations, thereby increasing the number of checks subject to the two-day hold cap.

"Back in 1995, 58 percent of checks were local and subject to the two-day availability of funds," she says. "In 2006, that increased to 71 percent through consolidation of our check processing facilities."

Still, she acknowledges, "We receive so many calls from people who just totally see this as a bad thing for consumers."