States act against bank policies that create extra bounced checks
By Lucy Lazarony • Bankrate.com

New York stood strong against banks' "biggest-first" check-cashing policy that can stick consumers with extra bounced-check fees.

The state's banking department adopted a regulation in August 1999 that requires financial institutions to spell out to their customers the order in which checks will be cleared.

The order makes a difference: If a bank uses the big-to-small processing method, clearing the biggest check first, it can be quite costly.

Say you write four checks on one day. Your bank will clear the biggest check first, even if you wrote it last. If it bounces, every subsequent check bounces, too -- and you get socked with four bounced check fees instead of one. With fees as high as $30 a pop, you can be paying some serious cash for that budgeting faux pas.

"This has been something of a deep, dark secret," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

"The only reason I'm aware of for banks to choose high-to-low processing is to bring in more revenue."

Processing order boosts revenue
Federal law allows banks to process checks in any order they choose.

"If there's 9,000 banks out there, you're going to have 9,000 slightly different policies," says a spokeswoman for the American Bankers Association.

But New York's policy says that the check-processing policy must be disclosed when an account is opened and again if a bank's policy should change. All current checking account customers in New York must be informed of their financial institution's check processing policies by Dec. 24.

"This way, things don't take place without (customers) knowing," says a spokesman in the State of New York Banking Department.

California has identified this practice as an example of "bad faith" on the part of the banks, Gaddy says. Nevada law prohibits banks from using big-to-small processing to boost bounced-check fees. It stipulates that when multiple checks are drawn on a single business day, and there is not enough money in the account to pay all the checks, the checks must be cleared in the order of ascending amounts.

But banks point out that lots of people prefer to have their larger checks, such as mortgage and car payments, clear before, say, their Sears bill. Some folks even prefer to pay their larger checks first.

According to the American Bankers Association, most consumers write their important checks first, so if checks are processed in numerical order they're going to come out high-to-low, anyway.

Ask about your bank's policy
Curious about your bank's check processing policy? Ask.

"We would encourage consumers to ask the question of the bank," says the American Bankers Association representative. "In many cases, checks get processed immediately. So it's really important to keep a running total in your account."

To avoid getting close to the edge where the order will make a difference, keep track of every withdrawal from an automated teller machine, every debit card purchase and every check that has been written. It's also a good idea to stagger larger payments so they don't all hit the bank at once, and pay the big bills right after payday when the account is flush with cash.

-- Updated: Jan. 31, 2002