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Understanding the Check 21 Act

That secure feeling that comes with having a physical copy of a check is about to go away. Oh, you'll still be able to write checks; but after October, don't expect to get them back.

A new federal law -- the Check Clearing for the 21st Century Act, commonly called "Check 21" -- goes into effect Oct. 28, 2004, and it will profoundly affect one of the most commonplace banking activities for consumers -- balancing a checkbook.

The law is a money-saver for the banking industry. For consumers, it's a mixed bag. The law will allow institutions to proces checks faster, which will do away with the "float" -- the unofficial but widely used grace period between when you write a check and when it is cashed. The law also raises concerns about double debit to your account and your right to a speedy correction when such mistakes take place.

To understand the law, the changes it will create and the potential trouble spots, you have to understand how checks work.

Write a check to stuff in your college kid's birthday card and that check takes a dizzying journey by land and by air in and out of banks and clearing houses, only to end its trek in your mailbox a month or so later.

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Multiply that check by the 42 billion checks a year that wind their way through similar routes and you can see why the Federal Reserve and the folks at your financial institution would like to put an end to your check's traveling days. It costs a lot of money, and it takes a lot of time to send checks along their circuitous route.

The shutdown of air transportation in the days following the Sept. 11 terrorist attacks forced the industry to ship checks by ground transportation, which resulted in businesses creating good-faith grace periods for late payments.

Truncation inclination
Bank officials say a lot of those problems might disappear if more checks were "truncated" -- that is, stopped in their tracks.

Check truncation is the act of processing checks electronically. A lot of checks are now truncated. If your bank sends you images of your check, copies of the back and front on a single page, or perhaps a line item statement listing the check number and the fact that it was paid; your bank is essentially truncating your checks.

But the way the system now works is you have to give permission for your checks to be truncated. When you opened your checking account you may have agreed to get check images or the line statement instead of receiving your original checks.

That's why most check truncation today takes place at the paying bank -- your bank, according to Nessa Feddis, senior federal counsel at the American Bankers Association.

The Fed wants to expand the truncation process. It wants to enable any institution along that circuitous route to truncate your check, process it electronically, and, if necessary, create a substitute check from the electronic image. The substitute would be the legal equivalent of the original check. It could be sent electronically or delivered to banks that want to continue receiving paper checks.

It's hoped that stopping checks earlier in the process will make the system more efficient and enable banks and customers to identify fraudulent checks faster.

Your permission to truncate your checks will not be needed, and you won't be able to demand your original check back. The bank that stops the check is free to destroy it.

"It's fine to say the paper copy of the check is the legal equivalent of the original check, but is that good enough for every landlord, merchant or the utility company that's on the verge of turning your power off?" asks Frank Torres, former legislative counsel at Consumers Union.

"How long will it take for the word to get out? You bring a copy of your check to the clerk as proof of payment and they say this is a photocopy."

Double-debit trouble
Torres says another problem he'd like to see addressed is the possibility of substitute checks leading to the double debiting of checking accounts.

"If you double debit my account for $1,000, how long will it take to resolve this? My landlord has received two payments and now I've bounced 16 checks."

Banking industry proponents say double charges would be easily recognizable and could be taken care of immediately.

How fast an account would be "recredited" is a major sticking point.

The new law requires institutions to recredit consumers for amounts less than $2,500 within 10 business days if the institution can't prove the debit was valid. Any amount over $2,500, accounts that have been open less than 30 days, accounts that are repeatedly overdrawn and instances where the bank suspects fraud, would not be covered under this provision. In those cases, banks would have 45 days to recredit.

Financial institutions say 10 days is not enough time to investigate a claim and leaves them vulnerable to check-fraud schemes.

Financial institutions would like the same kind of flexibility afforded under check law, the Uniform Commercial Code. The code varies somewhat from state to state, but generally allows institutions at least 30 days to recredit a customer's account.

Goodbye 'float'
The law also puts the brakes on the long-standing American tradition of working the float. Float is the period of time from when you write a check to when it is actually presented to your bank for payment.

Float time can vary greatly because some people receive a check and let it sit around a while before depositing it. But truncating checks eliminates most of the extra float time built in as the check winds its way through the mail.

Under the new law, if you send a check to your mortgage company and it's deposited promptly, the float shouldn't be more than a couple days. Folks who count on a check taking a week to clear because of the postal service, will have to change their evil ways or they'll bounce checks and get socked with hefty non-sufficient funds fees.

If the banking industry can stop driving and flying checks all over the country, you might think the truncation system will save money, and possibly a portion of those savings could be passed on to consumers. Don't count on it.

"We're trying to figure out if there will be cost savings to the industry," says Rob Drozdowski, senior regulatory specialist at America's Community Bankers. "There will be a lot of operational costs."

The law doesn't mandate that the banking industry make a complete switch to an electronic system; it just facilitates it. But given the industry's support for it, it seems likely most will implement it as fully as possible.

Congress passed the final bill earlier this month. It will go into effect 12 months from its Oct. 28 signing.

-- Updated: Oct. 28, 2003

See Also
10 most common checking account terms
Bankrate's semiannual checking study
Checking glossary
More checking stories

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