Consumers: Pay Attention to New Checking Law
- Tuesday, October 26, 2004
Can you say "October Surprise?" Well, brace yourself because you got one.
A sweeping new federal law -- the Check Clearing for the 21st Century Act, nicknamed "Check 21" -- took effect on Oct. 28, 2004.
While this law is great for the banking industry (measured in billions of dollars for banks), it does nothing good for consumers. In fact, it will forever change the way you balance your checking accounts and write your checks. Some experts say Check 21 will make it more difficult for consumers to prove payments, to fight fraud and to feel secure that banks are watching out for their customers.
To understand what's going on here you need to know how paper checks work now and also the meaning of the word 'truncation.'
Life of a paper check
When you write out a check and sign it you send it on a journey. It may travel from your hand through many others' including several financial institutions and clearinghouses. It can take days, weeks or months to find its way back to your bank where the amount is deducted from your account. That journey is called "float" time. It's like an unofficial grace period.
If you can imagine 42 billion paper checks a year floating their way through banks and financial institutions, you can see why banks see this as an antiquated system.
In the days following Sept. 11, 2001 when air transportation was grounded, the float system came to a screeching halt. The industry had to ship checks by ground transportation for nearly a week resulting in huge delays and tremendous financial losses. Finally the industry had the attention of federal regulators who saw the need to move the whole paper check process into the 21st Century. Enter electronic processing.
The word truncate means to stop something in its tracks. Truncation is the key to this new law because it stops checks in their tracks and long before they make it home to their issuing bank.
Check truncation allows checks to be processed electronically before they get "home." Many banks truncate checks once they make the rounds. 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. The law says that if you agreed to this type of account already, your bank does not have to notify you of what's to come thanks to a loophole in this new Check 21 law.
However, if you still receive your original cancelled checks then you have not agreed to truncation, therefore your bank must notify you of the terms of Check 21.
After October 28, truncation will become automatic and the wave of the future. Here's how it will work. The first financial institution that receives your check after you've written it will have the right to truncate it-to stop it, copy to a substitute electronic check and zap the money right out of your account, just like a debit-card transaction. That could happen the minute it is deposited on the same day you write it.
Double charge potential
Once there are two identical checks-the original and a duplicate or "substitute check" the institution that truncates it is supposed to destroy the paper check by shredding. And here is where things could go sideways. Because institutions are not required to truncate (it's optional), that paper check could theoretically be substituted and also go on through the system, make its way back to your bank and be charged against your account a second time. Human error is a real factor here.
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