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Consumers: Pay Attention to New Checking Law

  • Mary Hunt The Cheapskate Monthly
  • 2004 5 Nov
Consumers: Pay Attention to New Checking Law

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.

Automatic truncation

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.

No more float

The "float" is the unofficial grace period between the time you write a check and when the money is taken out of your account. Say goodbye to the float, forever. This law allows your check to be handled electronically, just like a debit card payment. You dare not write a check unless you have the full amount in your account the moment you sign your name-that is how fast the check will be processed. You cannot afford to be socked with big overdraft or bounce fees which banks have wasted no time in establishing.

No more stop payments

Remember the good old days when you could stop payment on a check because you changed your mind or the service was unacceptable? Well you can kiss those days goodbye. You will no longer have the luxury of time to change your mind.

No more cancelled checks

You won't be able to get your original paper checks back because your bank will not have them. Eventually they will be truncated even if it is after they get back to your bank. Your paper checks will be copied as "substitute checks" and then destroyed the moment they become electronic transactions. Cancelled checks for proof of payment or to fight a forgery are a thing of the past. This is very important: You want to make sure your bank sends you copies of your substitute checks, which will be legal proof of payment. Watch out for fees associated with a substitute check-returning account. Look for another bank if your bank charges a high fee to get copies of all your checks as substitute checks.

Placing hold on deposits

Just because your checks will clear faster doesn't mean your deposits will be available to you any sooner. As a clear indication that this law benefits banks and not the consumers who keep them in business, the new law does not shorten check hold times.

Watch your account

As stated, the possibility exists that a check can be turned into an electronic transaction with a "substitute check" and the original paper check fails to be destroyed, allowing it to make the rounds and be debited against your account a second time. Now more than ever it is important that you keep an eye on your account for such errors. If you spot an error or suspect fraud, the bank must put the money back into your account within 10 business days, but only if you have not waived your rights to have "substitute" checks provided to you.

Don't volunteer to truncate

Your bank may ask you to agree to "voluntary check truncation." This means you give up your rights to having copies of your substitute checks returned to you. If you do this you will have even fewer consumer rights with the voluntary non-return of your checks than you will have under the full provisions of Check 21. It is highly recommended that you decline invitations from your bank to convert to "voluntary check truncation."

The foregoing is only a summary of portions of Check 21. It is a complicated law. You owe it to yourself to learn as much as you can about how this law will affect you.

You can learn all about Check 21 and its provisions at the Consumers Union website, Look for the article, "Checking Law Means Trouble."

© 2004 The Cheapskate Monthly. All rights reserved. Used with permission.

  "The Cheapskate Monthly" was founded in 1992 by Mary Hunt.  What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt.  Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates.              Click here to subscribe.

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