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23–737 PDF 2005

IMPLEMENTATION OF THE CHECK CLEARING

FOR THE 21st CENTURY

HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

APRIL 20, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–20

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, JR., North Carolina, 

Vice Chairman 

RICHARD H. BAKER, Louisiana 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SUE W. KELLY, New York 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

JUDY BIGGERT, Illinois 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

BERNARD SANDERS, Vermont 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

GWEN MOORE, Wisconsin 

WM. LACY CLAY, Missouri 

JIM MATHESON, Utah 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

April 20, 2005 ................................................................................................... 1

Appendix: 

April 20, 2005 ................................................................................................... 45

WITNESSES 

WEDNESDAY, APRIL 20, 2005

Budnitz, Mark, Professor, Georgia State University College of Law .................. 25

Duke, Elizabeth A., Chairman, American Bankers Association .......................... 23

Hayes, David, Chairman, Independent Community Bankers of America .......... 27

McEntee, Elliott, President and CEO, Nacha—The Electronic Payments Association .................................................................................................................... 28

Roseman, Louise, Director, Division of Reserve Bank Operations and Payment 

Systems ................................................................................................................. 6

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 46

Bachus, Hon. Spencer ...................................................................................... 48

Hinojosa, Hon. Rube ́n ....................................................................................... 52

Budnitz, Mark ................................................................................................... 53

Duke, Elizabeth A. ........................................................................................... 60

Hayes, David ..................................................................................................... 70

McEntee, Elliott ................................................................................................ 78

Roseman, Louise ............................................................................................... 84

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

America’s Community Bankers, prepared statement .................................... 100

Roseman, Louise: 

Written response to questions from Hon. Carolyn McCarthy ....................... 103

Credit Union National Association, Inc., prepared statement ............................. 105

(1)

IMPLEMENTATION OF THE CHECK CLEARING 

FOR THE 21st CENTURY 

Wednesday, April 20, 2005

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 2:15 p.m., in Room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] Presiding. 

Present: Representatives Bachus, Tiberi, Feeney, Hensarling, 

Neugebauer, Price, Sanders, Maloney, Watt, Waters, Ford, McCarthy, and Baca. 

Chairman BACHUS. Good afternoon. The subcommittee will come 

to order. 

Today we are focused on the implementation of Check 21, which 

facilitates the movement of checks through the payment system by 

making it easier to transport check images electronically between 

banks. 

This legislation passed the House of Representatives on June the 

5th of 2003. It was called the Check Clearing For the 21st Century 

Act, or as we refer to, Check 21, and it actually passed by a vote 

of 405 to 0. It was signed in the law by the President October 28th 

of that year. So it has been coming up on 2 years, or a year and 

a half, but actually only became effective, I think, 6 months ago. 

So today’s hearing was requested by Representative Frank, Representative Sanders and Representative Maloney, and a host of 

others, but primarily the three of you all. And it also is a priority 

of Chairman Oxley and myself, because we are all concerned 

about—because of issues which have been raised since the passage 

of Check 21. 

Check 21, I believe, is an innovative measure which aims to modernize the Nation’s check transportation system by providing an interim step toward the electronic movement of checks. Although the 

goals of Check 21 are significant, the Act itself has a relatively narrow focus, making substitute checks legally equivalent to original 

checks, thereby facilitating electronic check presentment. 

This change in law was necessary because most banks, aside 

from some of the larger ones, didn’t have the resources to accept 

electronic check images. These banks will now be able to request 

that a substitute check be created in lieu of electronic image, which 

can then be processed like a traditional paper check. 

2

Over 36 billion checks are processed annually through the payment system in the United States. The vast majority of these 

checks are physically transported from one bank to another for 

payment. This system has historically relied on the steady flow of 

air and ground transportation in order to ensure that the checks 

are presented to paying banks in a timely manner. That way of 

doing business has been in practice for more than a hundred years, 

and the technology that is being used today dates to the 1950s. 

Perhaps the most dramatic example of the need for this legislation was demonstrated in the aftermath of September 11th. As everyone remembers, for approximately one week, planes were not allowed to fly. This prohibition extended the flights carrying checks 

through the payment system. Over the course of that week, billions 

of dollars afloat built up in the system, and the Federal Reserve 

was forced to come up with alternative methods for transporting 

checks. One of the primary goals for Check 21 was to ensure that 

if there were future problems with the Nation’s transportation system, the financial system and the payment system within it would 

continue to function. 

It is important to note that the consumer protections under current check law continue to apply under Check 21, in fact, Check 

21 goes further, and in that legislation, we granted additional protections through an expedited recredit if a customer asserts that an 

electronic check or substitute check was improperly charged 

against their bank account. In addition, the legislation requires 

banks to provide warrantees for substitute checks, and to indemnify customers for losses resulting from the receipt of a substitute 

check rather than the original one. 

Since the enactment of Check 21, there has been some confusion—and this is probably the most important part of my statement right here—since the enactment of Check 21 there has been 

some confusion as to the impact this law has had on consumer accounts. The reality is that Check 21 is still in its infancy. Of the 

50 million checks processed by the Federal Reserve every day, 

there are only about 400,000 digital image or substitute checks 

being handled daily. In fact, I think, Director Roseman, you give 

a number in your testimony that matches pretty much that figure. 

So less than 1 percent of our checks are being electronically cleared 

today, or about 1 percent. 

The vast majority of those checks are still physically transported 

from one bank to another for payment. 

This is less than 1 percent of all checks. What has occurred—and 

this is where the confusion comes in—what has occurred at about 

the same time is an increase in ACH transactions appearing on 

consumer bank accounts at a time when the publicity surrounding 

Check 21’s enactment was at its peak. The result was that many 

consumers believed that the ACH transaction on their statement is 

actually a Check 21-related transaction. It has nothing to do with 

Check 21, it is ACH. I hope today we can clear up some of the confusion of what Check 21 does and does not do, as well as learn 

more about ACH transactions and whether we have a problem 

there. 

Because there has not been widespread adoption of Check 21 to 

date, there has not been a significant reduction in the time it takes 

3

to clear checks. The Federal Reserve expects Check 21 to become 

widely used by the private sector by 2008. In addition, Federal Reserve is required, under Check 21, to study the impact of the new 

law on the U.S. Payment systems to determine if there are reductions in the time periods that it takes to clear a check. 

If the Federal Reserve finds that the time period for clearing 

checks is reduced, then it must also reduce the permitted hold 

times that banks may place on checks. Chairman Oxley and I have 

been concerned that banks would reduce check processing times 

without reducing hold times. Accordingly, Chairman Oxley, Congressman Hart and Congressman Tiberi and I have sent a letter 

to the Banking Trade Associations urging them to provide customers timely access to their funds as check processing times are 

reduced. 

As the time period for transportation of checks are reduced by 

greater electronic processing, simple fairness would seem to dictate 

that consumers should also realize the benefits of quicker credit for 

their deposits. 

Let me close by saying what we said in our letter to the Trade 

Association. Holding a deposit to ensure its safety and soundness 

is reasonable, but holding a deposit in order to profit from the interest is completely unacceptable. The latter practice prevents consumers from realizing the benefits of their own assets while creating an illegitimate revenues straining for financial institutions. It 

unfairly penalizes consumers, and should be eliminated from the 

U.S. Payment system. 

With having said that, I see no evidence that we are seeing that 

today. What I do see is that people are having ACH payments deducted, and that is causing a problem because it is reaching their 

account quicker than their customary experience. 

The chairman now recognizes Mr. Sanders, the ranking member 

of the subcommittee, for any opening statement that he would like 

to make. And I did hear today that Senator Jeffords is retiring, so 

I really didn’t expect him to be here, I thought he would be up in 

Vermont. We welcome you to the hearing. 

Mr. SANDERS. Thank you. And Mr. Bachus, thanks very much for 

holding this hearing, we appreciate your listening to people on this 

side of the aisle. 

And this hearing is dealing some major problems that have arisen as a result of the passage of the Check Clearing Act for the 21st 

Century. 

As a result of Check 21, banks are now able to process checks 

electronically, reducing to minutes or hours the time it takes for 

the money to be deducted from the check writer’s account. This will 

allow banks to save an estimated $2 billion each and every year 

in paper processing costs. 

Mr. Chairman, as you may recall, when we were considering this 

bill, I and some other members expressed major concerns that 

there were absolutely no requirements in that legislation for banks 

to pass along those savings to consumers in terms of lower fees; but 

it gets worse. Not only will consumers see no savings as a result 

of Check 21, but according to the consumers union at the Consumer Federation of America, as a result of Check 21, consumers 

will bounce an estimated seven million more checks a month and 

4

pay an additional 170 million in monthly bounced check fees. That 

is because they did not require—we did not, as a Congress, require 

banks to change the length of time the banks can hold deposited 

checks before making the funds available to consumers, up to 2 

days for local checks, 5 days for non-local checks, and 11 days for 

checks over $5,000. 

For example, if consumers deposit their paychecks on Friday, 

they can’t safely write checks for this money until the following 

Tuesday without the possibility of having their check bounce. If 

consumers deposit checks late in the day on Friday, banks can 

make them wait until Wednesday to use the money to pay their 

bills. If their paycheck comes from a nonlocal bank, their bank can 

make them wait a full week, 5 business days plus one weekend. 

Banks can even make consumers wait through two weekends if 

they deposit checks on a Friday after the bank’s cutoff time. This 

is unfair. To correct these problems, I am a proud co-sponsor of the 

Consumer Checking Account Fairness Act, which was introduced 

by Congresswoman Maloney, and I am sure in a moment she will 

be talking about some provisions in that legislation. 

Mr. Chairman, the bottom line is that consumers should be entitled to the same advantages as banks when it comes to check clearing. But Mr. Chairman, this is just one of a myriad of predatory 

lending tactics being perpetrated by the banking industry. The unfortunate fact of the matter is that today’s modern day loan sharks 

are no longer lurking on street corners, but they are taking advantage of consumers in many, many other respects. So we have a 

problem here. And I thank you very much for your willingness to 

call this hearing, and I return the microphone to you. 

And I apologize for stepping out, but you mentioned the reason 

why, and I will be back later. 

Chairman BACHUS. Thank you. 

And Ms. Maloney. 

Mrs. MALONEY. Thank you so much, Chairman Bachus, for holding this hearing, which we requested, and I am glad that we are 

holding it to address the issue arising from the evolution towards 

electronic funds transfer in the banking and financial services industry. 

According to the Federal Reserve study, over 55 percent of all 

transactions are now electronic. Last year Congress gave that trend 

a boost by passing the Check 21 Act, which allows banks to clear 

checks electronically without meeting a prior agreement with the 

other banks involved. Banks and the Fed argued that this bill will 

enable them to realize efficiencies of cost and speed, and improve 

on cost to consumers. This committee fully supported that goal. 

The United States is way behind much of the developed world in 

terms of the speed and efficiency of our banking system. 

However, I am concerned that while withdrawals by paper 

checks and increasingly electronically are becoming instantaneous, 

deposits including cash, paper checks and electronic transactions 

are still subject to long deposit holds set by the Fed about a quarter of a century ago and was outlined by Congressman Sanders. 

This creates a structural imbalance which disfavors consumers and 

is not good public policy. 

5

I have introduced a bill, and I have also written to the Fed, along 

with my colleagues on this issue. My bill is H.R. 719, the Consumer 

Checking Fairness Act, to address this imbalance, and I hope this 

committee will move this legislation forward. But I also hope that 

financial institutions and banks themselves will take steps to address the issues created by the rapidly increasing move to electronic funds transfer, and invest willingly on their part in the technology necessary to speed up deposits as well as checks. 

And I hope to hear from our witnesses that banks are taking 

steps to address these problems. And I welcome the speakers today, 

and thank you for having the hearing. 

Chairman BACHUS. Thank you. Ms. McCarthy or Mr. Baca. Either of you wish to make an opening statement? 

Mr. BACA. Yes. 

Chairman BACHUS. Mr. Baca, you are recognized, the gentleman 

from California. 

Mr. BACA. Thank you very much, Mr. Chairman. I would also 

like to thank the witness for being here today to testify in the implementation of Check 21, and let us know what the status and 

how it is implemented and how it works, and then also look at any 

flaws, if there are any flaws, and what flaws need to be corrected 

as well. 

I was proud to vote for Check Clearing 21 Century Act in year 

2003. Congress realizes that this legislation would provide a way 

for banks and consumers—and I will state for banks and consumers—to take advantage of new technology for the purpose of 

convenience, while also assuring stability of our payment system. 

By enacting this law, we are accepting the fact that times are 

changing. We all have to realize that one day, future generations 

may never learn what a paper check is, although we need cross and 

balance. 

Early into the 21st century, we will also discover that there are 

growing pains—and those are the pains that we need to answer 

and questions that we hopefully will address—in accepting new 

and more convenient ways of banking. As we work through the implementation of Check 21, I hope the Congress will do what it can 

to limit the negative—and I state the negative effects these growing pains may have on our consumers. And that is a concern for 

all of us, and that is the reason for having this hearing. 

Check 21 allows checks to clear faster, which may be positive, 

may be negative, which also is convenient for banks, merchants 

and creditors, but we have not yet perfected allowing consumers to 

benefit from the same convenience. We must look at whether banks 

should adjust the amount of time they hold on check deposits—

which is something I hope we will consider—and how soon it can 

be done. We must learn how to decrease the effects that our country’s shift towards electronic payments may have on our poorest 

consumer, and who must count every penny to make ends meet. 

A lot of times, many of them live paycheck to paycheck, they 

don’t balance their checks on time, and sometimes when it clears 

and the effects it has on them, so hopefully we can look at this. 

Until the electronic conveniences of Check 21, these consumers 

will rely on the float period for all of the transaction. The poor may 

be the most affected by the possibility of dual debits where a check 

6

is presented twice for payment, and sometimes these families cannot afford them, and then what additional charges will be done 

with them as well is very much our concern. 

I hope to hear these and other concerns addressed during the 

testimony today. I look forward to the discussion today on how to 

improve the implementation of Check 21 and provide convenience 

and benefits equally to all who may enjoy them. 

Thank you very much, Mr. Chairman. I yield back the balance 

of my time and look forward to our hearing. 

Chairman BACHUS. I am told no other member has an opening 

statement, so at this time, we welcome Ms. Louise Roseman, Director of the Reserve Bank Operations and Payments Systems with 

the Federal Reserve Board of the United States. We welcome you, 

Ms. Roseman, for an opening statement. 

STATEMENT OF LOUISE ROSEMAN, DIRECTOR, DIVISION OF 

RESERVE BANK OPERATIONS AND PAYMENT SYSTEMS 

Ms. ROSEMAN. Thank you, Mr. Chairman. 

Mr. Chairman, members of the subcommittee, I appreciate this 

opportunity to discuss the initial implementation of Check 21. 

As background, I thought it would be helpful to first review the 

trends and the use of checks and electronic payments. It was only 

2 years ago, for the first time ever, that businesses and consumers 

began making more payments electronically than by check. In the 

past decade, the number of check payments in the United States 

has declined by more than 25 percent, from roughly 50 billion in 

1995 to less than 37 billion in 2003, and the rate of decline has 

been accelerating in recent years. 

In contrast, electronic payments have tripled during the same period. This is a dramatic shift in the way payments are made in this 

country, and is resulting in a less costly payment system. The declining use of checks is only part of the story. Although Americans 

will continue to write checks for many years to come, the way these 

checks are collected will evolve substantially as a result of Check 

21. 

This very important law, which was enacted with the strong 

leadership of this committee, is laying the foundation for substantial improvements in the check collection system. Like other significant operational or technological changes, the adoption of electronics in the check system will be gradual. The check collection 

system did not change materially last October 28th when Check 21 

took effect. To date, relatively few banks have begun to take advantage of the opportunities it provides. The Federal Reserve Banks 

have been among the industry leaders in making use of the Check 

21 authorities, but thus far, as the chairman mentioned, their 

Check 21-related volumes are relatively small, less than 1 percent 

of the 50 million checks the Reserve Banks process each day. 

Clearly, this is an evolutionary, not a revolutionary process. 

For the banking industry to fully leverage the efficiencies Check 

21 makes possible, additional steps must be taken. For example, 

banks must invest in new technologies and adjust their operations 

to make best use of them. They must also ensure that their systems work with those of other banks. As banks improve these capabilities, they can reduce their reliance on air and ground transporVerDate 0ct 09 2002 14:47 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\DOCS\23737.TXT FIN1 PsN: MICAH
7

tation, and on paper check processing, thereby reducing their operating expenses. 

While the pace at which these changes will occur is not certain, 

I believe that a decade or so from now our check collection system 

will look much different than what it does today. Though we will 

likely still be writing checks, I expect that their number will be 

substantially lower, and that most of them be will be collected electronically. 

Turning to the issue of check holds, the Federal Reserve Board 

has been monitoring these ongoing developments in our check collection system to determine when changes to the funds availability 

policies may be appropriate. 

The Expedited Funds Availability Act, which Congress enacted 

back in 1987, sets the maximum permissible holds that banks can 

place on check deposits based on two factors; one, the desirability 

of providing customers with timely access to their funds, and two, 

the need for banks to manage their risk of check fraud. 

In the Expedited Funds Availability Act Congress directed the 

Federal Reserve Board to reduce the maximum check holds for a 

category of checks, for example, nonlocal checks, based on when 

banks can reasonably expect to learn of the nonpayment of most 

of those checks. We take these responsibilities very seriously. While 

we have not yet seen sufficient improvements to justify reducing 

the hold period, the Board will reduce the availability schedules 

when we find that there has been sufficient improvement in the 

check collection and return times. 

It is important to recognize, however, that many banks routinely 

provide faster availability to their customers than the law requires. 

Moreover, many consumers have also been getting faster access to 

funds over the last several years as a result of the Federal Reserve 

Banks’ initiative to reduce their check processing infrastructure in 

the face of declining check volumes. 

When Congress passed the Expedited Funds Availability Act, it 

defined local checks as checks where the bank of first deposit and 

the paying bank are both located in the same Federal Reserve 

check processing region. Therefore, as the Reserve banks combine 

some of their check processing regions, some checks that were once 

considered non local are now or will in the future be defined as 

local, subject to the shorter 2-day holds. 

Turning to consumer issues more generally, the Federal Reserve 

is actively working to provide accurate information about the 

changing way payments are made, including Check 21, as well as 

another different process, electronic check conversion, which is 

often confused with Check 21. We have published several consumer 

brochures and placed additional information on our public Web site 

that explains what Check 21, substitute checks, and electronic 

check conversion are all about. 

I would like to conclude by stressing how important Check 21 is 

to the future of the U.S. Check system. I believe this law will prove 

to be a catalyst for major change. Ultimately Check 21, as well as 

electronic check conversion, will facilitate the move to a more efficient and more electronic U.S. Payment system. 

In a competitive banking system such as ours, bank customers 

share in the benefits resulting from efficiency gains, and we expect 

8

that bank customers will likewise share in the gains that will accrue over time from the implementation of Check 21. And as warranted by improvements in the check system, the Federal Reserve 

Board is committed to reducing the maximum holds banks can 

place on check deposits for the further benefit of consumers. 

I would be pleased to answer any questions that you may have. 

Thank you. 

Chairman BACHUS. Thank you, Ms. Roseman. 

[The prepared statement of Louise Roseman can be found on 

page 84 in the appendix.] 

Chairman BACHUS. Let me first go to Mr. Neugebauer. 

Mr. NEUGEBAUER. I assumed the chairman was going to ask his 

questions first. 

Chairman BACHUS. I apologize. I was going to let some of the 

members—I will ask one question, and then I will yield to you. 

Mr. NEUGEBAUER. Thank you. 

Chairman BACHUS. Some have claimed that by reducing float in 

the check processing system, Check 21 will lead to sharp increases 

on the number of checks drawn on insufficient funds, allowing 

banks to collect large overdraft protection fees from consumers. Is 

this a legitimate concern in your view? 

Ms. ROSEMAN. We haven’t seen any evidence that that has happened. Actually, experience to date has shown that most checks 

that are being collected differently, due to the Check 21 authorities, 

are typically checks that don’t involve consumer accounts. For example, within the Federal Reserve Banks, when I mentioned that 

less than 1 percent of the checks collected rely on the Check 21-

related authorities, the average size of those checks is about 

$14,000. So we are talking mostly about business checks here so 

far. That is going to change in the future. 

One of the things that we have tried to do with our consumer 

education effects is to emphasize the point that consumers should 

have the money in their account when they write checks. When you 

write a check, that check is payable on demand. So you shouldn’t 

be able to rely on the fact that there is a certain delay between the 

time you write a check and the time that it is posted to your account. This is something that I think is important for consumers 

to recognize. But as we reduce the float in the payment system, we 

are also increasing the efficiency of the payment system. 

Chairman BACHUS. Okay. Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you. You stated in your testimony that 

you all have been reviewing the hold times and have not found any 

evidence that there is a need to reduce any of those at this time; 

is that correct? 

Ms. ROSEMAN. That is true at this time. I expect that that will 

not always be true in the future. I think as the implementation of 

Check 21 really picks up speed, hopefully we will see sufficient improvements to warrant reducing the holds, but that has not happened yet. 

Mr. NEUGEBAUER. Is the reason that you have not made a decision to reduce those hold times is that you believe that these current minimums are at a level that you are protecting the bank’s 

ability to protect themselves against overdraft or insufficient 

checks? 

9

Ms. ROSEMAN. That is true. That is what Congress was looking 

at when they legislated check holds, and really the standard that 

they asked the Federal Reserve Board to look at in determining 

whether it was appropriate to reduce the maximum hold periods. 

We only have authority to reduce those holds when we find for a 

particular category of checks, the bank of first deposit will learn of 

the return of most of those checks in a shorter period of time. We 

don’t have the authority to reduce check holds unless that standard 

is met, and thus far it hasn’t been, but hopefully in the future it 

will be. 

Mr. NEUGEBAUER. I was really surprised by the tremendous drop 

in just a relatively short period of time in the number of checks 

that are in the system because I remember in my old banking days, 

back in the—whatever—that, you know, that was a big part of the 

bank’s operation, the checks clearing. Do you attribute a lot of that 

to—is that coming from online banking, or is that coming—where 

is the reduction? I guess credit cards would be another, but what 

do you think the largest contributor to that is? 

Ms. ROSEMAN. I would say that within the last decade, the largest contributor has been the explosive growth of debit cards; they 

have replaced a great number of check transactions. 

Also, as you mentioned, credit cards have been growing at a 

slower, but still strong rate. And ACH transactions have also been 

growing at double digit rates each year. So increasingly a lot of 

consumers are not only getting their payroll deposited directly, but 

also they are having recurring payments like their mortgage payments or utility payments or insurance payments withdrawn from 

their account automatically through the ACH systems. So all of 

those contribute to the decline in check volume. 

Mr. NEUGEBAUER. And you mentioned the future of Check 21 

was an evolutionary process. I remember another evolutionary 

process that was initiated back in the 1970s, and it was called an 

ATM card, and it took a little while for that to catch on. Do you 

feel like things are progressing? Is there some things that could be 

done to encourage more of the financial institutions to get involved 

in Check 21? 

Ms. ROSEMAN. Actually, I think that the banking industry has 

been paying a great deal of attention and investing a lot of money 

in building up the capabilities to be able to use the Check 21 authorities. But as we learned with the Federal Reserve Banks, the 

software needed to do this is pretty complex, it requires a lot of 

testing with their counterparties. So there are some things that 

you need a period of time to be able to implement and have run 

smoothly. But I don’t think it is a lack of interest or preparatory 

work on the part of the banking industry, I think within the next 

year or two, we will see a lot greater use of Check 21 authority 

than we do right now. 

Mr. NEUGEBAUER. Is the technology getting better? Are there 

more companies involved in developing the technology, or is it just 

one or two? 

Ms. ROSEMAN. Many third-party vendors that provide software to 

banking industry have been developing capabilities within their 

software to be able to leverage the Check 21 authorities. So once 

an increasing number of vendors have completed that software 

10

work and made that software available to their banking customers, 

I think we will see a big increase in usage. 

Mr. NEUGEBAUER. Does the Federal Reserve have to certify any 

of those vendors for compatibility? Is there a process for——

Ms. ROSEMAN. There is a testing process that the Federal Reserve Banks use before they will accept electronic files from a bank 

depositing checks with us with check images electronically. We do 

testing with them just to make sure that the way they are providing the file to us is appropriate and in a way that we can read 

before they start doing it live. And we have discovered that there 

are some banks that think they are totally ready, but when we 

test, we realize there may be some further work to do or some 

glitches in their software they need to work out. But it is something that just takes a bit of time, and then they come up and running and start using it and doing it well. 

Mr. NEUGEBAUER. Thank you. Thank you, Mr. Chairman. 

Chairman BACHUS. Ms. Maloney, do you want me to give you the 

additional 2 minutes? 

Mrs. MALONEY. Thank you. 

You indicated in your comments that deposit hold periods should 

be shortened only when two-thirds of paper checks are clearing 

faster, correct? 

Ms. ROSEMAN. Well, I said that that was the standard that Congress suggested in the legislative history to the Expedited Funds 

Availability Act, so it is not something that the Federal Reserve 

Board made up as a standard, we are just relying on what the legislative history for the Expedited Funds Availability Act suggested. 

Mrs. MALONEY. Well, I have serious questions as to whether this 

is good public policy in the present environment when check clearing is absolutely immediate. 

And it appears that financial institutions really don’t have much 

incentive to speed up deposit holds to match check clearing. And 

shouldn’t we, meaning Congress and the Fed, be encouraging them 

to invest in new technology that would enable real-time deposit 

clearing to match real-time check clearing? 

Ms. ROSEMAN. Actually, surveys that have been done in the past 

showed that in this particular instance, I think the competitive 

marketplace is working very well, that many, and I believe most 

banks provide customers availability faster than what is required 

by law. So this is something that is fairly pervasive in the banking 

industry now. 

Mrs. MALONEY. Well, that is good news because deposit holds 

now apply to cash and electronic transfers as well, and at least for 

these, there is absolutely no reason not to reduce holds. And you 

are saying industry is doing that on their own; is that correct? 

Ms. ROSEMAN. Yes. And for electronic credits and for cash, that 

must be made available on the next day following deposit. And the 

only reason that Congress had said that that was a next day availability is that when you make funds available for withdrawal, you 

have to make it available for withdrawal as of the start of business 

on that day. So if I deposit cash in my checking account at one 

o’clock in the afternoon there is no way that the bank can make 

it available from the start of business, so it must be available tomorrow morning. 

11

Mrs. MALONEY. And with Congress saying that the Fed will only 

take action when banks have decided to clear two-thirds of paper 

checks faster, aren’t we, in effect, shackling regulation to the slowest and most inefficient segment? Just mathematically, as the segment of transactions and paper checks continue to shrink, twothirds of that number gets smaller and smaller until a tiny number 

of paper checks holds up the whole system. 

Ms. ROSEMAN. When the expedited Expedited Funds Availability 

Act was working its way through Congress, and Congress was debating what theory to use for check holds, as you may remember 

before that time, many banks had very long holds on customer deposits, up to a month or so; and what they were doing is they were 

looking at how long it takes checks to get returned unpaid. And 

generally, it is a curve with a very long tail. And what Congress 

said is, we are not going to try to set the holds to ensure that every 

single check that may be returned is returned before you have to 

give the funds up, but we want to make sure that you at least have 

a reasonable opportunity to learn if most checks. And so they basically cut off that long tail at the end, but said that we don’t want 

to have someone who wants to commit check fraud to have a high 

degree of probability that they would be able to withdraw the funds 

before their bank learned that the check that they deposited was 

bad. But if Congress——

Mrs. MALONEY. Why not shorten holds when checks are being 

processed more quickly these days? 

Ms. ROSEMAN. One of the things—when you look at why Congress set the holds that it did, it wasn’t looking at how quickly it 

takes to clear checks, but how quickly the bank of first deposit will 

learn of a check if it comes back return unpaid. And the way the 

check system works, it works basically on a no-news-is-good-news 

kind of basis, that banks don’t get any affirmative notice if a check 

has been paid, it only learns by the ultimate return of the check 

if it hasn’t been paid. And so it has to wait a period of time to see 

whether the check comes back bad in order to protect itself in some 

cases where they consider higher risk situations before giving the 

funds—making them available for withdrawal. So that was the theory behind the law that we are implementing. 

Mrs. MALONEY. You keep mentioning what Congress said in 

Check 21, and I strongly supported that legislation. Are you saying 

that the Feds should not set standards in this area? I know that 

a number of us have written the Fed and have requested that the 

Fed come forward with standards, are you saying that this is an 

area that the Fed should not speak or have any input? 

Ms. ROSEMAN. No. I think this is an important responsibility of 

the Fed, but what we are doing is exercising the authority that 

Congress gave us. And Congress gave us the authority to reduce 

check holds if a certain test is met. So when that test is met, we 

would certainly reduce the holds, but we would not have the authority to do so unless that test is met. 

Mrs. MALONEY. But under that test, aren’t you saying that until 

financial institutions or banks have decided to move that very last 

check faster, even while all other transactions are electronic, they 

won’t have to do anything about deposits? 

12

Ms. ROSEMAN. No. We are not basing the holds based on when 

the last check gets back, we are doing it based on when most 

checks are returned to the bank of first deposit. 

You know, one of the things that also—that I mentioned in the 

testimony that is really I think acting as a newer term impetus to 

really improve consumer availability is redefining what is local and 

nonlocal, because local checks must be made available no later 

than two business days after deposit. Over time, as the number of 

Federal Reserve checks processing regions decline, the number of 

checks that are considered local will continue to grow. 

Back in the beginning of 2003, the Fed had 45 check processing 

regions, by early next year, they will have 23, about half of that 

number, and the number is only going to decline after that. So in 

increasingly large area for any consumer account, that they could 

have checks drawn on banks in a larger area and still have them 

considered local subject to the shorter hold. 

So I think that will probably have more dramatic near-term impact for consumers. 

Mrs. MALONEY. Well, my time is up, and thank you for testimony. 

Ms. ROSEMAN. Thank you. 

Chairman BACHUS. Thank you. 

Mr. Feeney. 

Mr. FEENEY. Thank you, Mr. Chairman, and thank you for your 

testimony. 

Could you tell us in your opinion—this is fairly new, but with respect to Check 21 and the electronic check conversion, are there 

some new opportunities for fraud, for criminals to take advantage 

of the system that didn’t exist, either in the credit card system or 

the check cashing system, which you are familiar with? 

Ms. ROSEMAN. I think on net, Check 21, over time, will reduce 

the opportunities for check fraud, because over the longer term 

what our expectation is, is that Check 21 will encourage more electronics in check clearing, and that ultimately we will have faster 

collection and return times so that banks will learn sooner than 

they do today of checks that are coming back unpaid. 

Now, as an offset to that, there have been some organizations 

that have been somewhat concerned with moving to Check 21 because they currently have security features on the physical checks 

that they have, they may have microprinting on the signature line, 

they may have water marks on the check, those particular security 

features don’t withstand imaging of that check. So if they rely in 

looking at that in order to pay or not pay a check, those security 

features may not be available to them in this new world. 

But what the industry is doing now is they are looking at a new 

generation of security features that would go on checks that would 

withstand the image process. So it would be more electronic features that would be built into checks that you would be able to determine whether the check is genuine or not. So that is something 

that is currently being pursued by the industry. 

Mr. FEENEY. Are there folks in the industry that are paying attention to the biometric requirements we are engaging in for new 

passports that are issued by the 26 visa waiver countries in terms 

of identifying who you are dealing with, and is that an opportunity 

13

to reduce fraud, both in the debit card, credit card and ultimately 

in the electronic check cashing field? 

Ms. ROSEMAN. I have not heard of using that particular technology, but that may be a question to pose to the banking industry 

witnesses later. 

Mr. FEENEY. And I am interested, if you can predict in the future, where we are going, we know we have more electronic payments, we know we have got more debit cards, we know we have 

got less checks, both locally and that go through the Federal Reserve if they are nonlocal. It occurs to me that as we streamline 

this, one day I ought to be able to do everything I need by a home 

computer or a carried computer, or with one basic card, and that 

card—tell me if this animal exists today , a combination debit card 

and credit card. I sent $10,000 to whoever is the card issuer, and 

in addition, I have a $10,000 line of credit. Are there such things 

as a combination debit credit card in existence today? 

Ms. ROSEMAN. Frankly, I am not sure if there is or not. I think 

technologically that would certainly be possible. But I don’t know 

whether banks have issued joint cards or—you know, one way that 

gets a little close to that is if you have a debit card where your 

checking account has an overdraft line of credit, you can have debit 

and credit features on the same card, and once you exhaust your 

account balance, you would be tapping your credit line. But I think 

you are talking about a situation that on a transaction-by-transaction basis, you make the decision of whether to use the card as 

a debit card or credit card. I think typically people have two cards 

in their wallets, but I don’t know that that is essential that they 

do so. 

Mr. FEENEY. Well, some people have 22, but it would be nice to 

have one. 

Does the Federal Reserve have any jurisdiction over things like 

gift cards, other payroll devices? I mean, we have got prepaid 

phone cards, department stores now are issuing these things. Do 

you have any—your entity deals with check clearing or credit clearing, do you have any regulatory authority over those folks? 

Ms. ROSEMAN. As part of our authority to implement the Electronic Fund Transfer Act, we have been looking at the applicability 

of that act to certain types of prepaid cards, and for example, we 

currently have a proposal that had gone out for comment, the 

board has not yet taken final action, looking specifically at payroll 

cards and how Regulation E should apply to those cards. 

Mr. FEENEY. Well, I ask you to do that. I hope that if you have 

time you can respond; but I hope you will take a look at the issue 

of slippage. I just recently came across a 4-year-old gift card for a 

hundred dollar restaurant, of course, it expires after a year. And 

you know, I am confident that people lose these cards, that they 

forget to use them. What happens—there is a huge advantage to 

the retailer or the merchant if they issue a hundred dollars worth 

of prepaid credit and then there is a big slippage in the system; 

and as you move to this, I hope it is something that if you have 

jurisdiction, you will take a look at. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. And what we are doing is going 

in the order that the members came. 

14

I have Ms. McCarthy next. 

Mrs. MCCARTHY. Thank you, Mr. Chairman. 

I want to ask one question. With brokerage firms, now that basically offer checking accounts within the whole package, are they 

covered also under Check 21? Being that you would have a checking account with that particular brokerage firm? 

Ms. ROSEMAN. The Check 21 authorities apply to banks; but, for 

example, a brokerage firm, if you have a CMA type account where 

you can write checks against your money market account, those 

checks are drawn on a bank. That bank could then truncate those 

checks and process them electronically. Also, brokerage firms have 

been interested in Check 21 authority for the checks that they accept for deposits. You think of a lot of brokerages which have offices all around the country, they have bank accounts locally because they take in check deposits at their local offices, they don’t 

take cash, but they do take checks, so they have to manage a large 

number of local bank accounts. 

What some of them have been talking about is putting image 

technology in each local office so when their customers bring in a 

check, it would be imaged and sent directly to whatever their central bank account is to then be collected. And they would be able 

to do that if the bank they deposit it in agrees to accept it from 

them and the bank agrees to accept the warrantees that they 

would be providing when they put it into the check collection system. Under Check 21, only the banks would be providing the warranties, but they could extend it to their customers by agreement 

and take the risk. 

Mrs. MCCARTHY. So in other words—and I did support Check 21, 

and I still do support it—with that being said, I guess what I am 

trying to find out is then whose responsibility would it be to get 

a copy of the check from, or to have even the image of the check 

sent back to the consumer, me? The brokerage firm or the bank 

that they are dealing with? 

Ms. ROSEMAN. That is something I think I would need to get 

back with you on in writing just to make sure I give you the right 

answer on that. 

Mrs. MCCARTHY. Okay. Thank you. 

Ms. ROSEMAN. Thank you. 

Mrs. MCCARTHY. The other thing I wanted to ask, there is an 

awful lot of information on checks, and obviously—I know from 

reading the testimony on the second panel we are going to be talking a little bit more about fraud, but why do they do it? But people 

still apparently put their Social Security number on checks—hopefully we can get that message out that they should never do that 

in my opinion—or their full credit card number. Is the chance of 

ID theft greater with substitute checks than with cancelled payment checks in the consumer’s home? And I am wondering if you 

have had any feedback from any of the groups that that was happening? 

Ms. ROSEMAN. No, I don’t think that the risk of fraud would be 

any greater. If anything, when you truncate the original check, to 

the extent that you are processing it electronically, there is fewer 

eyes that could look at the actual check and be able to copy off a 

Social Security number or a credit card. 

15

I have not heard of instances where that has increased any risks 

that would already be there with a paper check, or that information is in the clear at that point. 

Mrs. MCCARTHY. We start talking about identity theft all the 

time, I will be very honest with you, whether it is my telephone 

bill or anything, I won’t put my account number on any of my 

checks anymore, and it is probably causing them a problem on the 

other end, but I just think it is, you know—we don’t know anymore 

who is looking at the checks. 

Mr. BACA. I have my account number on it. 

Mrs. MCCARTHY. Do you carry checks with you? Thank you very 

much. 

Chairman BACHUS. Thank you. Mr. Hensarling. 

Mr. HENSARLING. Thanks, Mr. Chairman. 

I am glad to hear from your testimony that apparently Congress 

did some good in the Check 21 Act. It is unusual that we passed 

it 405 to 0, because we usually can’t get that unanimity of opinion 

to change the name of a post office on a Tuesday night. Be that 

as it may, actually, my colleague, Mr. Feeney, covered most of the 

ground I wanted to cover, but I would like to get a sense from you 

of kind of the scope of economies of scale that can be achieved as 

we move increasingly into our non-cash payment transactions. 

In your testimony I think I read, let’s see, today the Reserve 

bank’s cost to process an ACH transaction is less than one-fifth of 

the cost of processing a check. And we have 80 billion non-cash 

payment transactions annually. 

Can you just give me some sense of what this might mean ultimately to the consumer, this savings? 

Ms. ROSEMAN. Well, first, you are right, there are a lot of economies of scale when you look at electronic payments because you are 

relying there on computers and telecommunications networks, and 

a lot of that is fixed cost. When you think about paper-based payments like checks, you need people running them through automated sorters, you need a lot more manual intervention. Even 

though we have reduced the number of staff within the Federal Reserve Banks that handle check transactions, I believe still one out 

of every 4 or 5 Federal Reserve Bank employees processes checks. 

But we have very few employees who need to process ACH or Fed 

wire transactions. 

So over time, as checks continue to decline, electronic payments 

grow, I think it will significantly reduce the cost in the payment 

system. But I think there is something also very important. With 

Check 21, for the checks that are written and banks invest in 

image technology, that image technology, they are also going to be 

able to leverage to improve the services that they provide their customers. 

So, for example, for my bank I can now go on line and see a copy 

of all the checks that I have written. As soon as they have cleared 

the bank, even before my monthly statement posts, I can look it up 

on line. Or if I call my bank to inquire about an issue about a particular check, they can call the image up on line and resolve my 

question a lot more timely than they could have a couple of years 

ago. 

16

So I think that these kind of things that the banks are investing 

in, they are going to leverage both to improve interbank clearing, 

but they are also going to use it to leverage to provide better services to their customers. 

I know a number of banks are talking about putting image technology in their branch networks, so to the extent that they do that, 

and take in check deposits at a branch, they may be able to have 

a later in the day cut-off hour for that deposit. So if you deposit 

a check at 3 or 4 in the afternoon, it will then be considered today’s 

deposit rather than tomorrow’s deposit, which speeds everything 

up. 

Mr. HENSARLING. The very limited number of constituents I have 

that are even aware of the Check 21 Act would tend to have a few 

concerns. Number one, ultimately is this going to save me money 

or cost me money, and we have covered that subject to some extent. 

Another, does this heighten or lessen the chances for identity theft, 

and we have covered a fair amount of that ground. And then a 

number are under the impression that Congress has told their 

banks they can no longer give them cancelled copies of their 

checks. 

In your testimony, you talk about some education efforts of the 

Fed. I would like to know what are you doing to help educate the 

constituents of the 5th Congressional District of Texas that I didn’t 

vote for a law that prevents them from getting copies of cancelled 

checks. 

Ms. ROSEMAN. Well, that is something we have always heard, 

and we have, as part of our education material, several frequently 

asked questions and answers relating specifically to the fact that 

because Check 21 passed, that does not mean that you wouldn’t get 

your checks back if you otherwise would; that is something totally 

independent, that is part of the agreement between the bank and 

their customer, but is not influenced by this new law. 

I have not seen any bank put that in writing, but I do suspect 

that some customers, when they call their banks saying why aren’t 

I getting my checks back anymore, the customer service rep may 

use it as an excuse at times because we have gotten some feedback 

in that regard, and that is why we have added information on our 

Web site specifically on that issue. 

Mr. HENSARLING. Thank you, Mr. Chairman, I yield back. 

Chairman BACHUS. Thank you. Mr. Baca. 

Mr. BACA. Thank you very much, Mr. Chairman. 

I guess one of the questions that Ms. McCarthy asked—I am still 

very puzzled because I do have on my checking account, I do have 

my account number. And it is puzzling because now I start looking 

at, in terms of security identity theft and others, when you don’t 

know who that person is when you transfer that particular check, 

if they can take your account; and hopefully it is a better process 

and we can look at that. 

But let me ask a question in reference to Check 21. Right now 

it does not require banks to shorten the hold period they place on 

deposit even though the checks are clearing faster; is that true, yes 

or no? 

Ms. ROSEMAN. Check 21 did not require that because there was 

already a law on the books that did require us to reduce check 

17

holds, so there was no need to reiterate the same requirement in 

Check 21. 

Mr. BACA. And the reason I state that, for example, a consumer’s 

check may pay his power bill online, may clear immediately, but 

a payment check he wants to deposit may take 2 to 5 business days 

to show up in his account. Also, the consumer may be uneasy now 

that they have less time to cancel the check before it is debited for 

their account. And as you know, the Federal Reserve is required 

to study within 2 years the impact of Check 21 on the U.S. Payment system to see if there are any reductions in time periods that 

it takes to clear a check. 

Do you believe that there will be a requirement change in hold 

time following the 2-year study? That is question number one. 

Ms. ROSEMAN. Frankly—oh, go ahead. 

Mr. BACA. And then do you believe that 2 years is necessary to 

gather the information needed to make that decision on hold time? 

Ms. ROSEMAN. Actually, given the very limited use of Check 21 

to date, I think that it would not benefit consumers to try to speed 

up the time in that study because the sooner we do the study, the 

fewer improvements would have been made due to Check 21 that 

we would be able to discern from the survey results. So you would 

want to give Check 21 enough time to play out in the marketplace 

so that you could see some noticeable improvements because of it. 

If we did the survey today, we wouldn’t see those noticeable improvements. 

So what we are trying to do is move the study late enough that 

there may be some improvements, but frankly, I am not sure if the 

studies that Congress required, that this initial study will see sufficient improvements because we will be doing that next year. And 

I suspect it may be——

Mr. BACA. What do we have to do to see significant improvements? Is there any changes that need to be done? 

Ms. ROSEMAN. It needs—the way Check 21 was developed, it authorized, but did not require banks to use new authorities that the 

law provided. So the theory was that as banks had a business case 

to invest in the technologies and the equipment needed to leverage 

the authority, they would do so. And a lot of banks are doing so. 

But there is, frankly, a fairly long lead time involved in that. 

So I think that we will see noticeable improvements—personally, 

and this is just a personal guess—I think that those improvements 

we will start seeing more significant improvements in the 2007, 

2008 time frame. I don’t know whether the improvements will be 

significant enough when we do our survey next year to at that time 

reduce the holds, but I think a couple years out from there we 

would see. 

Mr. BACA. Okay. Thank you. The next question I have is the implementation of Check 21 has created some confusion among consumers. There is confusion among the hold time of their checks and 

the difference between Check 21 and account receivable conversions. It appears to me that perhaps there should be a greater, as 

stated before, education of consumers to know about how to adjust 

and shift electronic payments. Does the Federal Reserve play a role 

in providing such educational programs? If so, how and when and 

where will they be implemented? 

18

Ms. ROSEMAN. Well, we have come up with information. We have 

consumer brochures talking about electronic check conversion, 

about Check 21. We have other information on our Web site. We 

have talked to—because there was lot of press coverage around the 

time this law became effective, and we talked to a lot of reporters 

and others developing stories. They did not quite get it right, even 

after having talked to them in many cases. 

But we have been trying to disseminate information. We have 

been relying on, leveraging our Consumer Advisory Council and 

thinking about educational efforts in this regard. But there are a 

number of things on our Web site that we refer consumers to, 

media to. So that has been the primary vehicle that we have used. 

Mr. BACA. Is any of your material bilingual? 

Ms. ROSEMAN. There are some in Spanish as well as English, 

yes. 

Mr. BACA. And what about Korean or Asian or any other foreign 

language or——

Ms. ROSEMAN. I believe, I can correct in writing if I am wrong, 

but I believe at this time it is just Spanish and English. 

Mr. BACA. Okay, well, hopefully, we can develop other languages, 

too, as well as we want more consumers to participate and utilize 

the system. Thank you very much. 

I yield back the balance of my time if there is any 

Chairman BACHUS. Thank you. Ms. Roseman, let me—I have 

got—we have had people, other Congressmen or even one or two 

constituents that have called us because of a lot of publicity with 

Check 21, and they have given us various scenarios. And so I want 

to kind of ask you an extended question with fact scenarios and let 

you kind of clarify whether or not Check 21 is involved in this or 

not involved. I think I know the answer, but I just want to hear 

it from you. And basically, I think that there is a lot of misinformation on what Check 21 does and what it does not do, what it authorizes and causes and what it does not authorize or cause. And 

have you—have you all had some of the same confusion that we 

have had? 

Ms. ROSEMAN. Yes, and a lot of it was prompted, I believe, by a 

lot of media reports last fall. There is confusion between Check 21 

and electronic check conversion as we discussed. There is confusion 

regarding, if you no longer get your checks back with your account 

statement, is that due to Check 21? It is not. So there have been 

some issues along those lines, yes. 

Chairman BACHUS. Yeah. Let me give you some examples of 

what we have found when we looked into these matters. Now, one 

is this—and that is, I think, a valid complaint that people have. 

And I—maybe you can tell me where you would fix this. People will 

say, they will look on their bank statements, and there will be a 

debit, a debit to their account where you have authorized a direct 

debit. And they really cannot tell from that debit much about the 

transaction. I have actually seen examples—they have sent me 

some of these. And it may actually—I saw one recently, where a 

cable company deducted on a direct deposit, and the only thing 

that appeared on that was the name of the city. 

Ms. ROSEMAN. I am sorry. The name of——

Chairman BACHUS. Was the name of the city. 

19

Ms. ROSEMAN. Well, under the—I believe, under the Electronic 

Fund Transfer Act and the Federal Reserve Boards’ Regulation E 

on periodic statements, if you are—you know, if a consumer has an 

electronic payment, it has to include the name of the payee. So, for 

example, most of the bills I pay, I pay through the ACH. It just 

automatically debits my account, but it will say, Comcast or 

Verizon or the name of the mortgage company, as part of the information that appears on my statement. That is required by law. 

Chairman BACHUS. Well, this one, they sent to us—it actually 

did not. And it was a large cable company. It had the name of the 

city. 

We have also seen another one that someone sent to us and it 

just had numbers. Now, what that was, and let me just move down. 

This is another one. We have the direct debits, and then you have 

where you go into a store, you hand them a check, they run it 

through some process, and they give you your check back. 

Ms. ROSEMAN. Right. 

Chairman BACHUS. In that situation, what is required? The merchant can then immediately go and debit your account; is that correct? 

Ms. ROSEMAN. What typically happens in that case is the merchant will use the information at the bottom of the check to create 

an ACH transaction that will——

Chairman BACHUS. An ARC transaction basically? 

Ms. ROSEMAN. Well, there are two different types. ARC transactions are for payments that you send in to pay a bill. 

Chairman BACHUS. Okay. 

Ms. ROSEMAN. There is another transaction code but it is the 

same concept. 

Chairman BACHUS. And what is it called when they do it in the 

store? 

Ms. ROSEMAN. POP, point of purchase. I knew it was POP; I just 

could not remember what it stood for. And that is just another code 

for a different but similar type of ACH transaction. But in that 

case, on the statement, they should be getting the name of the 

store along with the other information, you know, date of the purchase and the amount of the purchase. That should appear there, 

similar to the way, if you use a debit card or credit card, that information would show up. 

Chairman BACHUS. And so when you get your statement, it 

should have all that information. 

Ms. ROSEMAN. It should. Under the law, it should. 

Chairman BACHUS. And I think, maybe this is a transitionary period, but you know, we are seeing, in these, you know, cases where 

the information does not appear, they are getting that kind of information. The third one, as you mentioned—I think you mentioned 

it—is where you mail your payment in. And we are getting—with 

the utilities. You mail it in, and what is happening is, it goes into 

a lock box as I understand. 

Ms. ROSEMAN. Right. 

Chairman BACHUS. That check is destroyed, and it goes—they 

immediately have access to your account. Now, you are agreeing to 

that apparently. 

20

Ms. ROSEMAN. Well, when you say, immediately, what they will 

do, the lock box processor will get in all the checks for your credit 

card or mortgage or whatever, and they will again use the information at the bottom of the check to create ACH transactions that 

they will put into the ACH system. It would typically be the next 

day that it would settle on your account. 

Chairman BACHUS. Now, none of those have anything to do with 

Check 21 do they? 

Ms. ROSEMAN. Not at all. 

Chairman BACHUS. Okay. 

Ms. ROSEMAN. The main thing they have in common is they both 

came about in the same general time frame which is, I think, why 

they got so confused with each other. 

Chairman BACHUS. Do you see any of those cases? I think, when 

this happens to a member of Congress or his constituents, they 

turn around and call me because I am subcommittee chair, send it 

over to me, and we call them. But, you know, I think the main 

complaint that we are hearing is, when they get their account or 

they call their account up on the Internet, they really cannot get 

enough information, or, many times, it says that—I wish I had 

brought one of them in here because I have got four or five—that 

transaction is not available; electronic image of that transaction is 

not available. And I think mostly those are on those lock box 

things. But are they supposed to be available? 

Ms. ROSEMAN. Generally, what happens for the lock boxes is they 

will take an image of your check for their records when they—before they initiate the ACH. So in the event the ACH transaction 

comes back bad, they have more information about who you are to 

be able to pursue you. And sometimes, they may end up then over 

time creating a substitute check from that information to collect it 

as a check if for some reason it did not clear as an ACH transaction. 

Chairman BACHUS. But I guess my question is, are they required 

to—is there a requirement by the Federal Reserve that, on your 

statement, where you go on to the Internet and you can get—go in 

and electronically call up an image, is there some requirement that 

you will be able to do that? 

Ms. ROSEMAN. Yes. There are requirements for what appears on 

your periodic statement, what information about an electronic payment must be there. And it would have to include the name of the 

person that you are paying. 

Chairman BACHUS. Are you getting the same complaints that we 

are? 

Ms. ROSEMAN. I am not aware of complaints along those lines in 

particular. 

Chairman BACHUS. Okay. But none of those complaints would be, 

as you say, are Check 21. They are really more to do with either 

the Expedited Funds Availability Act or deposits. 

Well, another example is this. This is my fourth example. And 

I have heard this from time to time. And I think this has been happening for years, but people, now with Check 21—they call and say 

this is Check 21. A person has someone working at their home, 

painting or, you know, cutting the grass or whatever. And they give 

them a check. And they go down to the bank and deposit it. I 

21

mean—I am sorry, they give them the check, to XYZ bank. They 

realize, oh, you know, I do not have the money to cover that. So 

they go down to the bank at the same time, you know, usually 3:00 

or 4:00 in the afternoon, and they deposit money to cover that 

check. And it could be that the person that they gave the check to 

walks into one branch, and they walk into the other branch about 

the same time, or even an hour apart. What we are hearing is the 

person is able to cash the check and when they do, they will overdraft because there is overdraft protection, and then they will go 

in and put a check in, you know, between 3:00 and 5:00 of the 

same day, and they do not get credit for it. Now, they complain 

that that is part of Check 21. 

Ms. ROSEMAN. No. That is totally independent of Check 21. I 

think the circumstance that you raise often is the case. If you give 

a check to a handyman, and your check happens to be drawn on 

a bank that is local, he may go directly to that bank and, you 

know, cash that check over the counter because they want their 

money right away. 

Chairman BACHUS. And that is what has happened in several 

cases. In fact, they leave the house. They go down to the book and 

they cash the check. You are following them in the car, and 30 

minutes later, you deposit a check. 

Ms. ROSEMAN. But I think it is important to have further education for consumers to make them understand that when you 

write a check, that check is payable on demand. So you should 

have the money in your account to cover the value of that check 

at the time you write it and give it to somebody. 

Chairman BACHUS. I will not go any further with that. They do 

have another complaint about when they get two or three issued 

worthless checks they sort of think that, you know, and the bank 

ought to probably not take the biggest one first, biggest check and 

run it through first. They ought to take the little ones, which would 

have gone. But then, I had a constituent who called and said they 

bounced my mortgage payment because they took that one first. I 

guess it is hard to know which one they ought to take first, right? 

Mrs. Maloney. 

Mrs. MALONEY. No questions. 

Chairman BACHUS. All right. No further questions of this panel. 

But—so we will dismiss our panel one, or Ms. Roseman, and call 

our panel two. 

And Mr. Ford is going to introduce one of our witnesses to the 

second panel. 

Mrs. Maloney, I know that you are friends with Mrs. Duke, and 

so I do not know if—you have introduced her in the past. I did not 

know if you wanted to do it today. We welcome our second panel. 

And at this time, I am going to recognize Mrs. Maloney to introduce one of our panelists. 

Mrs. MALONEY. Okay. Thank you so much. 

And it is my great honor to introduce Betsy Duke who is the 

Chair of the ABA. And she is the first woman in history to hold 

this position. So I am always supporting women when they break 

that glass ceiling and become trail blazers, make the road easier 

for other woman. But it is an extraordinary achievement, and we 

are very proud of this achievement. She is also a former president 

22

of the Bank of Tidewater. And this position, likewise, was the first 

time that a woman held this position. And she hails from the great 

State of Virginia, and my hometown of Virginia Beach, Virginia. 

And every time I come home, everybody talks about Betsy Duke. 

So your hometown is extremely proud of you. 

And she also happens to be the personal banker to my family. 

And they are very fond of you and send their regards and thank 

you for everything you do and for being—thank you. What can I 

say? 

And she is really a vice president now of Wachovia and my good 

friend, Mel Watt, is very proud of that position in the bank that 

hails from the great State of North Carolina. 

Mr. WATT. I just told her not to try to steal my constituent while 

she was making the introduction, Mr. Chairman. 

Do not try to steal Wachovia for Wall Street, you know. We are 

delighted to have her here, and we were arguing about who got to 

introduce her, so we just split it. That is what happens when you 

are so popular. Everybody wants to introduce you. Thank you for 

being here. 

Chairman BACHUS. Mr. Watt, you have from time to time talked 

about larger institutions gobbling up smaller institutions, and as 

Mrs. Maloney——

Mr. WATT. But Charlotte is bigger than Wall Street. 

Chairman BACHUS. Mrs. Maloney used to be employed by South 

Trust Bank in Birmingham, and in fact, South Trust was gobbled 

up by a Charlotte bank, Wachovia, which is a very fine bank. And 

we are still proud to have her with us now kind of tentative——

Mr. WATT. I told you everybody wanted to introduce you. I mean, 

what can you say? When you are on a roll—anybody else want to 

get in on this introduction? 

Chairman BACHUS. We believe that actually that is probably the 

reason for that. They were actually trying to get a chairman of the 

American Banking Association. They had to buy a bank to get one, 

so—and then Mr. Ford is going to introduce the gentleman from 

Tennessee. 

Mr. FORD. I feel bad. Hayes is not going to get the kind of intro 

that Ms. Duke got. I am delighted to see you, too, Madam Chairlady and to Chairman Bachus and all the members of the committee. I feel bad for the professor and for Mr. McEntee, that they 

are not going to get these glorious introductions. 

But welcome to you, as well, to the committee. I am delighted 

that a fellow Tennessean, although not from my congressional district, but someone whose organization, independent community 

bankers I have leaned on greatly over the last few years in my 

service on the committee to learn more about issues confronting not 

only bankers but certainly their customers throughout my state. 

Mr. Hayes hails from the Security Bank of Dyersburg and, as stated, is the chair of this great organization. 

And today, Chairman Bachus, he will bring a perspective that I 

know has been shared or is shared by many on this committee. 

And as one who was active in the passage of this great act that 

we talk about today, Check 21, for many, many reasons, the fact 

that it reduces fraud and makes it—reduces costs for banks and 

customers alike—it is interesting to hear the perspective of commuVerDate 0ct 09 2002 14:47 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\DOCS\23737.TXT FIN1 PsN: MICAH
23

nity bankers, really institutions that are at the forefront and on 

the front line of providing capital to families and farmers and small 

business people. 

Oftentimes, as Mrs. Maloney and Mr. Watt know, we brag in this 

institution about the great job growth over the last 10 years. And 

sometimes we forget—as easy as it is to point to large operations, 

and we have one the largest in my district called FedEx—it was 

really small businesses that lead the job creation engine in this 

country. And it is community bankers like Mr. Hayes and many of 

his colleagues within his organization that have provided fuel for 

that wonderful fire over the last several years. 

He will bring a set of recommendations today, Chairman Bachus, 

that I hope this committee not only listens to but heeds, in many 

ways, as we do our best to implement what is a positive act. And 

I applaud you, Chairman, for having the good sense to allow an assessment of where we are and how this bill will be implemented, 

how this law will be implemented. But I hope we pay close attention as we talk about the deployment of technologies and the resources needed to ensure that banks in his organization and his 

peers within his association are able to bring not only this law to 

reality but bring the good benefits to their many customers. 

So with that, I welcome you, Chairman Hayes, and welcome the 

other members of the panel as well. 

And, Ms. Duke, I look forward to getting to know you because 

all these folks love you. You must be doing some great things. And 

you have got a good man siting right behind you in Floyd so keep 

him on board. 

And with that, I yield back the balance of my time. 

Chairman BACHUS. Thank you. Our two other panelists are 

friendless. They are both—I will note, that I do not know if that 

is because you are the two Democratic witnesses, but I welcome 

both of you. Professor Mark Budnitz from Georgia State University 

College of Law. I can tell you that Georgia State is a fine institution, has a tremendous School of Business and known for its economics and now its law and other fields, and a very good school, 

right in the top 20 and top 30 in several fields. So I am very aware 

of them. And it is a fine institution. 

So despite what your testimony may be, you come from a fine institution. But, no, we very much welcome you. Mr. Hayes and Ms. 

Duke have been here on other occasions, and so we have not mistreated them. They have come back. That may tell you something 

about this committee. 

And Mr. Elliott McEntee, president and CEO of NACHA, which 

is the Electronic Payments Association. And what a fine association. 

We welcome you to our panel. 

So without further ado, we welcome your testimony, and we will 

start from my left with Ms. Duke. 

STATEMENT OF ELIZABETH A. DUKE, CHAIRMAN, AMERICAN 

BANKERS ASSOCIATION 

Ms. DUKE. Good morning, Mr. Chairman, and members of the 

committee. Thank you for that introduction. I am not sure anybody 

has ever been as warmly welcomed as I have been here today. 

24

When it started out—it reduced my nerves. Perhaps as it went on, 

it maybe increased them. I will try not to disappoint anyone. 

My name is Betsy Duke. I am chairman of the American Bankers 

Association and an executive vice president with Wachovia Bank. 

I am pleased to be here today to discuss Check Clearing For the 

21st Century, or Check 21. Prior to Check 21, every single check 

that was deposited in the United States had to be physically transported to the bank on which it was drawn. And now, banks will be 

able to use 21st century technology to transport those checks electronically in the same way that most of us today use e-mail rather 

than mailing physical letters. So no longer will there be tons of 

paper checks having to move around on trucks and planes subject 

to damage, delay by weather, accident or vandalism. Customers 

will retain the convenience of a check but will also have the efficiency of an electronic payment. Funds will be collected faster, 

making them available sooner and reducing fraud. And check 

transport will be more predictable and more secure. 

But all of this will not happen overnight. The initial cost that enables the bank to be able to send and receive electronic checks is 

very high, and any new process needs testing and refinement. My 

bank, Wachovia, is a leading-edge electronic processor, but despite 

these capabilities, we expect to process only 2 to 3 percent of our 

checks through electronic image exchange by year end. 

Nationally, the Federal Reserve, as you have heard, reports that 

less than 1 percent of the checks that it processes are done electronically. So the adoption will be gradual, and significant volume 

is certainly not expected until some time in 2007. 

Now, in spite of a concerted effort to educate the public about 

Check 21, we continue to hear predictions of dire consequences of 

the law, none of which has any basis in fact. For example, some 

consumer activists reported that 7 million checks would begin to 

bounce each month as a result of the new law. Nothing like this 

has occurred nor is it expected to occur. Moreover, the length of the 

float time has been declining for decades as banks and companies 

find more efficient ways to collect their payments. Electronic presentment is simply one other efficiency method. And those who use 

the float quickly adjust just as they have for many decades of innovations in check processing. 

We have also seen stories claiming that banks will place extra 

holds on checks in order to avoid paying interest. This is simply 

untrue. By law, banks must begin paying interest as soon as the 

institution itself receives credit for the deposit. Check holds are extremely important to preventing fraud. Banks need enough time to 

allow the paying bank to return the check to discover insufficient 

funds or fraud. The Federal Reserve by law has established schedules for funds availability and is required to adjust those schedules 

as average clearing times change. As more checks clear electronically and as normal times speed up, the Federal Reserve is required to change the availability schedules. 

However, the funds availability schedules should not be shortened until the actual time to process the checks has speeded up. 

It is important to note that most banks do make funds available 

sooner than the mandated availability schedules, especially in 

cases where the risk of fraud is low. An ABA survey has shown 

25

that between 72 and 87 percent of banks provide funds for local 

checks before the law requires; for nonlocal checks, between 72 and 

82 percent do so. 

Mr. Chairman, the ABA and our member banks are committed 

to providing the most efficient cost-effective check processing possible for our customers. Check 21 will speed funds availability and 

reduce fraud for all of our customers. We are excited about the potential, and we look forward to providing the benefit, and I appreciate the opportunity to testify on the progress of Check 21 to date 

and to clear up some misconceptions. I will be happy to answer any 

questions. 

[The prepared statement of Elizabeth A. Duke can be found on 

page 60 in the appendix.] 

Chairman BACHUS. Professor Budnitz. 

STATEMENT OF MARK E. BUDNITZ, PROFESSOR, GEORGIA 

STATE UNIVERSITY COLLEGE OF LAW 

Mr. BUDNITZ. Good afternoon, Mr. Chairman, members of the 

subcommittee. 

Congress passed the Check 21 Act with the best of intentions. It 

is a good act. It enables banks to process checks in a more efficient 

manner, reduces costs, increases the speed with which checks clear. 

However, Check 21 made a really complicated situation even 

more complicated and more confusing for consumers than it already was. Several of you have mentioned consumer education. You 

asked Ms. Roseman what efforts the Fed is making to educate consumers. Well, they have a tough job to do, because the law is based 

on matters completely beyond the control of the consumer. 

Let’s just take one example. There are lots and lots, but just take 

one that has been mentioned this afternoon. That is why I picked 

it. The credit card company sends me a statement. I put a check 

in the mail to pay the credit card company. The credit card company gets that check—and I have two credit card companies who 

do it this way myself—and they can do one of two things. They can 

process the check the regular way, just deposit the check into their 

bank, their depository bank, the bank of first deposit, or they can 

process it electronically. Two entirely different legal regimes apply. 

Now, even if you have a credit card company that deals with this 

in the traditional way, they take my check, and they deposit the 

check into their bank. The banks now start processing the checks. 

And they can do it one of two ways. There is the usual way, or now 

with Check 21, they can go and use electronic check imaging, and 

eventually the check will be changed into a substitute check. 

Again, different rules, different responsibilities, different rights, 

different deadlines, four different sets of rules. 

And I have not even mentioned the NACHA rules which also affect the electronic payments. And so, it is a very difficult situation 

for consumers to grasp. What I am suggesting today is that you 

take a look at the entire spectrum of the legal context in which 

these things take place and see if you can introduce some uniformity into the system, because if there is a problem, for example, 

if it is an electronic transfer, then there is the Electronic Fund 

Transfer Act and Regulation E, and the consumer is entitled to disclosures, the consumer has 60 days from after the bank sends a 

26

bank statement to notify the bank of errors. If it is a transaction, 

however, that was processed through checks and Check 21 kicked 

in, entirely different legal regime, entirely different rules, different 

deadlines. The consumer, in order to submit a claim under Check 

21, if the consumer thinks something went wrong, has to provide 

information to the bank that I can hardly even understand, and I 

have written law review articles, I am revising my book on this 

subject and so forth. Somehow the consumer has to know what a 

warranty claim is under Check 21 in order to—or otherwise explain 

why, I need to have the original check in order to understand why, 

when I got the substitute check, something went wrong. A very 

complicated regime in contrast to Regulation E. And if the check 

is just processed the usual way, no Check 21 kicking in, no substitute check, then the Uniform Commercial Code applies. Entirely 

different rules. Under the Uniform Commercial Code, the bank has 

no duty to investigate, has no duty if it cannot figure out what 

went wrong, to recredit the consumer’s account. The consumer’s 

only remedy is to go to court and file a lawsuit. But there is probably an arbitration clause in the bank agreement that does not 

even allow that to happen. 

This is just one little tiny slice of the pie. There are all kinds of 

other things going on. And let me just mention one other, and that 

is the bank statement. We have already talked about the confusion 

between electronic check conversion, the ARC situation, and Check 

21 with consumers being very confused about the two and not understanding the difference between them, that two entirely different rules apply. In addition, there are so many other things 

going into and out of the consumer’s account. It is right, and it 

sounds just fine to say, before the consumer writes that check, the 

consumer better make sure there is enough money in the account. 

Right? Direct Deposit, pre-authorized payments, online bill payments, account aggregation, debit card payments, lots of transactions going in and out of that account at all times. So it is very 

hard to keep track. 

Very briefly, what I recommend is that the committee take a look 

at the entire situation, use the Electronic Fund Transfer Act as a 

model. It has served well the test of time. Congress did a fantastic 

job with that. Also look at the NACHA rules. NACHA has some 

very fine rules that have been worked out in conjunction with the 

business community, the banking community, and incorporate 

some of those into the law so that we make sure that those are a 

definite permanent part of the law. 

In terms of funds availability, one thing I would mention is that 

Mrs. Maloney’s bill includes a lot more than making the funds 

available quickly. There is a lot of other stuff in there, quite apart 

from whether it is time now to go and reduce the waiting period. 

And so I would urge the committee to look at those other aspects 

of the bill as well and consider them seriously. Thank you. 

[The prepared statement of Mark Budnitz can be found on page 

53 in the appendix.] 

Chairman BACHUS. Thank you. Mr. Hayes. 

27

STATEMENT OF DAVID HAYES, CHAIRMAN, INDEPENDENT 

COMMUNITY BANKERS OF AMERICA 

Mr. HAYES. Thank you. 

Congressman Ford, thank you for the kind introduction and my 

second day here in Washington in front of the chairman from Alabama, in both cases, so I look forward to the fall, sir. 

I am honored to be here with so many former bankers. I mean, 

it certainly makes my life much easier. You know, it is my honor 

to be here today to represent the 5,000 community banks that belong to the Independent Community Banker Association of America, and to be here representing my own institution which is a $135 

million asset organization and 70 employees. So I am a small business person by occupation. Check 21 became a law approximately 

6 months ago, and by authorizing the creation of the substitute 

checks, the new law has opened the door to wide scale electronic 

check processing. Implementation will not happen overnight. It is 

very much an evolutionary process. Therefore, until the necessary 

technology investments are made, relatively little change will occur 

for community banks and our customers. 

My bank began offering image statements to our customers in 

1999, and today, we have invested a half a million dollars in the 

technology. Yet, like many community banks, in the 6 months since 

Check 21 became effective, we have made very few changes to our 

processing environment. Instead, we are waiting to move to full 

electronic check clearing without the need for substitute checks. 

Earlier this month, the ICBA surveyed its members on Check 21 

implementation and its impact on our customers. Almost 400 community banks of all asset sizes responded; 86 percent are not currently using image technology to present and clear checks but are 

waiting for their intermediaries like software providers to develop 

the software and complete testing of the end-to-end image exchange. Of the banks that are using image technology for check 

clearing, none have engaged in full check image clearing. Imagebased clearing is not yet the dominant form of check clearing, and 

it is important to note that the new law does not mandate that 

banks process or receive checks in electronic format. Analysts have 

predicted that it will be several years before digital images are 

used to clear most checks. And our survey results support this prediction. Therefore, it is premature to conclude that checks are 

clearing faster since the enactment of Check 21. 

We also appreciate the members of this committee have acknowledged the importance of check holds in the prevention of fraud 

against bank and depositor losses. This is too often overlooked. I 

am reminded of a situation of a small community bank where a 

customer’s check kiting scheme almost caused the bank to fail in 

a matter of hours. The kite depleted nearly all of the bank’s capital, and the bank was close to being unable to honor the local public school payroll. Today, we have a major problem with fraudulent 

cashier’s checks. So you see, for community banks especially, the 

impact of check fraud can go well beyond the institution and have 

real consequences for the community. 

We also recognize concerns that some processing practices could 

increase the likelihood of overdraft fees for consumers. However, 

nearly 90 percent of ICBA survey respondents post deposits and 

28

other credits before checks and debits. Therefore, contrary to the 

claims of consumer groups and others, most check processing practices are not yielding an illegitimate revenue stream for banks. I 

must also point out in the interest of good customer service, many 

of our member banks make funds available to customers earlier 

than required but still have the legal and regulatory authority to 

place holds where needed in specific cases: twenty-eight percent of 

our survey respondents provided same business day availability on 

items that qualify for next day availability; 91 percent provide 

same or next business day availability for items that qualify for 

two-day availability; and 86 percent provide faster availability for 

checks that qualify for 5 business day availability. 

ICBA is concerned that with only 6 months since Check 21 became law, preemptive legislation or regulatory efforts to reduce 

check hold periods without a proven history of faster check clearing 

and settlement times will leave banks and our customers exposed 

to serious losses and sophisticated fraud schemes. Current law requires the Federal Reserve Board to reduce check hold periods 

whenever check processing times improve. The Fed must also study 

availability practices and existing funds availability requirements 

and make recommendations for legislative action. We urge Congress to give the Federal Reserve a chance to do its job. In conclusion, broad and appreciable reduction in check clearing times will 

only occur over time. The majority of the financial institutions 

must determine that there is a business case for making significant 

capital investments and major operational changes to support full 

electronic check clearing. Wide scale electronic check clearing will 

only be as effective and efficient as the number of banks that participate. 

Mr. Chairman, thank you for the invitation to appear today, and 

I will be happy to answer any questions later. 

[The prepared statement of David Hayes can be found on page 

70 in the appendix.] 

Chairman BACHUS. Thanks. 

And Mr. McEntee. 

STATEMENT OF ELLIOTT C. MCENTEE, PRESIDENT AND CEO, 

NACHA—THE ELECTRONIC PAYMENTS ASSOCIATION 

Mr. MCENTEE. Mr. Chairman and distinguished members of the 

subcommittee, I appreciate the invitation to testify on a type of 

electronic processing known as check conversion. 

In check conversion, a check that a consumer mails to pay a bill 

is processed electronically using the same payment network that is 

used to process Direct Deposit of payroll payments. Using an electronic payment network to process checks enables the payment to 

be processed more efficiently. It also provides the consumer with 

more protection than if the check was processed in the traditional 

manner. 

Before I discuss check conversion in more detail I just want to 

give you a brief overview of the organization I work for. NACHA 

is a not-for-profit association that develops and maintains the operating rules that govern the processing of ACH payments. The 

NACHA rules spell out the rights and responsibilities of financial 

institutions and businesses that process ACH payments. And they 

29

also contain several provisions dealing with consumer protection. 

The public and private sectors have been working since the late 

1970s to use electronic payment networks to clear and settle billions of checks that are written each year in the United States. 

Earlier efforts were not successful, mostly due to the lack of a 

clear legal framework dealing with the relationship between checks 

and electronic payments. Working very closely with the Federal Reserve, a legal framework was developed in 2001. That legal framework treats a check that has been converted as if it was always an 

electronic payment. With that legal framework, consumers have 

the protection of Regulation E and the NACHA rules even when 

they are writing a check to pay a bill. The interest in using electronic networks to collect checks increased dramatically because of 

the grounding of all commercial flights after 9/11. Today, check 

conversion is used by the Federal Government, several State and 

local governments and hundreds of billers. 

Every biller that is going to convert checks must provide clear 

and conspicuous notice to consumers prior to the receipt of every 

check. The notice must state that receipt of the check authorizes 

an electronic debit to the consumer’s account. Billers must have 

reasonable procedures for the consumer to opt out. In other words, 

if the consumer does not want their check converted and notifies 

the biller, the biller may not convert any checks received from that 

consumer. Billers must provide consumers with a copy of the check 

upon request. As with any ACH payment to a consumer’s account, 

the NACHA rules require a consumer’s financial institution to recredit the consumers account if the consumer reports within a certain time frame that a transaction was not authorized. 

But what are the benefits of check conversion? For consumers, 

check conversion preserves the choice for consumers who want to 

continue to pay their bills by check. Consumers gain the protection 

of Regulation E and the NACHA rules, which provide more protection than when checks are processed in the traditional way. When 

checks are converted, consumers receive more detailed information 

on their monthly statements, including the name of the company 

that they are paying and the check number that the consumer 

wrote. For companies, the main benefit is gaining the efficiencies 

and cost-effectiveness of electronic processing while still offering 

consumers the choice of paying by check. 

In 2004, there were about 1.25 billion checks converted by billers. 

The consumer opt out rate is typically less than a half a percent. 

A recent survey conducted for NACHA found that 69 percent of 

consumers surveyed responded that they are familiar with the 

check conversion process. The survey also found that 55 percent of 

the consumers, when given the open-ended opportunity to say anything, expressed no concerns about check conversion. Most of the 

concerns that they did express were about privacy and security 

issues. And as was pointed out by Ms. Roseman in her presentation, electronic check processing does offer more privacy protection and security for both consumers and the banking industry and 

businesses. 

In the surveys that we have conducted, consumers did not express concerns about checks being cleared more quickly. And we do 

have statistics that I would like to share with the subcommittee on 

30

this issue. Our data shows that the insufficient funds rate for check 

conversion payments is .3 percent. That is .3 percent of the ACH 

transactions that have been converted from paper checks are returned because of insufficient funds. And that is a lower rate than 

in the traditional check collection system, suggesting that check 

conversion is not causing more checks to bounce. The rate at which 

consumers claim that check conversion payments are unauthorized 

is much lower, .0045 percent, which means 45 out of every 1 million checks that are converted a consumer claims that the transaction was unauthorized, showing that there is no significant problem with proper authorization or with fraud. 

However, we are aware, as some of the subcommittee members 

have pointed out, that there are some problems with check conversion, and some consumers are clearly confused with how the system works. The first problem is when the billing company does a 

poor job of informing its customers that the check is going to be 

processed electronically. To address this situation, NACHA organized an industry effort consisting of many banks and billers to develop consumer education materials that billing companies and financial institutions can use at no cost to educate customers about 

check conversion. The second is that there are a small number of 

consumers that do not want anything done differently to their 

checks. NACHA revised its rules to require billing companies to 

have reasonable procedures to allow consumers to opt out. 

In conclusion, check conversion is being adopted very rapidly in 

the market place. Check conversion is an example of a true winwin innovation, providing consumers with more protection and 

more information and providing businesses and financial institutions the ability to collect checks more efficiently. That concludes 

my remarks, and I will be glad to try to answer any questions. 

[The prepared statement of Elliott C. McEntee can be found on 

page 78 in the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Tiberi. 

Mr. TIBERI. Thank you, Mr. Chairman. 

Thank you all for testifying today. 

Ms. Duke, there has been some confusion, misperceptions, over 

what Check 21 does and does not do, from what I have heard over 

the last several months. Have you heard, either as a banker yourself or speaking on behalf of the American Bankers, some of the 

confusion? And can you tell us a little bit about how you all are 

dealing with it? 

Ms. DUKE. Some of the biggest confusion just simply has to do 

with, are banks going to be required to convert all checks to electronic, and are customers no longer going to be able to get their 

checks back? And yes, we are doing everything we can to communicate what Check 21 does and does not do. 

The ABA has offered news stories to media outlets. It has written columns for print outlets, all trying to explain what is happening. In addition, we have fielded thousands and thousands of 

calls. Wachovia Bank has sent out all of the disclosures and as well 

spent a lot of time training our employees. Probably training our 

employees is the biggest piece of Check 21. 

31

But as far as where the confusion comes from, I am not so sure 

that there is not more confusion being created about things that 

might possibly happen as a result of Check 21, which are in fact 

not happening. Again, back to the example of these millions of 

checks bouncing. That is just simply not happening. But when you 

create the expectation that it will and the fear that it will, I am 

afraid it may be raising the anxiety on Check 21 much more than 

this should 

Mr. TIBERI. Do you think there has been an organized effort to 

purposely confuse consumers in hopes of creating maybe an opportunity to have us come back and do something? 

Ms. DUKE. I really could not say whether it has been purposeful 

or not. Like I said, we have not found that, once Check 21 came 

into effect, that we have had really any negative feedback about 

anything that actually has to do with Check 21. So, hopefully, this 

is a storm that will pass. 

Mr. TIBERI. Okay. 

Mr. Budnitz? 

Mr. BUDNITZ. Yes. 

Mr. TIBERI. Professor, speaking of confusion, I am very confused 

with something you said, a couple of things that you said, and I 

tried to write one of them down. You said that with debits and Direct Deposit and other things, it is hard to keep track of a checking 

account for a consumer. If your responsibility is to have a checking 

account, aren’t you responsible for making sure there is enough 

money in that account when there is a debit or when you write a 

check? I am kind of confused. 

Mr. BUDNITZ. Consumers are using a debit card to pay for so 

many items. Money comes out right away. They have to make sure 

that they have written it down in their check register. 

Mr. TIBERI. I understand. I am a consumer. 

Mr. BUDNITZ. They have to keep careful track every time they 

right a check, of course. Also, money is coming into the account in 

terms of payroll checks, and so forth, maybe child support, government benefits. Also, there are pre-authorized payments. I pre-authorize the utility company to take money out of my account. 

Mr. TIBERI. I have to authorize that though. 

Mr. BUDNITZ. Pardon me? 

Mr. TIBERI. As a consumer, I have to authorize that. And I do 

that. I have—American Electric Power takes a monthly—my bill 

out of the checking account. 

Mr. BUDNITZ. Also, consumers get calls from telemarketers, and 

telemarketers often will withdraw the money through a pre-authorized draft, another way of taking money out of the consumer’s account. 

Mr. TIBERI. But I have not authorized that. 

Mr. BUDNITZ. Yes. Although there are lots of complaints and also 

some NACHA rules to try to ensure the integrity of telephone ACH 

withdrawals because of concern about problems, and the Federal 

Trade Commission has lots of rules about telemarketing. The point 

is that, sure, the consumer is responsible. The consumer has to 

keep track. 

My point was, it is not easy to keep track of it. And then when 

you get your monthly statement, it is not easy to understand everyVerDate 0ct 09 2002 14:47 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 G:\DOCS\23737.TXT FIN1 PsN: MICAH
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thing that is on that monthly statement because of the way things 

are—there is no standardization in terms of the format and how 

things are identified. And so what I am suggesting is that it is not 

an easy task. I was not saying the consumer did not authorize it, 

although sometimes they did not. What happens sometimes is the 

consumer authorized one withdrawal, and then it keeps happening 

month after month. And they keep making phone calls saying, wait 

a minute, I only authorized one withdrawal, or too much is withdrawn and so forth. There are a lot of complaints about mistaken 

withdrawals. There are lots of withdrawals where no problems 

occur at all. All I am saying is it is not an easy matter to keep 

track of it all. 

Mr. TIBERI. Well, I would love to continue this debate. Unfortunately, my time has expired. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. 

Mr. Hayes, I am trying to be clear on whether you think, on balance, Check 21 increases the likelihood of fraud or decreases the 

likelihood of fraud? 

Mr. HAYES. Check 21——

Mr. WATT. I mean, once it gets implemented out, going forward. 

Mr. HAYES. Being a person that has spent a lot of time in technology over my career, I believe that Check 21 in fact will reduce 

fraud, and that is that we are able to ultimately clear items 

quicker and determine whether or not that is a valid item. Once 

we have those electronic clearing systems in place, then I think we 

put more and more fraud detection systems in place, and ultimately, that benefits the whole. So over the long term, as it 

evolves, I think it is in fact reducing fraud. 

But still, we are dealing with a paper-based item today that 

someone presents to you, you being our staff, and you know, we are 

seeing increases in that area. 

Mr. WATT. And Ms. Duke, Mr. Hayes and Mr. McEntee, what say 

you about the suggestion that the professor has that we should try 

to make all of the legal constructs around paper, Check 21, whatever mechanisms we are using, the same? I mean, I am just trying 

to get reactions to—that you had to the professor’s bottom line suggestion. I think that was his bottom line suggestion. 

Ms. DUKE. I think we all are in favor of simplicity. The difficulty 

is that each of the channels that checks can travel or that payments can travel have their own particular considerations, and so 

it is not necessarily possible to make the rules for checks exactly 

like the rules for electronic payments. At the end of the day, 

though, I am not quite sure it would even be necessary because I 

am not aware of any situations where consumers are being held responsible for payments that they did not authorize, regardless of 

the difference in the time frames and the procedures for making 

those objections. Typically what happens is the consumer goes to 

or contacts the bank and says, I did not authorize this, and that 

starts the process of finding out exactly what happened. And so I 

do not think there is really a risk there of consumers being charged 

for payments they did not authorize. 

33

Mr. HAYES. I concur. I mean, I think if a consumer calls our staff 

and says, you know, this is not an item I have authorized, I mean, 

we are going to immediately respond. We operate under a sunset 

rule. We get a customer inquiry relative to that, and we will move 

on that. I think we provide consumers multiple access points for information on their accounts. You know, being able to come into our 

lobbies and talk to our people to being able to call into an audio 

response system and see what items have cleared, and today, with 

online banking, really the availability of that information to them 

online wherever they are. So you know, at this point, I think, you 

know, the system is working well, and I think we respond well to 

our consumers. That is our business, service and response. 

Mr. MCENTEE. I think this concept, what the professor said, really makes a lot of sense. It would be great if you had a uniform set 

of rules that dealt with all types of payments, and actually, there 

were a group of professors and lawyers that attempted to do that 

quite a few years ago where they attempted to develop new provisions under the Uniform Commercial Code that all the States 

would agree to follow that would basically try to marry check law 

and electronic payments law together. It was a very, very complex 

task, and it ended up not succeeding. 

There is quite a bit of difference between a paper check and an 

electronic payment. There are a lot of things that you could do with 

electronic payments where you can offer more protection to the consumer that you cannot do with a piece of paper that is moving 

through the physical check collection system. So, in theory, I would 

like to go down the path that the professor is suggesting. But I 

think, in reality, it would be very, very difficult to do. 

Mr. WATT. One final question. Most of us, some of us on the committee were supporters of this Check 21 process because we 

thought, ultimately, it would lead to efficiency, reduce fraud, reduce errors, and speed up the processing time which, all of which 

would be to the benefit, ultimately, of customers. 

Ms. Duke, I heard your testimony saying, do not rush to the 

speeding up of the processing time before you get this in place. But 

first of all, how long do you think it will be before we get to that 

ultimate objective of saving processing time so that customers have 

the money in their accounts quicker and we can get to that? I am 

not trying to rush us there, I am just trying to get a good estimate. 

And ultimately, what do you see as the real—the totality of cost 

savings? What part of you all’s bankers’ dollars were actually being 

spent on processing paper checks, and what is the potential savings, looking way out, once all of this is implemented and the 

equipment is in place? 

Ms. DUKE. To begin with, as far as how quickly this is likely to 

happen, it is almost a chicken and the egg thing. When you are 

right at the very beginning, we have very few items being processed and so actually any item that is processed electronically 

today is very expensive because you have this huge investment to 

process a very small number of items. The second piece is a lot of 

items are being processed partially electronically. But then if you 

take a check and you convert it to an electronic image and then 

later on convert it back to a paper check and then process that 

piece of paper, you actually have a transaction that is more expenVerDate 0ct 09 2002 14:47 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 G:\DOCS\23737.TXT FIN1 PsN: MICAH
34

sive than if you had simply processed the original check. The third 

piece is you need to have more than one or two banks able to accept these electronic items. And so there is that process. 

It seems to me that the vendors who supply the community 

banks are really well along on the game on this, and there is a 

process right now of putting everything in place to do it. I would 

say it is probably going to be very slow for the next year or so, but 

there is all of a sudden going to come some tipping point where all 

of a sudden a lot of volume moves very quickly to electronic processing. I am hopeful that this will happen somewhere around 2007, 

but there are so many pieces that have to come together at the 

same time, it is difficult to say. 

As to the question of reducing hold times before these checks are 

actually moving faster, the danger you have there is not just to the 

banks but also to the consumers themselves. There is nobody who 

studies the funds availability schedules and the actual processing 

times that it takes checks to move better than the criminals who 

are out to perpetrate fraud. And the newest of the consumer scams 

right now is a consumer will have something for sale, say on the 

Internet, and are contacted by a purported buyer who says, you 

know, I cannot get there right now, but I have somebody who owes 

me some money. They will send you a cashier’s check, and then, 

you know, we will pay for the item, and then you could wire me 

the difference, which is the money that they owe me. The cashier’s 

check is required to be credited within 1 day. It turns out to be 

counterfeit, and so the customer has actually lost both the item 

they were selling and the money that they have wired out. So that 

is the real risk when you shorten the availability times. Customers 

do get confused and believe that if the deposit is available in their 

account that it has been finally collected from the other bank, and 

that is not necessarily the case. And I think—did I answer all of 

that question? Thank you. 

Mr. WATT. Thank you. I yield back. 

Chairman BACHUS. Thank you. Mr. Ford. 

Mr. FORD. Thank you. Really quickly, first of all, I thank—I recognize Stoner over there. I want to also recognize you have got 

good people. Walter Price is good, and Joy Sheffield is pretty doggone good, too. David Hayes. 

But the question that I have to all of you and that ties into what 

the first panel—although I was not in the committee room; I was 

in the back and I watched portions of it. And Professor, you raised 

part of this as you talked about financial education. And I am curious, three questions very quickly. And I hate—I am going to have 

to leave, Hayes, right when we finish the questioning, so I want to 

apologize in advance. One, in your testimony, you cite through specific things that as you talk about, in order to move to a check 

image exchange platform, we must have three critical components 

in place—the new software, the intermediaries must have the capability to send and receive check images, and there must be widespread acceptance of common interbank image exchange rules. 

What can we do specifically? It sounds like the first one, maybe, 

is there some resources that we need to look at providing here 

through the Congress? And if not, can you give me how we can 

help affect those three steps? 

35

Mr. FORD. The second is financial literacy. I am as big a supporter of anyone and profess and believe that at the end of the day 

that is the answer to much of the problem in Congress. We do all 

this big talk about it, but we provide no money for it. 

And I applaud this chairman, Chairman Bachus, because he has 

been more willing not only to talk about this, but to act on this 

than many people on this committee. And I can only hope that—

you are not the only witness. Witness after witness, panel after 

panel, come before this committee urging us to do this. And we talk 

a good game, but we do very little. 

So I guess my question is, what kind of financial education has 

been given to current and new account holders with regard to 

Check 21? And what more can we in the Congress do to help provide not only on Check 21, but really the broader enlightenment 

that needs to occur, even the younger level, the middle—elementary, middle and high school, I would argue as well. 

So specifically, Mr. Hayes, what can we do on the first three, and 

what has been done to help people understand how this Check 21 

will work? 

Mr. HAYES. To answer the questions, Congressman, I think we 

are in that process. As any movement of change, especially as it relates to technology, there is a learning curve and there is an implementation curve, and as we sit here today we are so early in this 

process. 

I have viewed Check 21 since day one as really somewhat of 

drawing of a line in the sand that says we can move to this new 

frontier, but for a period of time the transaction balance between 

physical items and electronic items will gradually change. We have 

seen that in history as it relates to ATM usage, as it relates to 

debit card usage. You go back, and it is almost as though the older 

we get, the less we are likely to change; and our young people, as 

we teach them the tools, they adapt that technology, and as they 

become our age, the movement is there 

So I think we have done that. I think the leadership that this 

committee and the members have in setting Check 21 really will 

move us forward. 

Now, I am a guy that goes back to the mid-1960s and we are still 

processing checks the way we did in the mid 1960s, and so Check 

21 is the vehicle that allows us to look to the future. And I think 

we are there, it is just now time. And I can’t particularly say anything that there needs to be, that this Congress or this committee 

needs to recommend, because I think we have the tools. It is now 

time and education. 

I will be glad to answer the financial literacy because you recognize where I am from in west Tennessee, and we have a challenge 

of financial literacy. And I think it is the responsibility of government and the private sector and our leaders in education to start 

education at the very lowest level, and explaining that here is a 

dollar, a dollar will buy you this; you don’t have 1.25, you have a 

dollar. So we have got to teach the basics, and it has to start early, 

and it has to be reinforced by, you know, the government, the 

teachers and the private sector. 

Mr. BUDNITZ. I fully agree with everything that Mr. Hayes has 

just said. My problem as an educator is that, as I said in the beginVerDate 0ct 09 2002 14:47 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 G:\DOCS\23737.TXT FIN1 PsN: MICAH
36

ning, it is just so complicated now to try to even explain these 

things because of the present legal structure that it is a formidable 

task. And it is important to start early. 

And what can the Congress do? Well, unfortunately, I think the 

answer is if there were money available to provide incentives so 

that materials could be developed and teachers could be trained 

and so forth, that is the way to go. 

If I could respond to one aspect, though, that is related to consumer education and how uniformity would help. You can’t have 

one law that is going to be exactly the same for every payment system, but if we could teach consumers that well, once you get that 

bank statement, you have X number of days to look at that, and 

then you have to tell the bank if there is something wrong. Now 

it is not that way. If it is certain kinds of transfers, it is 60 days; 

if it is a Check 21 problem it is 40 days; if it is a regular kind of 

a check, the traditional check processing, it is up to the bank and 

the customer’s agreement, which often says 2 weeks. 

Consumer education is so much more feasible if we just could say 

to consumers, you have 60 days to get back to the bank and tell 

them what is wrong. 

Mr. HAYES. May I add something, Congressman? I think as we 

look at our role as bankers, our role is to be there for our customers. And when there is customer confusion, a customer question, I mean, it is our responsibility, and we take it seriously. And 

we do advise customers of their rights, because at the end of the 

day, service is what we deliver and trust. 

And therefore, I think we move to that next level of always being 

there for that customer and trying to advise them of their rights. 

And at the end of the day, we are there for our customer. 

Mr. MCENTEE. If I could just add a couple of points. One is, even 

though the time frames are different, depending on the type of 

transaction that is involved, I think if we can communicate to consumers that it is important to look at your financial statements as 

quickly as possible; if you see a problem, contact the financial institution or the company that initiated the transaction. 

I think the key to the consumer is to look at the statement as 

quickly as they get the statement, and if there is a problem, point 

that problem out right away, because there is plenty of procedures 

and regulations in place for the consumer to have that problem addressed. 

And Congressman Ford, when you mentioned about education, I 

have two teenage daughters, and they think money all revolves 

around my wallet. So I think—it would help me personally, but I 

think it is really important for consumers to understand what a 

checking account is, what a credit card is, what a debit card is, 

even while they are in elementary school, middle school, and high 

school. And I think anything that Congress can do to help out in 

that area would be a tremendous benefit to consumers. 

Mr. FORD. Thank you, Chairman, I yield back. Thank you. 

Chairman BACHUS. Ms. Maloney. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

And I thank all of the panelists, and particularly I appreciate 

your kind comments, Professor, about my bill. And I invite you to 

37

elaborate on the provisions that you think are particularly fair and 

appropriate. 

But I would like to ask the panel about their views on two provisions of my bill which were literally raised by constituents who 

brought them to my attention, and they felt that they were unfair. 

And I invite anyone to comment on them, and I would like to start 

first with the professor, since he said such nice things about the 

bill. 

Anyway, the first one, it would require banks to process credits 

before debits; in other words, to add deposits before deducting 

checks, and this would reduce the number of bounced checks. And 

this practice—the reverse of this practice has happened to some of 

my constituents, and they have complained to me about it; they 

thought it was unfair. So I invite anyone on the panel to comment 

on this provision. 

And the second provision that I invite anyone to comment on, if 

they support it or oppose it or think it is fair, or whatever, is to 

count Saturdays as one of the business days towards the checkhold period if the bank takes the money out of consumer accounts 

on Saturdays. So, a reciprocity of treatment on Saturdays. 

And I have got to tell you that even in New York, in the great 

city of New York that is so advanced, I get many, many concerns 

about the long hold on checks. I just relay that to my good friends. 

Anyway, Professor. 

Mr. BUDNITZ. In terms of the long holds and the problems that 

banks have with the risk of fraud—and there certainly is a lot of 

fraud. I wanted to point out that in the Federal law the availability 

schedules have important exceptions for new accounts. There is an 

exception for a customer that has frequent overdrafts, and there is 

an exception if the bank has reasonable cause to doubt the collectibility of the check, language to that effect. 

And so Congress has already recognized the fact that there is a 

risk of fraud, there are certain circumstances under which that risk 

is greater, and allow the banks to provide accordingly. And that 

has been in the law for a long time in the Expedited Funds Availability Act; it is also in Check 21. 

In regard to the order of posting and counting Saturday as a 

business day under certain circumstances, to me it just sounds like 

that is fair. And beyond that, as Mr. Hayes was pointing out, it is 

really important for a bank to have a customer that trusts the 

bank, that has confidence in the bank, and so responsible bankers 

really take that seriously. 

When I talk to consumers, part of consumers’ anger is that what 

they are doing in terms of the funds and the posting and so forth 

just doesn’t seem fair, and that engenders a distrust in the institution, which is not good for the bankers but also not good for consumers. We don’t want to be scaring consumers away from the 

banking system. We want to encourage them to use the traditional 

banking system and not be running to these marginal fringe operators. 

Mrs. MALONEY. Any comments? 

Mr. HAYES. I would address—well, I think that the majority of 

the banks post credits first, no question, and that is fair. And the 

consumer has—they have a decision of who to do business with. 

38

And you know, quite honestly, if someone is not posting their credits first and the bank down the street is, then there is a decision. 

Number two, on Saturdays. Having spent a lifetime in the processing side of the business, I mean, you know, if Saturday is a 

business day, Saturday is a business day all over the organization 

because you know, the bottom line is debits have to equal credits. 

And so posting checks and not posting credits, you know, to me is 

just foreign. And I think that the bankers take that seriously, and 

I would not see that as something that engenders trust in our customers. 

Mrs. MALONEY. Thank you. Thank you for the comments. 

Mr. MCENTEE. I would like to respond to the concern about hold 

policies. I know quite a few of the subcommittee members had expressed some concern about funds’ availability practice of banks. I 

just want to point out that there is an alternative that consumers 

have for payroll payments, retirement payments, interest and dividend payments, and that is direct deposit. About 71 percent of the 

consumers are now being paid by direct deposit. Over 75 percent 

of Social Security recipients are now being paid by direct deposit. 

My guess is everyone in this room today is being paid by direct deposit. And one of the big benefits of direct deposit is that financial 

institution must make the funds available at the opening of business on pay day. That is a NACHA rule. The NACHA rule is even 

stronger than the Regulation E requirement. So if the consumer 

has the opportunity to get any income payment by direct deposit, 

we urge them to do that. Then they wouldn’t have to worry about 

any hold policy that a financial institution might have. 

Mrs. MALONEY. Well, thank you. My time is up, and I appreciate 

all of your testimony today. It is great to see you again, Betsy. 

Chairman BACHUS. Thank you. I reserved my questions until the 

end because I knew members had other hearings to go to, so I am 

going to ask one or two. 

But Ms. Duke, there have been a lot of recent revelations about 

data security breaches. ID theft is on everybody’s mind, fraud prevention. Some people have talked about immediately across-theboard reductions in deposit hold times. What effect would that 

have—would that make it more difficult for banks to detect and 

prevent frauds? 

Ms. DUKE. Well, across-the-board reduction in hold times without 

any similar improvement in the times where checks are actually 

collected would make things a whole lot easier for those who wanted to perpetrate bank fraud, because they are the ones that really 

study and test what the actual clearing systems are, and their best 

friend is the difference between the fund ability schedule and the 

actual clearing times. 

Chairman BACHUS. And I think you have alluded to that earlier, 

or mentioned that, but if we do consider reducing those hold times, 

we run the risk of playing into the hands of——

Ms. DUKE. Actually, I think if you reduce them below the actual 

clearing times, you have the worst of both worlds because you have 

consumers who don’t have access to their funds as early as they 

might like, and yet depriving them of that period of access hadn’t 

helped anybody in terms of preventing any fraud. So I think that 

would be absolutely the worst thing we could do. 

39

Chairman BACHUS. Do any of the panelists disagree with that? 

All right. Professor, in your testimony you say that consumers 

who have agreed to have their checks truncated or exposed to the 

risk of new errors in fraud but do not get Check 21’s protections, 

who were you referring to there? 

Mr. BUDNITZ. Yes. Check 21 makes a major distinction. If you 

are among the 40 percent of customers who get your checks back 

every month, your canceled checks along with your statement, then 

you will be provided with substitute checks, if what is happening 

with your check includes imaging, and your right to your re-credit 

and indemnity rights kick in. And this is an important protection. 

However, if you are among the other 60 percent of customers who 

have already agreed not to get your canceled checks at the end of 

the month, then you do not get those protections unless the bank 

decides to provide you with substitute checks anyway out of the 

goodness of their heart. 

But they do not have to, under the law, provide them to the customer, because the customer has already previously agreed not to 

get the original canceled checks and therefore does not have any 

right to get substitute checks. One of the things that concerned me 

is that I received a notice from one of my banks just a couple of 

months before Check 21 went into effect, urging me to sign up for 

check truncation, urging me not to get my canceled checks, and not 

alerting me to the fact that on October 28, 2004, when Check 21 

goes into effect, if you do agree not to get your canceled checks, 

tough luck; you are going to lose the protections that Check 21 

would give you—you, the customer who does get his canceled 

checks back at the end of the month. 

So Check 21 made this very fundamental division, giving some 

important rights to consumers who did not agree to truncation, 

who still get their original checks, but depriving the others of those 

protections. 

I do a survey——

Chairman BACHUS. Did it take the protections away or does the 

period, the 40-day period start to run? Or do they just take the protections away altogether? 

Mr. BUDNITZ. The consumer who is not provided a substitute 

check has no right to claim an expedited recredit, and consumers 

who have agreed to truncate their checks have no right under the 

law. 

Chairman BACHUS. Other than the underlying UCC; right? 

Mr. BUDNITZ. The bank may choose to give those customers substitute checks anyway, in which case the protections would kick in, 

but the bank does not have to. 

Chairman BACHUS. But I would think the underlying UCC provisions would still be in effect. 

Mr. BUDNITZ. Yes, absolutely. The UCC, however, in article 4 of 

the Uniform Commercial Code, the Uniform Commercial Code does 

not require the bank to engage in an investigation if a consumer 

complains. 

Now, as Mr. Hayes is saying, a responsible bank does it anyway, 

but they are not required to; and they are not required, as under 

Check 21 and the Electronic Fund Transfer Act, to recredit the consumer’s account if they can’t figure out in 10 days what the probVerDate 0ct 09 2002 14:47 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 G:\DOCS\23737.TXT FIN1 PsN: MICAH
40

lem is. If it is true that banks all investigate anyway and will recredit within a reasonable time anyway, then what is the harm of 

just putting that into the law? It just codifies what the banks are 

doing anyway, if they are doing it. 

Chairman BACHUS. Mr. Hayes, now the professor, he has recommended that we amend the Expedited Funds Availability Act to 

require banks to give consumers access to their funds more promptly. How would that affect community banks and their customers? 

Mr. HAYES. Number one, as I stated earlier, a majority of our 

member banks, and my bank in particular, gives our customers, 

you know, availability, unless we have some reason as allowed 

under the law to question the item. If we knew the item being presented was always a valid and nonfraudulent item, we wouldn’t be 

having this conversation. But there is nothing out there that gives 

us that protection, so we are in the risk management business. But 

at end of the day, our customers—we look at that relationship and 

we try and move forward. 

So until we can fix the fraud side, I don’t think we can expedite, 

you know, the clearing; because we are speeding the process up 

over time and I think that will pass, you know, to the consumer 

and those institutions. But to say that we have to do that where 

we sit today, I do not see that. 

Chairman BACHUS. Professor, back to you. Check 21 requires the 

Federal Reserve Board to make recommendations to us for legislative action by April of 2007. And I think they can reduce—I don’t 

know if you can reduce check-holding times now by regulation. Do 

you think other than if check holding times—if check processing 

speeds up, they have a right to go ahead and reduce check holding 

times? Do you think that is sufficient or do you think we ought to 

go further with additional legislation? 

Mr. BUDNITZ. I think you need to gather as much data as you 

can so that you know what the present situation is to see if it is 

justified to shorten those times. And also I think you need to take 

a careful look at where the problem areas are. 

Ms. Duke was talking about this scam using cashiers checks. I 

have received a lot of complaints about that recently. I get the complaints from lawyers who are representing customers, who then 

come to me for help in terms of what can we do under the law. And 

this is an area that I would urge the committee to take a very serious look at to see what it is possible to do to protect consumers who 

are subject to this cashier’s check fraud. So it is a complicated situation. There are lots of different kinds of risks that banks take, 

some more than others. 

But just one final point. Bankers keep saying, we are giving consumers much faster credits on almost all the checks than we are 

required to anyway, and so there is sort of a disconnect. If you are 

doing it anyway, what is the harm in shortening the time periods? 

At least as long as we carefully define the situations under which 

the bank can say, wait a minute, we need to have a special rule 

here, like with new accounts and overdrafts, and reasonable cause 

to doubt collectibility. That is in the present law. 

So I am not giving a simple answer because it is not a simple 

situation. There may be special cases which need special kinds of 

rules where the bank does not have to give the money as quickly; 

41

in other situations where there is little risk and the banks are 

doing it now anyway. 

Chairman BACHUS. I have heard a lot of cases where people buy 

a car with a forged cashier’s check. And we do hear that from time 

to time, and it turns out that it is a fraudulent check. Oftentimes, 

I think it is stolen from the banks. But in that situation, it seems 

to me that reducing the hold time, once a consumer, he goes down, 

and once it is credited through his account, he probably lets the car 

go. But he probably holds it until that check clears. So it almost 

seems to me in that case it might make it easier for someone that 

is trying to pass a cashier’s check. 

Mr. BUDNITZ. Well, as I indicated, I urged the committee to take 

a specific look at the cashier’s check problem and see just what, if 

anything, would be a legislative solution to that particular problem. 

But there may be other areas where there just are not problems 

where the availability could be made quicker. 

Chairman BACHUS. Okay. All right. 

And Check 21 does have that. And what we are going to do is 

basically what you are saying; we are going to gather information, 

and by that date they are going to make recommendations to us. 

And they are free to make recommendations before that date. It is 

simply by that date. 

My last question, one thing—and I do see your point about truncated checks, Professor. I am not sure that consumers do realize 

that if they agree to that, that they fall back into a different category. I don’t know how, unless we—it does seem like we could 

have maybe more uniformity. I am not sure that it is possible. 

But——

Mr. BUDNITZ. As I suggested.——

Chairman BACHUS. Have you known of any instances where 

someone has come back to their bank, say, after a month and said 

this is a fraudulent account—other than the cashier checks 

maybe—and their bank—that is actually a deposit, but a case 

where their bank account has been charged and they have come to 

their bank after 3 or 4 weeks and their bank said too late? 

Mr. BUDNITZ. Well, let me just suggest one other element that 

came up earlier, just to make your job even harder. Mr. Feeney 

was asking Ms. Roseman about other kinds of cards and Ms. Roseman was talking about payroll cards. The thrust of much of my remarks today has been that you can’t just look at Check 21 very 

narrowly. It is part of a much larger picture, because as Ms. Roseman was indicating, the Federal Reserve Board has proposed to 

treat payroll cards under Regulation E. 

Now, payroll cards come within the category of stored value 

cards and they have not been regulated at all by Federal statutes 

or by most States. And I think it is good to bring the payroll card 

under the regulatory umbrella as well. But this is a moving target 

and that is why the whole situation becomes so confusing to consumers. Lawyers, businesspeople—I try to educate businesspeople 

and they are very confused as well. 

So I am not making your job any easier but I am saying you need 

to take a look at all the different things going on. 

42

Chairman BACHUS. But even—and I realize you are pointing 

these problems out, but I don’t think Check 21 precipitated any of 

these problems or made them worse; is that correct? 

Mr. BUDNITZ. I believe it made it worse in the sense that it 

makes things even more confusing, as I think everybody this afternoon has agreed. Consumers can’t figure out the difference between 

ARC or electronic check conversion at the lockbox and Check 21. 

They are confused about that. So that is an area where——

Chairman BACHUS. I guess I am saying it did not take any rights 

away from them. 

Mr. BUDNITZ. Yes, you are right. You are correct. 

Chairman BACHUS. Mr. McEntee, it seems to me there is a lot 

of confusion surrounding Check 21 that has come from the fact—

and I said this earlier to the director of the Federal Reserve, Ms. 

Roseman—that there has been a sharp increase in the number of 

ARC or ARH? 

Mr. MCENTEE. ARC. 

Chairman BACHUS. ARC transactions, and little or no awareness 

by the consumers. You say your associations work to make them 

more aware of what is happening. But how would you respond to 

that? Do you see there is some confusion there? 

Mr. MCENTEE. We definitely think there is confusion there. Actually, I think part of the confusion is that, although the rules for 

ARC were approved before Check 21 legislation was implemented, 

what happened was a number of large billers started to convert 

checks around the same time that Check 21 regulations went into 

effect, and there was a tremendous amount of media coverage 

around Check 21, but a lot of the coverage, I think, really conveyed 

a confusing story to the consumer. They got Check 21 and check 

conversion all mixed up together, and that led to a lot of confusion 

and phone calls—a lot of phone calls to billers. And I know Congress has gotten a number of letters and phone calls as well. 

We hope that that confusion has been greatly reduced because 

we do know that the biller community and the banking community 

are doing a much better job now disclosing the information. I have 

seen quite a few brochures and pamphlets that banks have provided that really explain very carefully the difference between 

check conversion and Check 21. So our belief is and our hope is 

that the confusion that was out there 5 or 6 months ago has been 

greatly diminished. 

Chairman BACHUS. I can tell you that in every case—and I bet 

there were 30 cases where we had referrals from other Members 

of Congress—in every case when we tracked it down, it was not 

Check 21. It was another existing problem. 

But my final question is this. And I will say that this is not a 

problem that has gone away. Is really—does not have anything to 

do with this hearing because this hearing is on Check 21. But it 

does have something to do with customers having the right to know 

what is going on in their accounts and whether or not these checks 

drawn on their account are legitimate transactions or not. 

In hearing all of these complaints and hearing people talk, I still 

believe there are situations where people’s bank accounts do not 

contain enough information about various transactions. I think a 

lot of them are direct deposits. It is hard to figure out for a while 

43

whether it is a direct deposit or what it is. You just see there is 

a withdrawal from an account and sometimes it takes us 2 or 3 

weeks trying to figure out, talking to whoever is making the deduction. 

But I think surely at least some threshold of information should 

be in there. And you said you require that? 

Mr. MCENTEE. Yes. Our rules require that the financial institution display the name of the payee, and our rules also require the 

company that converts the check to list their name in the electronic 

record as well as the check number. So that information should be 

provided to the consumer. 

We do know that some banks have done a great job in modernizing their statements. Others are still in the process of making 

changes to their statements. But our belief is that if the consumer 

looks at their complete statement, they will have an easier time 

reconciling that statement than when checks are processed in the 

traditional way, the name of the payee and the check number. 

We also know that some of the billers, at least initially, were not 

doing a very good job disclosing the information about the possibility that the check could be converted to an ACH transaction. I 

don’t want to be too critical of lawyers, but in some cases the lawyers got ahold of very carefully crafted language by the marketing 

and customer service people, and they turned it into absolute gobbledygook and buried the information on the back of the statement. 

When that kind of problem is pointed out to us we will contact 

the biller, explain the problem that the biller is causing, and 

strongly urge the biller and their bank to come up with a better 

disclosure and to get the information on the statement so that the 

consumer can readily understand what possibly could happen to 

that check. 

Chairman BACHUS. All right. Anybody else want to comment on 

anything? No? Any final comments? This is open mike time. 

Mr. HAYES. I think at the end of the day, you know, you go 

through transitions. And I cannot recall a situation where Check 

21 has been a problem, where there is an issue—problem with a 

consumer and the check and our image statements. Because I 

think at end of the day, as I said earlier, you call me or you call 

my staff, we are going to research it, because the customer is why 

we are there. And if we do not serve them properly, we are not 

going to have them tomorrow. 

And so you got regulation and you got relationship, and we are 

in the relationship business. And I am proud to say if a customer 

calls us, we are going to be on top of it and help educate if there 

is a question. 

Chairman BACHUS. I said this when we started considering 

Check 21—I think we had 14,000 airplanes in the air and over 

100,000 vehicles. And most of them have not been eliminated now, 

but they will be; and with gas prices at $2.40 a gallon and us importing 65 percent of our energy today, this goes a long way towards making a more efficient system when we really do not have 

gas to burn or waste. 

And the other countries that we compete with have already gone 

to this model. So you know, we are certainly making our financial 

system more competitive with our global competition. And that is 

44

one reason why we need to make this work and not abandon it and 

not confuse other problems with Check 21. 

But I appreciate all of your suggestions and your testimony here 

today. Thank you. 

[Whereupon, at 4:47 p.m., the subcommittee was adjourned.] 

(45)

A P P E N D I X

April 20, 2005

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