BOSTON—Consumers may
get hit with more bounce check charges, and lose valuable rights as Check 21,
a new federal banking law, goes into effect on October 28, 2004. Under this
new law, consumers will lose the check float, because banks will be permitted
to process all checks electronically by converting paper checks into electronic
images and back to paper versions of the electronic image without ever moving
the paper check, but consumers may still have to wait 2-5 days (depending on
the type of bank) to access to their deposited checks. In addition, consumers
will no longer receive their cancelled checks with their monthly statements
The law is designed to save banks money and time in the check clearing process.
"While Check 21 gives banks
faster clearing of the checks we write to others, it doesn't require banks to
give us quicker access to the checks we deposit," said MASSPIRG's consumer program
director, Deirdre Cummings. "That means big bounced check problems for consumers
and big bounced check fee income for banks."
In addition to its shortening of the float on checks consumers write, Cummings
pointed out the other main impacts of the new law: First, Check 21 will facilitate
the process for banks to convert checks to digital images or pictures. Consumers
can continue to receive these images instead of cancelled checks, but under
the law, images are not legally equivalent to a cancelled check in a dispute.
Second, banks may charge extra fees to receive a special kind of copy of the
check which is legally equivalent to the original cancelled check and which
triggers an important new consumer right. This special kind of copy is called
a substitute check. In Massachusetts, because we have a law requiring banks
to return cancelled checks upon request (MGL chap. 167D section 27), banks must
offer an account which provides consumers with substitute checks at no extra
cost.
"The only way consumers
will know if there is a problem with their accounts is to read their statements
carefully and check everything that is returned with the statement," added Cummings.
"If you see a problem remember that all copies are not created equal, you will
need to specifically ask for a substitute check - not merely a copy - to legally
resolve any dispute with a merchant or creditor. An image is not a substitute
check, and not every paper copy is a substitute check."
"When you use your debit
card at a merchant or when a merchant converts a check at point of sale to an
electronic transfer, you have a legal ten business day right of recredit in
any dispute," said Cummings, "But when you have a dispute over a check that
you've written, for example, if the check is paid twice, paid for the wrong
amount, or otherwise paid in error, you will not have that same 10 business
day right of re-credit unless you have received a substitute check."
Banks can make Check 21
less disruptive for their customers by adopting pro-consumer policies. These
policies would avoid using Check 21 as a new opportunity for fees and would
give consumers the security of a ten business day timetable for recredit on
all checks, no matter how the checks are processed or what is returned to the
consumer.
MASSPIRG, along with Consumers
Union and other consumer groups called on all banks to adopt the following policies
to improve how Check 21 affects consumer:
1. Promise to return
funds to a consumer checking account within ten business days when something
goes wrong with a check no matter how the check was processed and no matter
what type of copy of the check is returned or made available to the consumer.
2. Don't charge a fee
for substitute checks.
Charging a fee designed to deter requests for a substitute check, which is necessary
to trigger a statutory right, would be an unfair business practice. Further,
state chartered banks must offer an account which offers the return of substitute
checks, for no additional fees.
3. Offer an account that
returns substitute checks every month, for no more than the price you have been
charging for an account that returns original checks.
4. Give consumers the
benefit of faster check clearing by crediting consumer accounts when a deposited
check clears, even if that is earlier than the hold period allowed by law.
5. Suspend bounced check
fees from October 28, 2004 to December 31, 2004.
The increased speed with which checks will clear under Check 21 is likely to
cause at least a temporary increase in the number of bounced checks. Financial
institutions should ease the transition to Check 21 by suspending bounced check
fees between October 28 (the start of Check 21) and the end of 2004 and using
this time to educate customers about the increased risk of bouncing a check
due to faster check clearing under Check 21.
6. Send a substitute
check to every consumer who asks for a copy of a check or for an original check.
Check 21 creates a new kind of copy of the check which is the legal equivalent
of an original paid check (to prove payment) and which triggers certain consumer
rights. When a consumer asks for an original check or for a copy of the check,
the financial institution should always send that consumer a substitute check,
which is the only kind of copy that proves payment, that is legally equivalent
to the original paid check, and that triggers the consumer's right of recredit.
We are concerned that consumers
who call and ask for a copy of a check won't be told that there are two kinds
of copies, and that only one type of copy triggers legal rights.
If a consumer calls their
bank and says: "please send me a copy of my check," it should not be up to the
consumer to know that there are two kinds of copies, and to request the superior
type of copy, the substitute check. Banks should adopt a policy of sending a
substitute check, at no fee, whenever a consumer calls and asks for either an
original check or a copy of a check.
7. Be upfront with all
your customers about Check 21.
We think that all bank customers, not just those receiving original paid checks
or requesting substitute checks, need to know about Check 21. All bank customers
may experience faster check clearing, for example. All customers may have a
need for a legal equivalent of an original paid check from time to time, yet
the federal regulation implementing Check 21 does not require banks to give
notice to all customers at the start of Check 21. The statute and regulation
require financial institutions to give notice only to those consumers who receive
or request original checks or substitute checks. A consumer who is not receiving
original paid checks in October 2004 may never be told about the availability
of the substitute check unless the consumer later asks for an original check
or for a substitute check—something the consumer has never been told about.
MASSPIRG urges all financial institutions to notify all consumer customers about
Check 21.
MASSPIRG is recommending
several steps for consumers to take in order to both inform and protect themselves
from these new laws:
• Only write the check if the funds are in the bank. With the use of
new electronic images, banks may process a check within hours of when they were
written; negating the "float time" many consumers take advantage of. This will
likely lead to more bounced checks and overdraft fees.
• Know and understand
what "substitute checks" are. Under Check 21, the only legal substitute
for a cancelled check is a substitute check. A substitute check is a paper copy
of an electronic image of your cancelled check, but not all images provided
by banks are not legally the same as substitute checks. Substitute checks are
required to start a ten business day timetable for a bank to fix any errors
in payment of a check from a consumer's account. MASSPIRG advises consumers
to contact their bank and inquire whether or not they will be charged a fee
to obtain a substitute check and to be aware that all Massachusetts banks must
offer an account, for no additional fees, that will send consumers substitute
checks monthly.
• Consumers should carefully
examine all bank statements. Since paper checks will be scanned into an
electronic image, there is a chance that the bank will double-debit a customer's
account, posting both the original check and its electronic copy. Another problem
could occur during the transfer from paper to electronic file if the amount
written on the check is misread. MASSPIRG recommends that consumers carefully
track all written checks and take the time to read their bank's monthly statement
to insure that no bank errors occurred. If an error has occurred, they should
obtain a substitute check from their bank immediately in order to prove the
error.
• Consumers have the
right under Check 21 for a re-credit within 10 days of the mistake being made.
In order for a re-credit to occur they must first obtain a substitute check.
