Seven policies banks could adopt to improve Check 21 for consumers

August 11, 2004
Chief Executive Officer
Dear Bank CEO:
Consumers Union, the nonprofit publisher of Consumer Reports, and the Consumer Federation of America ask you to adopt seven policies to mitigate the adverse impacts on consumers of the federal Check Clearing for the 21st Century Act, “Check 21.”
We are hearing from consumers who are unhappy that they won’t be able to get back their original checks after “Check 21” goes into effect starting October 28, 2004. Your financial institution could make Check 21 less disruptive for its consumers 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.
We ask you to adopt these policies to improve how Check 21 affects your consumer customers:
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.
There are many different ways that a check can be processed. Different forms and levels of consumer protection apply depending upon the processing choices made by the merchant or the bank. For example, a consumer check processed by a merchant through check conversion under the NACHA rules is an electronic fund transfer, with full federal Electronic Fund Transfer Act (EFTA) rights, including a right of recredit within ten business days. By contrast, a check processed through imaging after the effective date of Check 21 triggers a right of recredit to resolve disputes only if a paper substitute check was provided to the consumer, either with the account statement or in response to a request.
A check processed through electronic check conversion and an image-processed check both result in no return of the original check. A single check-writing consumer is likely to have checks processed through both methods. To make the situation even more confusing, a consumer can exercise the EFTA recredit right on a converted check without a copy of that check (which, under NACHA rules, has been destroyed), while the consumer whose check is processed by imaging must have been provided with a substitute check in order to exercise the Check 21 right of recredit. It will be difficult for consumers, and perhaps even for bank employees, to determine when a dispute about a particular check triggers the right to expedited recredit of disputed funds to the account, because that will depend on how the merchant and the financial institution chose to process that check.
A spokesperson for one banking trade organization has been quoted as saying that state law gives consumers a right of recredit, but the Uniform Commercial Code does not expressly require a recredit and does not set out any timeline for the return of disputed funds to a consumer’s account.
As a financial institution, you can prevent much of the confusion caused by differing consumer rights for different check processing methods by adopting a simple policy that applies a ten business day right of recredit to all disputes regarding checks, whether the processing is through voluntary imaging, processing with a substitute check, or processing through electronic check conversion. Such a policy would make it much easier to explain the changes in check processing to consumers. The policy would assure consumers: “If something goes wrong with a check, we will recredit your account within ten business days.” Such a policy would give consumers certainty despite the uncertainty of how a check will be processed after it leaves the consumer’s hands. This would increase consumer acceptance of the other changes accompanying Check 21. The proposed policy would avoid putting consumers to the trouble and delay of asking for a substitute check before requesting a recredit. Such a policy would also protect the financial institution from the risk of violating the EFTA by denying recredit to consumers who are entitled to it because customer service staff mistakes a converted check, which has EFTA recredit rights, for an imaged check, to which the EFTA does not apply.
For these reasons, we ask you to adopt a policy to give all consumers a ten business day right of recredit whenever a check is paid wrongly, no matter how the check was processed. The new account exceptions used in the EFTA and in Check 21 could be applied to ensure that this policy does not pose a fraud risk.
2. Don’t charge a fee for substitute checks.
Consumers who don’t get their checks back will need a substitute check from time to time, perhaps to prove that they have paid a bill. Financial institutions are expected to save up to $2 billion under Check 21. We ask you to choose not to charge a fee for a substitute check. Don’t turn Check 21 into a new fee opportunity. If your financial institution does not adopt an across-the-board recredit policy for electronically processed checks, then there is another important reason not to charge for substitute checks. The consumer needs a substitute check to trigger the recredit right under Check 21. Charging a high fee for the substitute check could discourage consumers from exercising the rights conferred by Congress. We believe that 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.
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.
Consumers who manage their finances using original paper checks, which studies says is still just over 40% of U.S. households with checking accounts, will experience the most disruption under Check 21. You can minimize that disruption and reduce the level of customer dissatisfaction by offering an account which returns substitute checks each month in the same fashion, and for the same price, as the account or accounts with original paid checks which you offered before Check 21. One purpose of the substitute check is to minimize disruption for consumers by providing for a kind of copy that is legally equivalent to the original paid check. This purpose won’t be served if consumers who now get back original paid checks are sent legally inferior copies that are not the type of copy that qualifies as a substitute check. It should not cost any more to generate a substitute check from a computer file than to sort and handle an original paid check. There is no reason to charge more for, or refuse to provide, an account that returns to the consumer substitute checks (the only type of copy that is legally equivalent to the original check) than your financial institution previously charged for an account that returned the original paper 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.
Check 21 is widely expected to speed up check clearing, because the sending of original paper checks will no longer be required. Although Check 21 does not require financial institutions to give consumers access to deposited funds sooner, it is only fair to give consumers earlier access to funds if the checks consumers deposit are actually clearing sooner. For this reason, we ask you to adopt a policy that funds deposited in a consumer account will be made available, for withdrawal and to pay checks, on the earlier of the statutory hold date or the date the check depositing those funds actually clears.
5. Suspend bounced check fees from October 28, 2004 to December 31, 2004.
Consumers Union and the Consumer Federation of America advise consumers not to write a check unless the funds to pay the check are already in the consumer’s account. However, 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. Your financial institution could 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 your 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 your financial institution 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. We ask you to 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 your customers, not just those receiving original paid checks or requesting substitute checks, need to know about Check 21. All your customers may experience faster check clearing, for example. All your 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 you 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. We ask you to notify all your consumer customers about Check 21.
We also suggest that you educate your commercial customers about substitute checks under Check 21. The substitute check looks different from an original check, even though it is legally equivalent to an original check. Consumers may have trouble getting landlords and merchants to accept a substitute check as proof of payment if financial institutions haven’t explained the substitute check concept to their commercial customers.
We are asking major U.S. deposit-taking financial institutions to adopt these policies by October 1, so consumers can decide if they want to change banks before the start of Check 21. Consumers Union plans to post information about the responses we receive from the large deposit-taking financial institutions on our website, If you’d like to discuss these seven proposed policies, please contact Gail Hillebrand at Consumers Union, 415-431-6747, or Jean Ann Fox at the Consumer Federation of America, 757-867-7523.
Very truly yours,
Gail Hillebrand
Senior Attorney
West Coast Office
Consumers Union of U.S., Inc.
Jean Ann Fox
Director of Consumer Protection
Consumer Federation of America
Click here for more information on the Check 21.