Lawmakers Tell Fed Financials Should Share Profits Resulting from Check 21

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A group of top lawmakers called on the Federal Reserve last week to ensure that banks and credit unions are sharing any new profits on "float time" accrued from the new Check 21 law with consumers.

In separate letters sent to Fed Chairman Alan Greenspan and a group of trade associations, including CUNA and NAFCU, the lawmakers note that the new law aims to improve the check clearing process by establishing electronic check images as legal tender, thereby expediting the clearing process and making funds available sooner. The lawmakers, who include House Financial Services Chairman Michael Oxley of Ohio, urge that banks and credit unions pass on savings of reduced holding times for checks to their consumers/members.

"Bottom line, Check 21 was designed to benefit consumers," said Rep. Spencer Bachus (R-AL), chairman of the Financial Services Subcommittee on Financial Institutions and another signer to the letter. "We expect financial institutions to implement the act in a way that benefits, not penalizes, their customers."

'Institutions Should Not Profit'

"As Check 21 is implemented, financial institutions should not be able to profit by holding a customer's deposit for an extended period. It is only fair that consumers' deposits are also credited to their accounts quicker," Bachus said.

At stake is billions of dollars of so-called float, the daily interest earned on funds available to banks and credit unions and their customers/members. Under current law, the Federal Reserve's Reg CC, institutions may hold checks deposited with them for five days while they verify the availability of the funds. Those five days can mean millions, if not billions of dollars in additional interest earned on funds held by a bank or credit union.

A spokesperson for the Financial Services Committee said last week the lawmakers are interested in making sure that consumers benefit from the new law as much as financial institutions. She said the lawmakers have asked the Fed to see what can be done to ensure that the law is implemented fairly.

In their letter to Fed Chief Greenspan, the lawmakers urged the Fed to proceed with the study mandated by Check 21 on what effect the new law will have on the speed of payments and whether the allowable "hold time" for checks should be reduced.

The major impetus for new law was financial crisis caused by the terrorist attacks of Sept. 11, 2001, when millions of paper checks usually transported by planes were grounded, clogging up the nation's check clearing system.

In their letter to the trade associations, the lawmakers expressed concerns that banks and credit unions would try to unfairly profit on the extra float created from the new law. "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," they wrote. "The latter practice prevents consumers from realizing the benefits of their own assets, while creating an illegitimate revenue stream for financial institutions. It unfairly penalizes consumes and should be eliminated from the U.S. payment system."

The lawmakers asked the groups to work with their member institutions to ensure that members gain timely access to their funds, without prompting from either the Federal Reserve or from Congress.

The letter was sent to CUNA, NAFCU, the American Bankers Association, America's Community Bankers, Consumer Bankers Association, Electronic Check Clearing House Organization, Financial Services Roundtable, and Independent Community Bankers of America.

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