Bad Checks Surged Last Year; Bankers Blame Fed's New Rules

Bank customers wrote more bad checks in 1990 than in previous years, and some bankers say new federal check-clearing regulations are increasing their exposure to fraud.

A survey by the American Bankers Association showed that last year, at banks with assets of more than $1 billion, the ratio of bad checks to total checks deposited rose 19%. Smaller banks reported similar results, the survey reported.

The survey covered 420 banks and was conducted in the first quarter of this year.

Steep Losses

Although bad checks constitute less than 1% of the total number of checks written by bank customers, the resulting losses are steep, because banks often do not recoup all the funds they pay out.

Banking experts say that the Federal Reserve's Regulation CC - rules that mandate how long banks can hold checks before cashing them - increase fraud losses.

"The increase [in bad check deposits] is directly attributed to Reg CC," said Robert B. McDonald, chairman of the ABA's document and check fraud task force. "Under the current deadlines, banks often release the funds before they ultimately know whether the check is good. The window to check for funds availability is smaller."

"We hear stories about instructions on how to beat Reg CC that were circulating among criminal rings in California and on the East Coast." said Edward Alwood, a spokesman for the ABA.

Timing Was Changed

Changes in Reg CC that took affect last September mandated that banks make funds available in as little as two days for local checks and five days for nonlocal checks. The actual check clearing process for out-of-state checks can take up to two weeks in some cases.

Bankers lobbied against the changes in Reg. CC because they were concerned about increased fraud losses, but Congress approved the new regulation under pressure from consumer groups. Now the industry is gathering information that will attempt to prove a direct relationship between shorter check hold times and increased losses on checks.

Last month, the ABA mailed questionnaires to the top 500 U.S. banks to survey how much banks lose as a result of check fraud. The ABA hopes to use the statistics to persuade regulators to allow more time for clearing checks.

Ballooning Is Expected

Many bankers expect bad check losses to increase. Over 44% of bankers at institutions with assets over $1 billion said they expect losses to grow, the 1990 survey showed.

Banks also saw an upsurge in the percentage of checks returned because of insufficient funds. At banks with more than $1 billion in assets, the ratio increased 16% in 1990.

One reason for the increase in bounced checks is the recession, bankers say.

The average loss because of bad checks at a large bank was $330,000 in 1990, the ABA survey showed.

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