Depository institutions are blasting a Federal Reserve Board plan that would force them to clear out-of-town checks faster.

Banks, thrifts, and credit unions told the central bank in comment letters that the proposal is unnecessary, would increase compliance costs, and could increase check fraud.

"We believe the proposal ... would substantially increase community banks' regulatory burden without commensurate benefit," wrote William L. McQuillan, president of the Independent Community Bankers Association.

In December the Fed issued an advance notice of proposed rulemaking that would reduce the hold time on nonlocal checks from five to four days. The Fed divides the country into 12 regions and defines "nonlocal" as a check paid and cashed by a bank in another region.

The central bank said the Expedited Funds Availability Act requires it to cut clearing deadlines when two-thirds of the checks in a given category are being returned to the paying bank faster than regulations demand. The Fed also noted that since the law was enacted in 1987, check processing systems have improved.

More than 90 comment letters were filed by the March 15 deadline. A final rule is not expected to take effect until this time next year.

Banks, thrifts, and credit unions challenged Fed research showing that more than 82% of nonlocal checks are returned to paying banks within five days and that nearly 60% were returned within four days.

However, institutions writing comment letters said those numbers are too high. "Our analysis showed that only 39% of the nonlocal return items reviewed were received by the fourth business day," wrote Wendy A. Weiss, compliance officer at Provident Bank, Cincinnatti.

Small institutions complained the loudest.

"Checks processed by smaller banks would be most likely to take the longest time to clear," said Elizabeth A. Duke, president of Bank of Tidewater, Virginia Beach, Va.

"The proposed change ... actually will aid the criminal elements to set up schemes to defraud financial institutions and individual consumers," wrote H.J. Bedinger, vice president of finance at USA Federal Credit Union, San Diego.

Large banks also weighed in, citing an increased regulatory burden and costs.

"Bank of America strongly opposes the proposal," wrote Patrick M. Frawley, director of regulatory relations at the country's largest bank. "The task of explaining holds ... to consumers is already difficult," he said. Breaking nonlocal checks into smaller categories, Mr. Frawley said, "will make it even more difficult for both bank employees and customers."

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