WASHINGTON - A Federal Reserve Board official and industry representatives told a House Financial Services subcommittee this week that they oppose legislation to shorten holds on checks.
Rep. Carolyn Maloney, D-N.Y., reintroduced the Consumer Checking Account Fairness Act two months ago. The bill, originally introduced late last year, would reduce the maximum hold time for a nonlocal check from five days to two days and require Saturday to be counted as a business day when clearing checks.
She called the bill a response to consumer complaints stemming from the Check Clearing for the 21st Century Act, which makes it easier for banks to clear checks electronically. Electronic processing is expected to significantly reduce float time.
Rep. Maloney said at a financial institutions subcommittee hearing Wednesday that some of her constituents have complained their debits are clearing faster than their deposits. She called the situation is "a structural imbalance that disfavors consumers."
But Louise Roseman, the director of the Fed's reserve bank operations and payment systems division, told the subcommittee, "Improvements in the check-collection system have not yet been extensive enough to warrant a reduction in the maximum permissible check-hold periods."
Ms. Roseman cited several reasons the bill would be premature.
The first: Check 21 was signed in October 2003 and took effect six months ago, but not a lot of banks are taking advantage of it yet. Roughly 400,000 checks a day, or less than 1% of the roughly 50 million the Fed processes, are being cleared electronically.
"In our experience to date, most checks collected digitally don't involve consumer accounts," Ms. Roseman said.
The Fed does not plan to start studying the effects of Check 21, including whether hold-time requirements need to be updated, until next year and will report to Congress by April 2007, she said.
Congress set the maximum hold times at two business days for local checks (those being cleared by in the same Federal Reserve processing region in which it was written) and five days for nonlocal checks in 1987. Higher-risk checks, such as those for large sums or from new accounts, require additional time.
These hold periods let the banking community manage their risk of check fraud and allow for customer service options, Ms. Roseman said. "The competitive market works very well," she said. "Most banks process checks faster than required by law."
David Hayes, the president and chief executive officer of the $131 million-asset Security Bank in Dyersburg, Tenn., and the chairman of the Independent Community Bankers of America, echoed her comments.
"Preemptive legislative or regulatory efforts to reduce check-hold periods without the proven history of faster check clearing and settlement will leave financial institutions and their customers exposed to serious losses and sophisticated fraud schemes," he said.
Rep. Bernie Sanders, I-Vt., said long holds are one of a "myriad of predatory lending practices" that consumer groups predicted could cost consumers more than $175 million of bounced check fees.
Yet the subcommittee's chairman, Rep. Spencer Bachus, R-Ala., indicated that he believed time should be taken to understand all of the law's effects.
"The reality is that it is still in its infancy," Rep. Bachus said.
