WASHINGTON -In an effort to speed up payment systems, Federal Reserve Board Chairman Alan Greenspan last week sent Congress draft legislation intended to make it easier for banks to process checks electronically.
The proposed Check Truncation Act "would enable banks to achieve many of the benefits of electronic check processing without mandating the receipt of checks in electronic form," Mr. Greenspan wrote in a Dec. 17 letter to Senate Banking Committee Chairman Paul Sarbanes, House Financial Services Committee Chairman Michael G. Oxley, and the ranking minority members of both panels.
"Banks would be able to truncate, or stop, the flow of checks, process them electronically, and create machine-readable substitute checks, if necessary, that would be the legal equivalent of the original checks," the letter said.
Truncation would reduce banks' reliance on air and ground transportation to move paper checks around the country, Mr. Greenspan wrote. "Had the provisions of this proposed act been in effect when air traffic came to a standstill due to the terrorist attacks on Sept. 11, banks would have been able to reduce the impact of the disruption in air transportation on the check collection system."
He asked the lawmakers for their "consideration" of the legislation, which does not yet have a formal sponsor and thus has not been introduced as a bill.
House Financial Services aides have said the panel will hold hearings on truncation policy next year. The financial institutions subcommittee is most likely to hold the hearings, industry sources said.
Under the draft legislation, banks could make electronic copies or machine-readable substitutes of deposited checks or send them to the check writers' banks electronically for processing.
Currently, banks have to present and return the original paper checks unless they have agreements - which they say are difficult to obtain - with the other banks involved to replace the paper checks with electronic versions. Customers generally prefer to receive their original paper checks after they have been processed and paid, according to industry officials.
Under the draft, banks receiving the substitute checks could process them in the same way as original paper checks. In a summary of the proposal, the Fed said this would not significantly affect the operations of banks that do not wish to participate in the electronic collection or return of checks.
Opponents of the plan - led by consumer groups and AirNet Systems, a company that flies checks around the country for processing - argue that the proposal would not set federal standards for what would qualify as a substitute check, it does not contain adequate protections against fraud, and it would not reduce costs or the amount of paperwork, because some banks would have to print out the electronic substitute checks.
