Bankers are voicing confusion over a provision in Check 21 regulations that could require them to act more quickly to resolve disputed checks than they do under current banking rules.
Though the industry is not expecting a flood of disputed items once the Check Clearing for the 21st Century Act takes effect Oct. 28 — such items are relatively uncommon today — bankers are parsing the Federal Reserve Board’s latest rules and are seeking clarification on when to apply the provision covering expedited recredit.
The provision was drafted in part to satisfy consumer advocates who were concerned that shifting to electronic processing would lead to faster debits, and who wanted to ensure that there was a mechanism in place for quicker repayment in case of bank errors.
However, some banking industry executives say that Check 21 was designed to facilitate the eventual transition to image-based clearing, and that the recredit provision likely will not be invoked very often.
Expedited recredit was a top issue for bankers who participated Tuesday in a teleconference sponsored by the American Bankers Association to discuss the new Fed regulations. On Monday the central bank released a 112-page document with revisions to its Regulation CC, which governs check clearing.
On the conference call, 500 bankers from communities around the country peppered Fed officials with questions about the recredit rule; the bankers wanted clarification on several of the technical provisions regarding responsibilities and obligations. The overall sense of caution reflected the concern among compliance, operations, and marketing employees about whether and how they would need to alter their processes.
Daniel J. McCarty, the senior vice president of treasury management services at Comerica Bank, said the final shape of the provision reflected the “ebb and flow of negotiations” between consumer advocates, who had sought stringent protection of their finances in the digital payment processing world, and bankers, who sought to guard against new forms of fraud.
The provision applies only to image replacement documents, the official printouts of check images that Check 21 says will be legal instruments. However, Mr. McCarty said in an interview that one of the goals of the regulations is to provide incentives to move beyond paper checks and substitute items. “The desire is not to have that many substitute checks created.”
Under the Uniform Commercial Code of state laws, banks typically have two to three weeks to investigate a disputed check before crediting the funds back to a customer’s account. Those laws vary from state to state. Check 21 gives a bank only 10 days to investigate a disputed item before recrediting the account.
However, the Check 21 provision kicks in only after the customer receives the substitute check itself, not when the customer finds a problem by viewing images of the check online, or by looking at a statement containing copies of check images; in those cases, the current rules would be in effect.
Even more confusing to some bankers is the fact that the recredit provision gives customers only 40 days to make a claim. In contrast, Regulation E, which governs electronic fund transfers, gives customers 60 days to make a claim.
Check 21 requires banks to notify customers who currently receive their original checks in their monthly statements that once the law takes effect, they will probably receive substitute checks instead. Customers must receive this notice in the first statement cycle after Oct. 28, and anytime they request a substitute check.
Stephen A. Schutze, the ABA’s director of e-strategies, said the same kinds of problems that have advocates worried — posting a check twice, or for the wrong amount — can occur today, and processes exist to handle such an error. “That’s the easiest thing in the world for a bank to spot,” he said in an interview following the teleconference Wednesday.
He downplayed the importance of the provision and predicted that it will be infrequently invoked.
“Expedited recredit — I don’t think that’s going to happen much at all,” he said. These kinds of “complaints are very rare.”
