Federal regulators are eyeing Texas' new, one-of-a-kind system for reducing check fraud to see if institutions with national charters must comply.
Under the Closed Account Notification System, depository institutions alert check verification companies electronically when an account has been closed because of suspected fraud. The system, which is administered by the Texas Department of Banking and went online early last month, also is designed to curb identity theft.
Texas law requires any financial institution doing business in the state — thrift, bank, or credit union, whether nationally or state-chartered — to participate in the system if a customer with a compromised account requests it. Participation is free for financial institutions, and in the first month nearly 800 institutions have signed up.
Five check verification companies, including two of the state's largest, have paid the $100 fee to register with the system.
The system is still in its early stages, but bankers said it is easy to use and effective, though they also said it requires employee training and new internal practices.
A spokesman for the Office of Thrift Supervision said at least one thrift has asked it to investigate whether the law should be preempted.
National banks, too, have questioned if they must participate. A spokesman for the Office of the Comptroller of the Currency said it is researching the law, even though it has not received any formal preemption requests.
Under the new system, customers whose checks have been stolen file a police report and provide a sworn affidavit to their financial institution, which then closes the account and electronically notifies the Department of Banking, which in turn notifies the check verification companies.
Broadway National Bank in San Antonio joined the system, but only after deciding the Texas law was unlikely to be preempted.
"We felt like we didn't have a choice," said Allyn Slauter, a vice president and the compliance officer with the $1.8 billion-asset unit of Broadway Bancshares Inc. "I don't think it is a bad idea, but I'm not certain how effective it will be, because the client has to bring certain things to you: a police report and a sworn statement. They have to go through a lot of extra steps to get it reported."
Karen Neeley, the general counsel for the Independent Bankers Association of Texas and an attorney with Cox Smith Matthews Inc. in Austin, agreed that the law is unlikely to be preempted.
"I'm sorry, but I don't see it," she said. "Maybe it would be appropriate if there were some visitorial powers being exercised … or if there was a competing federal law or the field was effectively covered in that area, but the answer to both of those is no."
Whether the law is preempted or not, the $1.8 billion-asset A.N.B. Holding Co. Ltd. in Terrell, Tex., will participate.
"We want to implement it as soon as we can," said Robert Hulsey, its chief executive and president. "We'll have to put some processes around it. It's not complicated; just requires doing some work."
The $13.6 billion-asset Cullen/Frost Bankers Inc. in San Antonio also is planning to participate.
"It is not that we have to; it is that we want to," said Sandy Sullivan, the senior vice president in charge of fraud management. "It is a no-brainer to me, because it is going to help everybody all the way around."
Chris Williston, the president and CEO of the Independent Bankers Association of Texas, said that several national banks have asked whether they must participate, and that he is telling them they should.
"It is a valuable tool," he said. "Do the nationally chartered institutions want to put themselves at a competitive disadvantage and not want to help cut identity theft and the fraud that is rampant?"
Teague Winger, a senior vice president with the $45 million-asset Gruver State Bank, said it used the system just two days after signing up, when a customer sent the first report the bank had received in about six months about a stolen checkbook.
"It was easy for us, good for the customer, and it is a good tool for the merchant using the check verification companies," Ms. Winger said. "Before the system, we notified each check verification company individually."
The law sprang directly from the frustrations of an identity theft victim. In 2004, thieves stole a box of checks from Texas Rep. Helen Giddings, D-DeSoto. She reported the theft to her bank, but retailers continued accepting checks written by the thieves, she said, because check verification companies had not been informed of the closed account.
