Truncation Questions

  Banks want Congress to endorse electronically imaged checks, but consumer groups worry about inadequate protections against mistakes and fraud.
  Most financial institutions routinely recredit consumer accounts within days after discovering a mistake or fraud involving a customer's paper check. And industry observers believe such practices would not change if paper checks become electronically truncated, which would be allowed under legislation now before Congress.
  But while the legislation could save banks billions in check-processing costs and offer consumers more efficient check-clearing services, consumer groups want to tighten banks' recrediting responsibilities for truncated checks. As such, banking groups are facing some of the same regulatory mandates for truncated check transactions as they have today for debit card and automated teller machine transactions under Regulation E of the Electronic Funds Transfer Act.
  For more than a year, the Federal Reserve Board has promoted legislation that would give the same legal status to electronically imaged and transmitted checks as paper checks The goal is to drastically reduce the need to transport billions of paper checks each year for presentment and settlement. Benefits could include processing and posting of ATM-deposited checks in real time and substantial cost savings from fewer daily deposit pickups at ATMs.
  Current legislation calls for requiring banks to accept the presentation of electronically imaged and transmitted substitute checks. But it does not preclude acceptance of checks in electronically imaged form without also producing a printed substitute.
  The legislation initially was introduced last year in the Senate as the Check Truncation Act, and a similar House bill-was introduced in April. Consumer groups contend both bills inadequately protect consumers against mistakes and fraud.
  Janell Mayo Duncan, legislative and regulatory counsel at the Washington, D.C.-based Consumers Union, recently testified against both measures. She says the legislation should offer consumers protections similar to those they have now for debit card and ATM transactions.
  Under the proposals, banks would be required to recredit for account errors within 10 days after a customer reports the mistake or fraud, up to a limit of $2,500. There is no dollar limit today for recrediting debit card transaction mistakes. Moreover, says Duncan, banks would not be required to give customers a copy of a substitute check, so financial institutions could avoid the 10-day recrediting rule if no substitute printed checks are produced and banks decide among themselves to accept electronic images.
  Duncan says that most large banks will opt to have check images processed directly from bank to bank without producing substitute checks. Millions of customers used to getting canceled checks back with their statements, therefore, will be unaware of mistakes and fraud for many weeks, and they will have more difficulty getting their money back promptly, she contends.
  "The legislation doesn't mandate a bank giving substitute checks back to consumers," says Duncan. "Consumers are not equally protected in this."
  Existing Laws
  But C.R. "Rusty" Cloutier, president of MidSouth National Bank in Lafayette, La., and president of the Independent Community Bankers of America, says most banks recredit consumers' accounts much sooner than 10 days and have legal and competitive incentives to settle such complaints promptly. "There are a lot of existing laws that already deal with this question," he says. "At our bank, we deal with (recrediting) in 24 hours."
  Existing check regulations are contained in state Uniform Commercial Codes, which cover check fraud but not processing errors specifically. Cloutier says banks are wary of setting an artificially short deadline to recredit accounts before having time to properly investigate potentially fraudulent claims or check errors.