New Banking Rules Affect Checking Accounts

We Americans write about 40 billion paper checks each year. In addition, for the first time that number recently was eclipsed by the annual number of automated transactions involving checking accounts. Checking account transactions are such a widespread part of our lives that consumers of banking services are well advised to become acquainted with major changes affecting banking laws. Federal legislation called the Check Clearing for the 21st Century Act, or "Check 21" for short, went into effect on October 28, 2004.

The Dangers of "Floating"

Check 21 will allow financial institutions to process "substitute" checks--high-quality paper reproductions created from electronic images of both sides of an original check. In time, check processing will be faster, and this is where there will be ramifications for check writers and depositors.

While it has always been prudent to have enough money in your account to cover a check the moment you write it, who has not used the lag time in check processing to make a necessary deposit? That will soon become a riskier strategy as electronic check processing becomes more prevalent. It will also be more important than ever to keep checkbooks up to date, especially bearing in mind deductions for ATM withdrawals, bank fees, and debit-card purchases. (Another downside to faster check processing is that you may have less time to place a "stop payment" on a check that you have written.)

As a last resort, there are overdraft services, including overdraft lines of credit. They have their place, but remember that each use of an overdraft service is essentially a loan, usually with interest charges or other fees.

Electronic Substitute Checks

Today, most banks do not return customers' actual checks with their monthly statements. Under Check 21, even your bank may not receive your original check but, rather, an electronic substitute check created by the bank where the check was deposited. As long as the substitute check meets standards established under Check 21, it should be just as effective as the original for a customer who needs to prove a disputed payment. Of course, long before the enactment of Check 21, images of checks, rather than the real thing, have enjoyed widespread acceptance as proof of payment. Even if the substitute check falls short in some way, Check 21 provides warranties and remedies to protect the parties to a transaction.

Expedited Recrediting

Erroneous or fraudulent payments are largely the domain of state laws, which can vary greatly. Usually, a bank can be held liable to its customer if it charges the customer's account for a check that is not "properly payable." Check 21 has provisions for "expedited recrediting" in the event of improper payment.

A bank customer can make a claim for expedited recrediting from the bank holding the customer's account if the customer asserts in good faith that the bank improperly charged the account for a substitute check. The customer must show that producing the original check, or a better copy of it, is necessary to determine the validity of the charge to the account. A claim for expedited recredit must be made within 40 days of delivery of the relevant bank statement to the customer, or the date when the substitute check is made available to the customer, whichever is later.

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