Check 21 May Impact Consumers’ Credit Reports

Check 21 is a new method of check processing that goes into effect on October 28, 2004. The vast majority of consumers have never even heard of Check 21, and fewer still are aware of what it means to them personally. This lack of knowledge is certain to start causing consumer pain, both in the form of damaged credit reports and additional fees for bounced checks, sometime in November.

Check 21 is simply a new methodology that the Fed will use to clear checks. The current system requires banks to process checks manually, by shipping them around the country; a process that can take several days and which creates a condition called “float”. Float is just the time between when a check is written and when it actually clears the bank.

Although you may never have heard of “float” before, most consumers have take advantage of it at one time or another. If you’ve ever purchased your groceries using a check on a Thursday, knowing full well that you didn’t have the money in your checking account but that your payroll check would be deposited the next day so you wouldn’t have any problem, you have used float. Beginning October 28th, if you try to use float, it could cost you.

Under Check 21, banks no longer need to manually process checks. Instead, they can simply scan the front and back of a check and then send the originating bank a digital image of it for processing. This means that the time that it takes a check to clear your bank could drop from days to hours.

Because of the reduced clearing time under Check 21, it is expected that the number of bounced checks written in November will spike significantly. This spike will result in damaged credit and a huge increase in the fees that banks will collect from consumer for bounced checks.

Check 21 does not require banks to participate. It simply encourages them to arrange private agreements between them for electronic check processing. They can do this either independently or in groups. Most large banks will participate however because the charges to electronic check processing from the Fed will be significantly reduced when compared to the older manual system.

Consumers and business both need to be aware of their rights under the new system. For instance, just because your bank participates in Check 21, doesn’t mean that when you deposit an out of state check to your account that you will see the money any faster. Although the check may clear the originating bank within hours, your bank can still put a hold on the posting of funds to your account.

According to the National Consumer Law Center, you may have to fight for your rights for the first few years after Check 21 is implemented. This is because banks and the Fed have not publicized the new system. Some of your rights include:
Receiving a substitute check – this is simply a copy of the front and back check image.
Substitute checks are the legal equivalent of an original cancelled check provided that they (a) they accurately represent the information on the front and back of the original check, (b) they contain a legend stating “This is a legal copy of your check. You can use it the same way you would use the original check” and, (c) the bank providing the check must provide warranties that the copy is issued in accordance with law.
Consumers can not be charged for a substitute check.
Banks can not request consumers to waive their rights to a substitute check.

You should also be aware that just because you are only receiving a digital image of a check, it does not mean that you’re original check has been destroyed. The processing agreements between banks may require them to keep the original checks for a period of time. In other cases, state or local law may require banks to hold onto check originals. This could prove to be important if you suspect that your signature has been forged or that a check has been tampered with. To find out how your bank is dealing with original checks you should talk to one of their representatives as well as check with your state.

Check 21 does require all banks to provide to provide notice of the new procedures however, they do not need to provide this notice until “the first regularly scheduled communication” with customers after Check 21 goes into effect. This means that unlucky consumers who have not received notice of Check 21, and who try to “float” money for purchases, will likely be surprised by bounced check charges and a blemished credit report without any warning.