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Tuesday, April 8, 2003
U.S. House of Representatives,
Subcommittee on Financial Institutions and
Consumer Credit
Committee on Financial Services,
Washington, D.C.

    The subcommittee met, pursuant to call, at 10:10 a.m., in Room 2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding.

    Present: Representatives Bachus, Bereuter, Baker, Lucas of Oklahoma, Gillmor, Biggert, Hart, Tiberi, Feeney, Garrett, Murphy, Barrett, Fossella, Capito, Kennedy, Hensarling, Oxley (ex officio), Sanders, Maloney, Sherman, Ford, Lucas of Kentucky, McCarthy, Crowley, Davis, and Frank (ex officio).
    Mr. BAKER. [Presiding.] If I could ask individuals to take their seats. Chairman Bachus has been momentarily delayed and has asked that I go ahead and call the meeting to order since we have people ready and available to be heard.
    The subcommittee meets today for a legislative hearing on H.R. 1474, the Check Clearing for the 21st Century Act, or Check 21 introduced by two distinguished members the subcommittee, the gentlelady from Pennsylvania, Ms. Hart, and the gentleman from Tennessee, Mr. Ford. Mr. Bachus is also a cosponsor of the legislation, as is Full Committee Chair Michael Oxley.
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    This is the second hearing the subcommittee has held on this important topic. As with last year, we are fortunate that the Vice Chair of the Federal Reserve, the Honorable Roger Ferguson, Jr., has joined us to discuss the Federal Reserve Board's view on this issue. We are also joined by a group of distinguished private sector witnesses that will share their views with us.
    The Check 21 legislation is intended to modernize the nation's check clearing system by providing an interim step towards allowing banks to exchange checks electronically, rather than in paper form. Electronic check imaging and the ability of financial institutions to exchange checks electronically is the first major innovation in the check-handling and processing process since the invention of the magnetic ink character recognition line in the 1950s. The consumer and economic benefits that will accrue from this technology are potentially immense.
    Perhaps the most dramatic example of the need for this legislation was demonstrated in the week after the September 11 terrorist attacks. As some may recall, for approximately one week after September 11, planes were not allowed to fly. As a result, the check clearing system suffered from severe disruptions as the planes that customarily transport checks could not carry the paper to the financial institutions on which they were drawn. Bad weather also has a disruptive effect on check clearing. While the September 11 tragedy provides perhaps the most dramatic illustration of the need for the Check 21 legislation, the legislation is important for many other reasons.
    Consumers in particular will benefit because the legislation will enable depository institutions to offer their customers a host of new products and services. For example, consumers in rural areas may be offered extended deposit hours because financial institutions will then be able to transmit the images of checks through the check-clearing process, rather than having to send couriers out to remote branches or ATMS to pick up the deposited items. In addition, consumers and business customers will benefit from quicker collection and return of checks. Other indirect benefits potentially will occur as well.
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    The Check 21 Act will create a new value proposition for check imaging technology, which will encourage depository institutions to implement check imaging and exchange. Financial institutions that have already implemented check imaging have learned how pleased their customers are that they can now have instant access to copies of their checks when they visit branches, speak on the phone with customer service representatives, or view pictures of their checks on the Internet. Moreover, the legislation will empower customers to better manage their finances and detect and prevent fraud against their accounts because they are provided more information about the transactions in a timely manner.
    In conclusion, we should acknowledge the work of all the persons who have contributed to the construction of H.R. 1474. Thanks should go to Chairman Oxley for making the legislation one of his committee's top priorities; to Vice Chairman Ferguson and the Board staff who first presented the committee with draft legislation in December, 2001, following many years of work by the Federal Reserve. Also, I wish to extend commendation to Ms. Hart and Mr. Ford for introducing the bipartisan legislation, and Congressman Mike Ferguson who sponsored similar legislation with Mr. Ford during the last Congress.
    Finally, there has been significant input from banks, thrifts, credit unions, technology providers, consumer groups—all stakeholders—to help assist in drafting the most appropriate legislative remedy.
    I just have one personal comment to make, too, with regard to the final consideration of this matter, and whenever markup may occur. Specific attention should be focused on the question of what I term ''float''—the time in which an out-of-area check is presented to a financial institution until the customer knows those funds are available for utilization. Under the current rule, out-of-area checks may have as a period up to five days before requiring the allocation of those resources to the appropriate account. It would seem very appropriate to have a careful analysis given the potential for electronic transfer to some significant reduction in that float period from the current five-day minimum to something customarily less than that, based on whatever the professionals tell us is achievable. But I know that many folks, when told they will not get access to their funds for a business week, are rather frustrated in the current system, and that offers potentially some significant benefits if we are able to move to a paperless electronic method of transfer. That is my own two cents, not Chairman Bachus'.
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    At this time, I would like to call on Ranking Member Sanders for his openings statement.
    Mr. SANDERS. Thank you, Mr. Chairman, and thank you, Mr. Bachus, for holding this important hearing.
    We are here today to discuss the Check Clearing for the 21st Century Act. It is my understanding that this legislation will eliminate the ability of millions of U.S. customers to get their checks back. So the first point that I want to make is I am sure that there is a very positive aspect to this legislation, but as I understand it, you are making it mandatory. That means an 80-year-old woman who does not own a computer, is not comfortable with computers, is going to be caught into that trap. Whether or not this should be mandatory, impacting every American, or those rather who want to be part of the process is my first concern.
    According to an April 3, 2003 article in the Associated Press, Federal Reserve Vice Chairman Roger Ferguson said that this legislation, quote, would bring huge cost-savings for banks, end of quote. Well, that is good for banks, but the question is what does that mean for the average consumer? What we have been seeing in recent years, in fact, is a huge increase in consumer fees that millions and millions of Americans are paying. So what is good for large banks is not necessarily good for consumers.
    Mr. Chairman, I will look forward to hearing from the representative of the Consumers Union who has some concerns about this legislation from a consumer point of view. I share some of those concerns. But my first concern is that in a Congress which very often talks about choice and the right of people to make their own choice, I am concerned, deeply, that every American is going to be asked to participate in this process. For millions of people, especially elderly people who are not comfortable with computers, this may be a very unfair burden.
    Thank you, Mr. Chairman.
    Chairman BACHUS. [Presiding.] Thank you, Mr. Sanders.
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    At this time, does Chairman Oxley wish to make a statement?
    Mr. OXLEY. Thank you, Mr. Chairman. I want to thank you for holding this important hearing on Check 21. It is bipartisan legislation, as we know, introduced by our friend Melissa Hart and Harold Ford, Jr. This hearing continues the work we began late last Congress in the subcommittee. I am confident this year we will succeed in getting a bill to the President's desk that truly modernizes the payment system.
    I would also like to thank the panel of witnesses who have come to testify—Mr. Ferguson, welcome back—and give their insights. I look forward to your thoughts and comments on the effect Check 21 will have on the domestic payments system.
    After the September 11 terrorist attacks, domestic flights were suspended, preventing millions of checks from physically moving through the payments system. While the system was stalled, float built-up in the payment system and the Fed was forced to take emergency action to continue the movement of checks around the country. This committee responded to the terrorist attacks with legislation aimed at eliminating terrorist financing, getting our financial markets open and operating, and providing businesses with protection from future losses from terrorist attacks.
    Check 21 is another effort by the committee to protect the payment system in times of national emergency by ensuring that checks will continue to be processed through the payment system with limited interruption. The technology exists to provide electronic check presentment, while combating fraud and improving service. As a matter of fact, if members of the committee have not seen the technology, it is really quite extraordinary. Today, millions of Americans could go online and examine their accounts, pull up images of their checks, and determine if the proper amounts were debited. Now, there is no need to wait until the end of the month to reconcile your account. It can be done on a daily basis. Americans without Internet access will benefit from this technology through expedited processing and will still receive images of their checks in the mail. There is little need for original paper checks in today's payment system. We should not mandate they be retained if they are not useful.
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    We must ensure that our banking system operates as efficiently as possible, while preserving safety and soundness. Check 21 achieves these goals by improving our payment system and encouraging the electronic movement of checks across the country. At the same time, this bill protects consumers by ensuring that they have the ability to retrieve improperly debited funds and are given information on the operation of this new system. I am hesitant to burden this bill with additional and unnecessary provisions aimed at creating new rights not already available under the current law of negotiable instruments. Check 21 grants banks useful tools to improve the delivery of services to their customers and expedite the flow of funds through the system.
    We must ensure that the efficiencies achieved are not reversed by excessive regulatory intervention. The laws governing checks have not changed much over the past several decades, and by all estimates the system has worked very well. Consumers are well-protected through existing check law in the UCC and other regulations. This bill does nothing to reduce these protections and actually provides enhanced provisions for consumers. I expect we will receive and achieve broad bipartisan support to move this proposal through the committee and to the floor for consideration. We have the technology and the ability to make current check processing more efficient, less costly and more consumer-friendly. Let's take advantage of it.
    I yield back.
    Chairman BACHUS. Thank you.
    At this time, we are going to recognize Mr. Ford. After Mr. Ford, we are going to recognize Ms. Hart and then Mr. Baker, and then if other members wish to be heard.
    Mr. FORD. I will be real brief, Chairman. Thank you, and thank you to Ranking Member Sanders and certainly to Chairman Oxley.
    I am pleased to join both Ms. Hart and my colleague Mr. Ferguson in introducing this. I know there will be some concerns expressed by some of my colleagues, including Mr. Sanders already, and I look forward to hearing from Ms. Duncan and from others on the panel to address some of the concerns raised by consumer groups and consumer organizations. I might add Ms. Duncan is a personal friend. I worked for her when I was in law school, a summer clerk for her at a law firm here in Washington, so it pains me a bit to be slightly on the opposite side with her and her interests at this moment.
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    However, I think Check 21 builds upon some of the goals set forth by Mr. Ferguson and the Fed in reducing costs and providing consumers with more options, and generally making our banking system more effective and more efficient in delivering services to the consumers. I happen to believe that Check 21 is a strong pro-consumer bill. The bill has already been described at length by both Chairman Baker and Mr. Oxley, and I would imagine Ms. Hart will as well. Let me just address one or two issues regarding how I think the bill will benefit consumers in multiple ways.
    First, as I said, it will lessen reliance on the physical transportation and presentation of checks, promoting efficiency in big ways. It will lower costs and expedite services as well. As Vice Chair Ferguson has indicated, check truncation is generally more efficient, more cost-effective and less prone to processing errors. Second, a streamlined system will reduce the disruptions caused by bad checks. By speeding up the check clearing system, individuals will be notified faster if their check has not cleared. This will reduce the likelihood that a single bounced check will result in a chain reaction of bounced checks.
    Third, more customers will be able to benefit from new products and services such as online access and review of check images. Millions of consumers already enjoy these services, which give consumers instant access to information about their checks day or night. Also, if a consumer makes an inquiry about a check, his or her bank's customer services representative will be able to access and review the check instantly. This can sharply reduce the time for customer inquiries. Consumers may also benefit from more deposit options. Because electronic processing could eliminate the need for daily physical pickup of checks, consumers could enjoy extended deposit cut-off hours or deposit services at more ATMs and remote locations.
    Finally, Check 21 establishes a new consumer right—an expedited re-credit for contested substitute checks. If a substitute check is not properly charged to a consumer's account, banks must re-credit the consumer for the amount of the check, up to $2,500 within 10 business days. This is a new and important consumer protection established by this bill.
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    Let me make one last point. I know my friend Mr. Sanders made the valid point about the actual presentation of checks. I might add that there is no right as we speak for consumers to actually receive that, and perhaps that is another conversation or something else the committee can take up. Check 21 facilitates check truncation without mandating the receipt of checks in electronic form. It does this by establishing a negotiable instrument, a substitute check with the same legal status as original checks. These substitute checks can be used by banks and consumers in the same way as original checks.
    With that, I yield back the balance of my time, Mr. Bachus.
    Chairman BACHUS. Thank you.
    Ms. Hart?
    Ms. HART. Thank you, Mr. Chairman. Thank you also for scheduling this hearing, and also to Chairman Oxley for your leadership and foresight on this issue, on legislation to modernize our nation's check processing system.
    I also want to thank original cosponsor, Congressman Ford, and Congressman Mike Ferguson who was involved in this issue in the last session, for joining in the introduction of H.R. 1474, the Check Clearing Act for the 21st Century. Our truncated name, which I prefer, is Check 21. Finally, I also want to thank my colleagues, members of the committee, who have joined as cosponsors as well, of this important legislation.
    The Fed estimates that over 40 billion checks are written annually, resulting in $39.3 trillion in payments. Today, a check is processed numerous times before it is eventually paid. Each step of this process relies on the physical transportation of the check, resulting in billions of checks being driven or flown across the country every day. I can only imagine the cost to consumers of this cumbersome and anachronistic process. But under current law, unless a bank has an agreement with another bank to receive payment by electronic means, the bank must physically present and return the original check to receive payment.
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    Today, there are over 15,000 banks, thrifts and credit unions negotiating separate agreements, which for each of these institutions would be an impossible task for even the most diligent financial institution. Building upon the Fed's check truncation proposal and legislation introduced in the last Congress, H.R. 1474 will end the requirement to physically move these paper checks, by removing existing legal barriers that prevent the banking industry from incorporating advances in technology such as digital imaging, to improve check processing efficiency and to provide improved services to customers.
    The members of the committee have at their desks an example of what one of these checks looks like. For those consumers who may not be technologically involved or maybe fear technology, it looks exactly like a canceled check. So this technology is not a non-consumer-friendly technology. In fact, it is extremely helpful to provide improved services to consumers. The legislation allows banks to technologically progress into the 21st century, as well as benefit these consumers in a number of ways. Financial institutions may have the ability to provide new and improved services to their customers, such as later deposit cut-off hours, expanded access to enhanced account information, and check images through the Internet, if that is what the customer prefers. Also, the ability to resolve customer inquiries more easily—and anyone who has ever had a problem with a lost check would understand how this enhanced opportunity to access account information will be helpful to consumers.
    In addition to these, consumers will benefit from a new expedited right of re-credit for amounts of up to $2,500. Most importantly, banks will be better able to stop and detect fraud very early in the check process, which is obviously another great benefit for the consumer.
    I would like to thank the witnesses in advance for the testimony they are going to give this morning, and look forward to hearing their suggestions on ways we can build upon or improve the bill. Mr. Chairman, I also have testimony from the National Association of Federal Credit Unions that they have asked me to submit. I ask unanimous consent that that testimony also be included in the record.
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    Chairman BACHUS. Without objection.

    [The following information can be found on page 244 in the appendix.]

    Ms. HART. And I yield back. Thank you, Mr. Chairman.
    Chairman BACHUS. Thank you.
    Are there members on the Democratic side that wish to make an opening statement? If not, Mr. Baker?
    Mr. BAKER. Just a real brief comment, Mr. Chairman. First, I thank you, as other members have, for convening this hearing on this important matter. Secondly, I thought your opening statement was excellent and it was very persuasively delivered this morning.
    Thirdly, I merely want to recognize your abilities to select a panel of very capable witnesses, not the least of which is the representative here today for the Association of Independent Community Bankers, Mr. Rusty Cloutier, who happens to be a good South Louisianean. I wanted to get that on the record so everyone would now it is Cloutier. I welcome him here today. Regrettably, I have another meeting which I must excuse myself, but it does not in any way diminish my interest in the subject, nor my appreciation for Community Bankers' testimony here today.
    Thank you, Mr. Chairman, I yield back.
    Chairman BACHUS. Thank you.
    At this time, we are going to hear from Vice Chairman Ferguson. I do want to make one comment to the members. The gentleman from Vermont used an example of the 80-year-old that might not be comfortable with this new technology. Actually, this is not new technology, because what she is going to be getting will be a copy of her checks. The copying machine is very old technology. She is still going to write a check. She is still going to have paper checks. She is still going to write the check the same way she would in the past. In two-thirds of the cases today, she does not get back a check. She gets back a copy of the check on the back of her bank statements. So two-thirds of the 80-year-olds today are not getting this. The difference in her check and this copy—this is a legal copy, which the courts in our country have been using as, and giving the same weight of evidence as the original for some 60 years. And it looks very much—I mean, that is just a copy of her check.
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    So I believe that, and I think we could disagree, but I think most 80-year-olds are used to seeing copies of things. In fact, many of them complain when they are asked to produce an original. We use copies of birth certificates, certified copies. We use all sorts of things today, and really our banking system is behind everything else in continuing to process these original checks. The checks will continue to go in. I did want to point out that. It is not anything overly complex about what she will be reading. And I think she can see a copy of it as easy as an original. I do not think that will give her any trouble.
    Mr. SANDERS. We will learn more this morning. The question is not so much the copy that looks like the original. The question is how many people in fact will be getting the copies compared to how many get the original. That is one of my concerns.
    Chairman BACHUS. Right. And she will have a right to get those, so she will have that right if she wants it. She can request it.
    Mr. SANDERS. It is one thing to have a right and it is another thing when you are 80 years old to be able to implement that right.
    Chairman BACHUS. Well, and two-thirds of people today are getting it on the back of their statements, or credit unions, for some 20 or 30 years—I do not know how long—have not been giving these checks. They do not do that, and there are many 80-year-olds who are members of credit unions, who write checks. I have not heard any of them complain about this.
    Mr. Ferguson—our first witness is Vice Chairman of the Board of Governors of the Federal Reserve System, the Honorable Roger W. Ferguson. Vice Chairman Ferguson, we look forward to your testimony.

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    Mr. FERGUSON. Thank you very much, Mr. Chairman. I would also like to thank the subcommittee for inviting me to discuss the Check Clearing for the 21st Century Act, or Check 21, and for holding hearings on this very important legislative initiative.
    This bill, which is similar to a proposal that the Board forwarded to Congress in late 2001, removes legal barriers to the use of new technology in check processing. It accomplishes this essentially by allowing banks to replace one piece of paper during the check collection or return process, the original check, with another piece of paper that contains the same payment information—a substitute check as you have already said. This simple change holds the promise of a more efficient check collection system.
    Today, consumers, businesses and the government write about 40 billion checks annually. Over the years, banks, thrifts and credit unions, which in the rest of this testimony I will refer to collectively as banks, have applied a variety of electronic technologies to automate check processing, which involves handling and sorting checks so that they can be physically shipped to their destinations.
    A typical check is processed several times before it is eventually paid. First, it is processed by the bank at which it is deposited. Then, it may be shipped for processing to one or more intermediaries, and finally it is shipped for processing and payment to the bank on which it is drawn. While most checks are currently processed in this fashion, some checks are removed from the collection process, and the payment information on the checks is captured and delivered electronically to the banks on which they are drawn. This process, which is commonly referred to as check truncation, reduces the number of times the checks must be physically processed and shipped. As a result, check truncation is generally more efficient, more cost-effective, and less prone to processing errors.
    The check system's legal framework, however, has not kept pace with technological advances and is now constraining the efforts of many banks to use new electronic technologies such as digital check imaging to improve check processing efficiency and to provide improved services to customers. Today, check truncation can occur only by agreement of the banks involved, because existing law requires original paper checks to be physically presented or returned in the absence of an agreement to the contrary. Given the thousands of banks in the United States, it is not feasible for any one bank to obtain check truncation agreements from all other banks or even a large portion of them. Therefore, legal changes are needed to foster the use of new electronic technologies to improve check processing and reduce the need for physical transportation in the check collection process.
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    Check 21 facilitates check truncation early in the check collection or return process without mandating that banks accept checks in electronic form. The Act accomplishes this by creating a new negotiable instrument called a substitute check that banks could use in place of an original check. Under the Act, banks would be able to truncate original checks, process check information electronically, and deliver substitute checks to other banks and bank customers that want to continue receiving paper checks. As a result, banks could handle much of their check processing electronically without needing to obtain legal agreements from thousands of other banks to truncate checks.
    A substitute check, as you have already seen, would be the legal equivalent of the original check and could be used by both banks and their customers just as if it were the original check. As you know, it would look like a regular check. It would carry an image of both the front and the back of the original check, and could be processed on existing check processing equipment. Under the Act, a bank could still demand to receive paper checks, although it would likely receive a mix of original checks and substitute checks. Because substitute checks could be processed just like original checks, the bank would not need to invest in any new technology or otherwise change its current check processing operations. Further, bank customers that receive canceled checks with their monthly statements would continue to receive canceled checks, only some would be the original checks and some would be substitute checks. Bank customers would be able to use the substitute checks in exactly the same way they would use the originals.
    While allowing banks to replace one piece of paper with another might seem like a small change, eliminating the need to deliver original checks would allow banks to speed up the process, a technological transformation in check clearing that is already under way. By adopting a market-based approach that permits each bank to decide when and how to use substitute checks, the Act should result in the use of technology to provide a more efficient and flexible check collection system.
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    The Act would also help address the risks to the check collection system from its extensive reliance on air transportation that was highlighted immediately after the September 11 tragedy. One effect of air transportation being grounded was that the flow of checks slowed dramatically. During the week of the attacks, the Federal Reserve Bank's daily check float ballooned to over $47 billion, which is more than 100 times its normal level. Had the Act been in effect at that time and had banks been using a more robust electronic infrastructure for check collection, banks would have been able to collect many more checks by transmitting electronic check information across the country and presenting substitute checks to paying banks.
    The Act might also enable banks to provide new and improved services to their customers. For example, banks might allow some corporate customers to transmit their deposits electronically. Further, if banks begin to transmit check images from the point of deposit to their operations centers for processing, they might be able to establish branches or ATMs in more remote locations and provide later deposit cut-off hours to their customers. Later deposit cut-off times could result in some checks being credited one day earlier and interest accruing one day earlier for some checks deposited in interest-bearing accounts.
    Because the Act will likely encourage greater investments in image technology, banks might also be able to expand their customers' access to enhanced account information and check images through the Internet. In addition, banks might be able to resolve customer inquiries more easily and quickly than they do today by accessing check images. Further, as banks reduce their operating costs, the savings will be passed on through a combination of lower fees to their customers and higher returns to their shareholders. Banks have indicated that they expect cost savings to be substantial.
    While there is a fairly broad consensus on the desirability of the Act's underlying concepts that permit the use of substitute checks, the issue of customer protection has been the subject of much debate. The Board has had an opportunity to further reflect on the views that have been expressed by both consumer advocates and the banking industry, and it has concluded that expedited re-credit provisions are not necessary for the successful implementation of the Act. We recognize that the issue of customer protections is the most challenging policy issue in the Act, and that Congress might arrive at a different conclusion as it considers whether to include expedited re-credit provisions.
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    I would like to discuss briefly consumers' rights under existing check law, additional rights granted under the Act's new warranty and indemnity provisions, and why we believe that expedited re-credit provisions are not needed. The Act extends the protection of existing check law, including the UCC, the Uniform Commercial Code, and the Federal Reserve Board's regulation CC, to substitute checks as though they were original checks. Long-established check law protects bank customers if checks are improperly charged to their accounts. While it is true that the UCC does not provide a specific time frame within which a bank must act, the UCC's provisions give the bank a significant financial incentive to resolve problems on a timely basis. Specifically, a bank generally would be liable to its customer for the amount of an unauthorized charge. Moreover, if a bank bounces a customer's check that would have been paid were it not for the unauthorized charge, the bank may also have to reimburse its customer for consequential damages. The only way a bank can limit its liability is by resolving its customers' claims as quickly as possible. This incentive appears to have worked well for many decades.
    In addition to the protections provided in the current check law, the Act requires banks to provide new warranties for substitute checks and to indemnify customers for losses resulting from the receipt of a substitute check instead of the original check. Customers whose checks have been converted to substitute checks receive a warranty that the substitute checks are legally equivalent to the original checks and that a check will not be paid more than once from a customer's account. Banks must also indemnify customers for losses they incur due to the receipt of substitute checks rather than the original checks. Taken together, these warranty and indemnity provisions provide customers with additional protections against losses related to the use of substitute checks.
    The use of a substitute check is not expected to result in problems different from those that are routinely addressed in today's environment, and existing law already encourages the prompt redress of consumer complaints. Therefore, the Board believes that the significant compliance burdens imposed by the expedited re-credit provisions on the banks that receive substitute checks would outweigh the small incremental benefits that the provisions would provide to consumers. Nonetheless, Congress may conclude that expedited re-credit provisions for consumers should be included in the legislation. In that case, we believe any expedited re-credit provision should be consistent with the Act's basic purpose and should not go beyond the provisions originally proposed by the Board in 2001. In the unlikely event that additional consumer protections are needed for substitute checks, the Act grants the Board authority to adopt such protections by regulation.
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    In conclusion, although an increasing number of payments are being made electronically, it is clear that checks will continue to play an important role in the nation's payment system for the foreseeable future. The Board believes that, over the long run, the concepts embodied in Check 21 will spur the use of new technologies to improve the efficiency and flexibility of the nation's check collection system and provide better services to bank customers. The Act accomplishes this by simply permitting banks to replace one piece of paper, the original check, with another piece of paper, the substitute check, both of which contain exactly the same payment information. Because the Act should result in substantial cost savings, it would also be desirable to begin obtaining these savings as quickly as possible.
    We look forward to working with the subcommittee as it further considers this legislation. Thank you, Mr. Chairman and members of the subcommittee for your attention and your time. I would be happy to answer your questions.

    [The prepared statement of Hon. Roger W. Ferguson can be found on page 109 in the appendix.]

    Chairman BACHUS. Thank you, Vice Chairman. Let me pose this question to you. There is a broad consensus among most of the members on the basic underlying need for this legislation. However, in your testimony you state that the Federal Reserve believes that the expedited re-credit provision is unnecessary. First of all, that is a change from last year when I think the Federal Reserve agreed that it was a necessary protection. Can you comment on what has led to apparently what is a change in position? I know there are some on this committee that think the expedited re-credit provision is an important consumer benefit.
    Let me go ahead and ask two questions and you can wrap them both up in one, because I think they are related. This legislation creates a new negotiable instrument, the substitute check. That is sort of the basis for this legislation. To have a substitute check, we have to produce an image of the original. Consumer groups have said that with an image out there, as well as the original check and then the substitute check, that it increases the likelihood that consumers may be double-debited on their accounts, and with both the original check, the substitute check and the image being made, that there may be a higher likelihood of fraud. Would you comment on these concerns?
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    Mr. FERGUSON. Certainly. Yes, the Board has changed its view from the original proposal. I thought it was important in our testimony to be very upfront about that so we could have just this discussion. The reason we have changed our view is that as we have analyzed both existing check law and importantly the experiences that have seen under existing check law, we believe that there are adequate coverages in that law. As we have said, this substitute check is a legal equivalent or would, should the Congress pass the bill, become the legal equivalent of the original check. Therefore, all the rights on the original check law under the UCC would apply. In the UCC there are a number of provisions that give banks incentives to avoid just the kind of problem that you have talked about in terms of double debit, for example. Those incentives emerge because should a bank inadvertently debit one's account twice, obviously there is no legal right to do that so they owe that extra debit back to the consumer right away. In addition to that, should other checks come in that are erroneously dishonored because of the original double debit mistake on the part of the bank, then the bank would be liable for consequential damages that may result from that original mistake.
    So having looked at that, and seen that the UCC, plus other regulations, seemed to cover most of the kinds of issues that people were worried about with respect to the substitute check, we thought that the expedited re-credit was no longer necessary. Now, to be very clear and to very fair, we are not opposing expedited re-credit if that is the judgment of Congress, but we also recognize that since there seem to be very, very few problems with 40 billion checks written now, there is a cost to adding a new kind of check law, and there are some burdens to the banks as well. I guess our judgment became, if one looks at the cost and benefits to society overall, that the expedited re-credit was not essential to putting forth the major benefits of this check truncation Act.
    Now, to go to the second part of your question, which is whether or not this substitute check, which again is very much like the real check and indeed has all the information on it, is prone to new types of mistakes. I would say the answer to that is no. First, with respect to double debit, exactly the same answer that applies to original checks would apply to the substitute check. The same set of incentives would apply to the substitute check. Secondly, the law as proposed in H.R. 1474 and as we originally proposed it, includes a couple of new provisions as well—warranty and indemnity. If there is a violation of the warranty and the indemnity comes into play, then banks could potentially be liable for consequential damages again, so that adds an extra element of incentive. And finally with the question of information on the bottom line here, what is called the MICR line that contains all the information about the check, we do not believe that there would be further MICR or translation problems because of this proposed law. The current check system depends on the information on that line. There is not a great deal of evidence of translation problems that exist currently.
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    More importantly, once the line is correctly input and is used in check processing, then whatever may or may not be easily legible on the paper check becomes irrelevant once you have the correct information on the MICR line. So I believe that going to more of an image base, more of an electronic system which this would allow—would not mandate, but would allow—has the possibility of reducing the number of errors that might occur. So for those reasons, one, I do not believe that on balance we need an expedited re-credit, but we are not in opposition should Congress choose to do that; and secondly, I do not believe that we are likely to see an increase in problems; and third, we have looked at our various databases among all the regulators and see no complaints that have emerged with respect to existing check law, and there is very little anecdotal evidence that this is a major problem requiring a new congressional intervention.
    So for that variety of reasons, yes, we did change our view. We are not in opposition if Congress wants to go down that path, but we do not expect a new range of problems to emerge from the availability of a substitute check.
    Chairman BACHUS. All right, thank you.
    The gentleman from Vermont?
    Mr. SANDERS. Thank you, Mr. Chairman, and thank you for your presentation, Mr. Ferguson.
    Mr. Chairman, it seems to me that there are two basic issues that we are dealing with today. One is the inherent strength or problems of the legislation, and Consumers Union is going to testify to some of the concerns that they have. The second broader issue is one that Mr. Ferguson touched on, and that is he indicated, and I think we are all in agreement, that the greater efficiencies that will be developed as a result of this legislation is going to save banks money. Is that correct, Mr. Ferguson? No argument there, right?
    Mr. FERGUSON. Correct.
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    Mr. SANDERS. The question you also said is that you assumed, or you thought that because of these efficiencies and these cost savings, consumers in fact might result in terms of lower fees. What we can agree on, I think, Mr. Ferguson, is that fees have soared for many consumers in the last number of years. Is that a fair assertion?
    Mr. FERGUSON. I think it depends on the product, and I would also observe that there have been new products and services introduced as well over the last several years, including for example, ATMs. So one should think about both the service benefit and the expansion of service.
    Mr. SANDERS. I know, but my question was dealing with fees. ATMs are a great service. We all take advantage of it, but it costs us a pretty penny as well to take advantage of it. But my point here is that you are saying——
    Mr. FERGUSON. But sir, you have to recognize there is no service without a cost to it.
    Mr. SANDERS. Excuse me—my point was that banks are pushing this legislation. Banks will save money. Your suggestion was that you think consumers will benefit. Maybe they will; maybe they will not. I would suggest to you that the Bank of America in 2001 made over $6 billion in net income. What they are able to do with some of that income is provide their CEO with over $17 million in compensation. Meanwhile, that same bank took many jobs from the United States and sent them to India. I am not sure that the fees at that bank went down. In 2001, Wells Fargo made over $3 billion in net income. They were able to pay their CEO over $34 million in total compensation. I am not sure that fees at that bank went down. At J.P. Morgan Chase in 2001, they made over $1.6 billion in net income. They managed to pay their CEO close to $22 million in compensation, and on and on and on it goes.
    So I think that there are two issues here. Number one, the benefits and the problems associated with that legislation, but second of all the assertion that savings for large banks are necessarily going to go to the average consumer. Now, what in this legislation is mandated that says that if there are savings that go to large banks, fees are going to go down. So that all the consumers in this country say, well, this is really good; banks are going to save money, therefore my fees are going to go down. I am just a regular, average bank consumer. I have got $10,000 in the bank; I strongly support this legislation.
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    Anything in this legislation that you could tell me that will guarantee that mandates that those savings will be passed on to consumers, rather than take CEOs who today get only $25 million, maybe they go up to $30 million. Did I miss some language in that legislation, Mr. Ferguson?
    Mr. FERGUSON. Is this the chance where I can respond?
    Mr. SANDERS. Please. You can respond right now, sir.
    Mr. FERGUSON. It is always nice to have that opportunity.
    A couple of points I would like to make. No, in America we do not mandate necessarily that banks change what they do in terms of compensation. However, to be very clear about what I believe in this matter, because we have a great deal of competition in the financial services sector, and we do, we have observed over many, many years that whenever there is any advance with respect to technology, consumers get some of the benefit. In your State, upstate in St. Albans, which I happen to go to every summer, in the far northern part of the United States—there are five ATM machines there that charge no particular fees that were not there 10 years ago, because banks have found that it is in their benefit to provide services to customers. There are other opportunities here that may also accrue to customers.
    One of the benefits of this, if I may complete my answer——
    Mr. SANDERS. We have a very limited amount of time.
    Mr. FERGUSON. I realize you do, but I have a point that I would like to make to you. One of the benefits here, and that is true in your State, in particular rural States, States that are affected by bad weather occasionally, is that if you have a more electronic check processing system, you are unlikely to find that far rural locations, for example, have disadvantages from not getting checks delivered on time because of the weather, et cetera. So there is a possibility that many consumers in all states, including yours, may find some benefits because the regularity of check service for them may go up. We do not have a major problem with that in this country, but there are some parts of the country where it is true. There are a number of arrangements.
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    Mr. SANDERS. If I may please.
    Mr. FERGUSON. If I can finish my answer, since you raised the question about the issue of compensation.
    Mr. SANDERS. The difficulty is we only have five minutes of time. That is all.
    Mr. FERGUSON. Fine.
    Chairman BACHUS. That time is already gone by. I will allow him to extend his answer, though.
    Mr. FERGUSON. The only other point I would make is I am not going to, I do not feel obliged necessarily to, defend CEO compensation and other things you have raised. That is an important part of your question. I am not going to necessarily go down that path. Thank you.
    Mr. SANDERS. Let me just in two sentences conclude by saying, this will definitely benefit banks, but there is no guarantee at all that it will necessarily benefit consumers. Some aspects of it may; some may not.
    Chairman BACHUS. This witness is testifying on behalf of the Federal Reserve, who has taken a position that this legislation will benefit the Federal Reserve, and actually the cost of your processing, too.
    Mr. FERGUSON. We actually, from the standpoint of the Federal Reserve, have not yet developed a strong perspective here on what this might do for us. We are putting this forward because we think it is in the country's interest overall, not that it is going to benefit us, but we think it will benefit consumers and potentially benefit banks as well.
    Chairman BACHUS. Thank you.
    The order of the witnesses is Baker, Tiberi, Hensarling, Garrett, Murphy, Barrett, Oxley, Feeney, Bereuter, Biggert and Fossella. So we will go to Mr. Hensarling.
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    Mr. HENSARLING. Thank you, Mr. Chairman.
    Mr. Ferguson, I believe that you testified here that nothing included in this bill is going to increase costs on the banks and that they will not need to invest in new technology in order to process this new particular negotiable instrument. Is that correct?
    Mr. FERGUSON. That is part of the testimony, yes.
    Mr. HENSARLING. Okay. So the Fed is predicting a substantial, I assume, system-wide savings by this new technology. Correct?
    Mr. FERGUSON. If I could be clearer, what we have said is this has the potential to do that. Because this is not mandatory, but gives an option, part of the question of the cost savings depends very much on how much the banks and consumers take up this option. So there is some potential for savings, for sure. We have not tried to calibrate it because we do not know exactly how many banks will use the option, but we think there is some potential for cost savings in the whole check processing system, yes.
    Mr. HENSARLING. But you are not mandating that banks invest in new technologies. Correct?
    Mr. FERGUSON. No, we are not mandating that banks invest in new technology. Some of them may choose to do that because it allows for new services, but we are not mandating that.
    Mr. HENSARLING. Do you have any estimate of the range of savings that might occur?
    Mr. FERGUSON. I have seen a broad range of savings, in all honesty, and as I have said I have attempted to avoid trying to estimate that, in part because it depends very much on what the bankers do and what consumers do. I would encourage you to talk to some of the people on the second panel, and they may give you a perspective on how much they might have saved already or what they think might occur here, but we have been pretty judicious in not putting a hard and fast number on it.
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    Mr. HENSARLING. One of my colleagues brought up the concern of a customer no longer being able to receive a copy of a paper check. Is there anything in this legislation that prevents consumers from receiving copies of paper checks?
    Mr. FERGUSON. No, there is nothing that prevents a consumer from receiving a copy of a check. It is the one that you have in front of you, the substitute check, and they simply have to request one.
    Mr. HENSARLING. Did I also hear in your testimony that in the opinion of the Federal Reserve this new legislation will mean fewer errors in processing checks?
    Mr. FERGUSON. Yes, you did. We believe that the system would be more efficient, more cost-effective, and less prone to errors.
    Mr. HENSARLING. Is there anything in this legislation that lessens the liability of financial institutions for negligence in handling negotiable instruments or checks?
    Mr. FERGUSON. No, there is nothing that lessens their liability. In fact, there are two provisions that are new that adhere particularly to the substitute check, so there are new kinds of responsibilities that would emerge from the legislation in lieu of having it lessened.
    Mr. HENSARLING. So if I understand the testimony correctly, in the opinion of the Federal Reserve this legislation will create fewer errors in the check transaction process for consumers. This has the potential to have a great cost savings within the system. And assuming a competitive marketplace within banks, along with the elasticity of demand, we are looking at savings to consumers. We are looking at additional options for consumers and we are seeing no diminution in financial institution liability. Is that correct?
    Mr. FERGUSON. That is a fair summary, yes.
    Mr. HENSARLING. If so, I frankly cannot conceive of a more pro-consumer piece of legislation within this context, and I applaud Mr. Ford and Ms. Hart for their leadership in bringing this to the committee.
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    Mr. Chairman, I yield the balance of my time.
    Chairman BACHUS. Thank you.
    We will now hear from the gentleman from Tennessee, Mr. Ford.
    Mr. FORD. I thank the Chairman, and thank you again, Vice Chair Ferguson.
    Let me ask just one or two very quick questions, to sort of walk through what exactly happens, because when some of the folks approach Ed Hill and others are approached about this issue, it was easier for me to understand when you sort of walk through what happens if I wrote a check to, say, a hardware store or something like that in my district, on my banking account, First Tennessee back in my State. What exactly happens? Can you walk through for me, when the hardware store deposits my check at the end of the day. What happens to the check before the whole process is completed? And two, how will this legislation potentially affect and/or improve this process?
    Mr. FERGUSON. What happens is that your hardware store would first endorse the check on the back and take it to their bank, which may or may not be your bank. That would be the first question. The bank will look at the check and determine, first, is this a check that is drawn on that bank, which is called ''on us,'' or is it drawn on another bank? They may first bundle up all the checks from a branch and send them to a processing center to make that determination. So there is a first night movement of the check. There will be determination of whether that check is drawn on that bank or drawn on another bank. If it is drawn on another bank, then the physical check currently has to be handled again either through another processing center, through an intermediary such as the Federal Reserve. It may go into a correspondent bank, which is another bank. There may be in Nashville or other places a clearing center, a clearinghouse for all checks.
    So then the check gets processed again and it goes to the——
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    Mr. FORD. I will overlook the fact you put Nashville above Memphis, but go right ahead.
    Mr. FERGUSON. This is where my colleague, Sue Biass, who used to work at First Tennessee, should have been here. She would have known that.
    Then the check then will go to your bank, the bank on which it is drawn. They will look at it. They will look at the information. They will then debit your account. Now, because you are good credit, you have plenty of money in your account. If it turns out that someone wrote——
    Mr. FORD. You are making up.
    Mr. FERGUSON. Your colleague to your right is supporting you completely.
    What may happen then, if in the unlikely event that you did not have a sufficient amount of money in your account if there were insufficient funds, then that check would have to be returned through this process back to the original bank, and then your hardware store would be notified that there were insufficient funds in the account and the check was not good.
    So what you see in the current process is that the check gets handled through two or three different intermediaries—two banks, maybe three if there is a correspondent bank; two banks, maybe the Federal Reserve if we are providing the check clearing process. It is a very, as you can tell, slow, cumbersome time and labor-intensive process in which there are a number of places where small things could go wrong. As you know, the legislation would allow that original deposit to be converted to an image, with the information at the bottom captured correctly, and have that image be the thing that drives the whole check clearing process. It does have the potential—I am not sure how it would really work out—but it does have the potential to shorten the time.
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    Mr. FORD. Shortening the time does not lessen the likelihood that mistakes, or I should say increase the likelihood that mistakes can be made, does it?
    Mr. FERGUSON. No, it does not increase the likelihood that mistakes would be made. There is no new increase in that risk from the way checks are currently handled, in my judgment.
    Mr. FORD. As a matter of fact, if a mistake is made, this process probably will accelerate discovery of that and help to remedy that quicker than the former process.
    Mr. FERGUSON. There are places where that might occur because it would allow the image to have been captured early in the process, and electronic images can be shared obviously more quickly than going back and trying to find the original piece of paper. So indeed you are right. There is a possibility that problem resolution times could be somewhat shorter because they could be driven off of what is, as you see here, a very accurate image of both the front and the back of the check.
    Mr. FORD. Let me switch gears for one moment. We constantly point to the tragedy of 9-11 and the anthrax mailings here on the Hill as examples of why legislation like this might be needed. I believe that to be the case, but I think it is convenient at times to point to incredible moments as justification for incredible changes. But you have talked a little bit in a previous question about why this bill could be helpful and how it could lower costs. You began to touch on how this may help some of the larger corporate clients do business faster and better and cheaper, which could produce greater benefits.
    I appreciate the question that Mr. Sanders asked, although some of his question is outside the scope of this hearing and this bill regarding compensation levels for CEOs of large companies, and perhaps that is something we can take up at another time. That is not necessarily relevant to this conversation or hearing or legislation today. Can you give me, outside of 9-11 and anthrax, just one or two, in addition to what you just stated, how this new process or this new law could impact positively a reduction of costs and increase services for consumers?
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    Mr. FERGUSON. I think you phrased it correctly, which is both a reduction in costs for some processing in the system and also potentially increase services. I will give you just a couple more examples—one physical and one that deals with something that went wrong, and then some other benefits that may occur.
    The Federal Reserve, as you know, processes about 40 percent of the checks that are not ''on us.'' We process the majority of checks that go through the system that are not drawn on the same bank. We have had a couple of experiences in banking because of bad weather, planes are grounded. We had an unfortunate accident in Montana a year and a half ago in which checks were destroyed. The process of then trying to figure out which checks were on that particular plane was a very cumbersome process, except in the cases where we had images, in which case the images were handled in the regular course of business, even though the checks had been destroyed. There are a number of businesses and households who were depending on a check clearing, and we could have through our process checks cleared on the regular schedule because the images were available. So it is not just terrorist attacks. It is not things such as anthrax, but frankly, it is bad weather, for example, that might slow down this process.
    It is also true that it is possible, if banks and businesses make these investments, that some checks may clear even more quickly then they do today, and it is one of the things that we obviously have to monitor and be aware of. There is a broad range of services. One of the congressmen astutely observed that if you have access—I think it was Chairman Oxley—if you have access to the image, your image of the check, on the Internet very, very quickly, then you can do things such as balance your checkbook much more quickly.
    So there are a number of possibilities here that might emerge, and it is impossible to identify exactly what all of them would be, but I think there is a high likelihood that because we live in a very competitive banking environment, that banks would have the incentive to hold onto customers by providing new products and services and using some of those cost savings in that way.
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    Mr. FORD. My time is up, but I will say this, thank you, Mr. Ferguson, for being here. I know that there is some concern on the part of the Fed regarding this expedited re-credit, this new consumer protection which I support, and I know that the Consumers Union and some of the other organizations have expressed concern that perhaps that should be expanded outside of the orbit of just substitute checks. I tend to agree with that, but maybe that is something this committee and Ms. Hart and I, since we developed this good bipartisan flavor here, can work on perhaps in the near future to try to address that concern.
    Thank you for being here, Mr. Ferguson. I yield back.
    Chairman BACHUS. Thank you.
    At this time, Ms. Hart—please?
    Ms. HART. Thank you, Mr. Chairman.
    Thank you, Mr. Ferguson, for being with us, as well. A couple of questions, kind of dovetail into each other a bit, but the first question is regarding the creation of a brand new negotiable instrument, this substitute check. We have discussed how that will expedite the processing and makes it a lot better for the consumer as far as access to their money. But is there not also an increased likelihood that with both an image of the check and a check in the payment system that there could be a greater chance of some kind of double-debiting issue or perhaps another kind of fraud? How would that be avoided?
    Mr. FERGUSON. One, I do not think there is an increased likelihood of that, as I indicated. The banks have a very strong incentive to avoid that. There are a number of processes that are already in place with respect to avoiding double debits, and those will stay in place. You also have to recognize that once a check has been imaged, it is really just the image or the MICR line information and the image that travels through the system. The original check is truncated—''truncated'' is a fancy word for saying basically it is safe kept someplace and over time may well no longer be available in the system. The credit unions, for example, do that already and there is no evidence of problems that we have seen or very little evidence, and none that has reached a policy concern.
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    Ms. HART. Is it envisioned at all that the check would be destroyed?
    Mr. FERGUSON. It is a possibility, and you can talk to the credit unions about how they handle it, and some other banks do as well. But you also have to understand that today, there is a range of estimates as to what percentage of checks are currently truncated, so the original check may no longer be available, but then you obviously would have the substitute check. But I do not think that there is a risk of a significant increase in double debits because of law that you have introduced here.
    Ms. HART. So the processes that are in place have really not experienced that problem as it is?
    Mr. FERGUSON. They have not experienced that problem as it is, and we already have a world in which there is imaging and some truncation that already occurs. So one of the reasons that we have some comfort is that, in fact, this is not creating something that is totally unheard of, other than the substitute check, but the processing behind it has been tested already and is understood and seems to be working.
    Ms. HART. Okay. Thank you. The other concern is regarding any other safety or soundness issues that may relate in increased electronic check truncation. Are you confident that the current technology is adequate to protect the U.S. payment system from some unanticipated crisis regarding that? Or is there something else that we should put in place?
    Mr. FERGUSON. No, I am confident that the confluence of technology, law and regulation and natural incentives on the part of banks and on the part of customers has all worked to create a payment system that I think benefits the consumers and serves an $11 trillion economy. So I think the concepts in the check truncation act would be a major step forward, without question, but I am not sure that we need at this stage any further changes, and we are not proposing anything else, other than the kind of things that have already been picked up, generally speaking, in H.R. 1474.
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    Ms. HART. Would you expect that the Fed will be ready to step up to the plate as this would proceed, and make suggestions?
    Mr. FERGUSON. Absolutely. We will be very vigilant through all of our usual methodologies, but I and a number of my colleagues are very involved in two or three different committees with the purpose of being on the forefront or understanding where the forefront of payment systems will be, and if we see other needs that emerge over time, we would certainly, as we did with our original proposal on check truncation, let the Congress know. So we will be vigilant on these matters.
    Ms. HART. Thank you for that, Mr. Ferguson. I yield back.
    Chairman BACHUS. Thank you.
    Mr. Davis?
    Mr. DAVIS. Thank you, Mr. Chairman, and Mr. Ferguson, welcome.
    Let me give you a chance to perhaps anticipate some of the criticisms that the panel after you may offer for this legislation, and let me get the benefit of your expertise in analyzing some of it. Recognizing that the Fed does not have a terrible stake in the re-credit provision either way, I still want to direct a few questions about it to you.
    One of the contentions, as I understand, of the consumer groups is that the re-credit provision, while it offers in effect a new set of protections to consumers, that the provision is triggered by the presentment of a substitute check. Their concern, as I understand it, is that for the class of consumers who may not have a substitute check in their position, for whatever reason—something as basic as losing it or something more advertent, such as not seeking it—that they are somehow worse off under this legislation than they would be under the current regime. Can you address that concern for a moment? First of all, do you agree, as a matter of interpreting this legislation, that to trigger the re-credit provision that one has to have in his or her possession a substitute check—do you agree with that?
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    Mr. FERGUSON. Yes. I think that is correct.
    Mr. DAVIS. Now, taking that point, can you comment on whether that leaves a class of consumers somehow worse off than they currently are?
    Mr. FERGUSON. No, I do not think it leaves a class of consumers worse off than they currently are. I think the scope that is here is much more practical to implement, if one is going to go down this path towards having a re-credit. Consumers that do not receive their canceled checks would have really no way to determine which checks they wrote were subsequently converted to substitute checks. So if you expanded this to more than individuals who did get back their substitute check, they would not know when and how to exercise that right. So I think you would be creating new confusion in the minds of consumers as to exactly which rights apply to them, and they would have to try to go back through their bank and figure out, gee, was this ever converted to a substitute check or not? I do not think that would be very beneficial to consumers.
    Mr. DAVIS. Let me cut you off and give you one hypothetical. Let's say that someone, most banks right now provide some service by which you can call a 1-800 number or call some other number and find out how much is in your account and find out the particular value of a check. Let's say that hypothetically I am checking my bank account by telephone and I find out that check 2874 shows a $100 check and I think I wrote a $10 check to Pizza Hut, and somebody could not read my handwriting. Now, in that instance obviously I have not gotten a substitute check. Let's say for whatever reason I never get a substitute check. Why shouldn't I just be able to call my bank and say, look, I called in yesterday on the 1-800 number and you all are showing a $100 check and I know that nothing at Pizza Hut costs $100. Why shouldn't I be able to do that by telephone? Why should I have to have a substitute check?
    Mr. FERGUSON. That issue is really much more about current check law, because what you are saying is your bank erroneously debited your account, and current law already prohibits that and gives you the right to have that money put back in your account beyond the $10 in your example. Indeed, if it turned out that they inadvertently debited your account for $100 when they should have debited for $10, under current law if you write another check for $90 and they bounce that and you have some late fees, et cetera, then they are obliged to make you whole for those as well. So the example you have talked about is really something that is well covered under current law. As I tried to indicate a few other times, we have seen no evidence that that current approach under the UCC is not working.
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    Let me remind you, we have 40 billion checks written every year in this country. So if that had been a systematic problem, then I think it would have been recognized. So what you are talking about now is current law, and current law covers your case very well and seems to cover it efficiently.
    Mr. DAVIS. Let me quickly address that before I ask you one final question. The time is limited. I think that is true in the sense that UCC provisions provide a protection for the consumer. However, I suspect that what the consumer groups would say in response is that someone has got to go out in effect and trigger the UCC remedy through getting a small claims lawyer and paying the fee for a small claims lawyer. Whereas the benefit of the re-credit provision, as I understand it, is that it creates an automatic set of rights that do not have to trigger through litigation.
    Mr. FERGUSON. But one must also understand two things. One is that banks have an incentive to do this right. It is a very competitive business. They are trying to hold on to consumers. Many banks look at the checking account and the checking relationship as the anchor of the relationship. What we have seen thus far is that the incentives that banks have seem to be working very well to get problems resolved quickly.
    Mr. DAVIS. Let me just make one point—if I could ask unanimous consent for about 30 seconds, Mr. Chairman—the point that I am making, I suppose, Mr. Ferguson, is that I think you are 100 percent correct in terms of the incentives the banks have, but those incentives do not create an error-free system. I think we agree on that. So the proposition that I am stating to you, and I suspect what the consumer groups are saying is that if we are going to have a re-credit provision, why shouldn't the re-credit provision be universal in its applications, as opposed to being limited? If I could just make one additional point, I think the argument is there is no question that the whole panoply of current State laws, the whole panoply of UCC laws do provide a remedy for the consumer, but in the spirit of truncation and the spirit of expediting the delivery procedure for checks, that it might somehow also be worth our while to expedite the challenge procedure, if you will. That is the whole thrust of the re-credit provision. If we do that, I suppose that their argument would be that we ought to have a system that is as simplified as possible and one that does not necessarily make it easier for some people than others.
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    I recognize that my time is also expired.
    Mr. FERGUSON. May I please respond to that, because I think that——
    Chairman BACHUS. In fact, we have two Harvard law school graduates debating, and I know that you would never get—five minutes would not be long enough
    Mr. FERGUSON. I was going to say, this reminds me very much of moot court.
    I will give one very uncharacteristically short Harvard response to this comment, because I think this is——
    Mr. SHERMAN. At least, Mr. Chairman, we do not have any senators.
    Mr. DAVIS. Unless we count Mr. Ford, anyway. Is that right?
    Mr. FORD. No.
    Mr. FERGUSON. Cut Mr. Davis off right now.
    Chairman BACHUS. I am actually enjoying this because it is two Harvard law school graduates, and I can actually follow what they are saying.
    Mr. FERGUSON. But you raise a point that is extremely important. I think it is very unwise, it would be unwise for Congress, I believe, to expand new capability of this expedited re-credit beyond the narrowest way in which it is required. The reason is, I believe, you give individuals—all of us are consumers—so you give us all as consumers a new right, but you do not let us know when we can exercise that right, then I think you raise the barriers and create confusion. You do not reduce confusion. The second point I would make is that no rights come without some costs here. The expedited re-credit provision does have some costs on the other side. I realize that not all of us are equally concerned about the costs to the banks, but I think it is important for you as legislators to be aware that nothing is free. If you decide that you are going to expand beyond what we had originally proposed and beyond where you are on H.R. 1474, you are going to be raising the cost and possibly cutting off benefits in other directions.
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    The final point I would make is I believe that if the federal government is going to legislate in an area, it is important to have found that a problem exists or there is a high probability of a problem. What I have just tried to explain to you is that while this is a major step forward in many ways, the risks of new problems, it seems to me, are not very high here. And to have the full power of the federal government creating some new legislation and some new rights when the probability of a problem, I believe, is very, very small, it strikes me as at least a question that you want to ask yourselves before you go too far down that path.
    So that is one of the reasons why the Board has changed its view completely, and says expedited re-credit is not necessary. If in the judgment of Congress you think it is necessary, I really strongly urge you not to expand it beyond what had been originally proposed because I am afraid you would be creating new costs, some confusion and federalizing an area of law where things are working extremely well today, though obviously we are proposing some areas for improvement. So that is my not very short Harvard answer back—it would not be based on evidence; but that is where I stand, sir. Thank you.
    Chairman BACHUS. Thank you very much.
    Mr. FORD. Did you follow that, Bachus? Did you get that? Did you understand that?
    Chairman BACHUS. Actually, one thing I will follow up as an Alabama graduate—but take it a step further—is that we are finding ourselves in a global economy. And if we have inefficiencies in this country that they do not have in other countries, then it is a disadvantage. But if we can create an efficiency in this country that they do not have in another country, it is an advantage. And this is an inefficiency in our present system that by eliminating we can be more competitive in a world environment.
    Mr. FERGUSON. I agree.
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    Chairman BACHUS. I think in this case, we would be ahead of other countries which we compete with, in eliminating a cost that they still have, and they have many cost advantages, labor and otherwise, but this would be a great advantage to us as we compete in the world arena.
    Mr. FERGUSON. I would agree with you, as I put on my economics hat, I would say that if we can help keep costs low and increase consumer service here in the U.S., then that is an advantage for all of us.
    Chairman BACHUS. Thank you.
    Mr. Garrett?
    Mr. GARRETT. I hope you will bear with me as a Rutgers Law School graduate.
    I am intrigued as to the cost efficiencies and the cost savings and the potential for the positive result for the consumer. As you very nicely walked through my colleague over there through the process, under current law, can you just fill me in as far as the requirements as far as the waiting period while checks are being held, during the float period? Is there a divergence as far as that time limit is, as to the nature of the check?
    Mr. FERGUSON. Well, yes, it is one that is basically non-local or local, is the shorthand way to think about it. There is a longer period that currently exists. But I want to make a quick point here, because there is a period in the law that is five days and I think three days, but the major point to recognize is that many, many banks are already providing services more quickly in that. Again, this makes the point about competition, so you should not think about our requirements under the Expedited Funds Availability Act as in some sense being the limiter here. Banks already in many cases, not all, are providing funds more quickly than the timeline currently required, the five days currently required. So the holds that people think about as being what is in the law may or may not be the experience that they have in their individual bank account relationships.
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    Mr. GARRETT. Okay. I just know that I hear from friends and neighbors as to why it takes so long. Although there may be competition out there, it seems like they are all taking——
    Mr. FERGUSON. But can I explain? Part of the reason why we have the time frames that we have is this entire process of getting a check from the place where you first deposit it, to the bank on which it is drawn, and then back. One of the reasons that this time frame exists is to help banks reduce the amount of fraud that they are subject to, because they have to know that there are good funds at the other end, and give some time for that to occur. So I do not think people understand that is the reason why there is some time that does elapse for many, though not all, in the check process; that funds are not immediately available because the banks have to make sure that whoever it is that gave you the check has sufficient funds. That is a multi-day process currently.
    Mr. GARRETT. You made a comment before, that percentage wise there are a number of checks that go through the Fed—I have not got the exact number that you rattled off as a percentage. The rest, I assume, then are the checks that could be called ''on us'' checks, that are bank affiliations where they are all within?
    Mr. FERGUSON. No, they are not all ''on us'' checks. Let me look at our numbers here. There are three ways that checks are handled—or four. One is ''on us'' checks, yes. Then we have about 40 percent of those that are not ''on us.'' But the others go through either a correspondent bank or a clearing house. Correspondent banks are banks that compete with the Fed in this area. First Tennessee is one of our strongest competitors, but many, many other banks provide that kind of service. And then there are within certain cities clearinghouses where the banks just clear the checks among themselves. And then there is another category which is called direct presentment, where a bank just simply has a bilateral relationship with another bank, maybe in the same town, and they do direct presentment. So this is an area in which, though we are active participants, it is very, very competitive. The margins are pretty thin, but there are banks that stay in it.
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    Mr. GARRETT. So for those that are the ones that I am thinking of, either ''on us'' or some of those other agreements that are in place right now that maybe are already using an electronic transmission, are we able to look to them today, or have you looked at them today already, to say, well, they are out there; they are doing it today; and their costs—this goes back to the issue of what is the benefit to the consumer—they are already doing it. Their fees are generally lower or their cost to the consumers are generally lower, so now if we impose it on the other 43 or 44—not impose, but allow it to the other 40 percent we can see that. Or if not, if that is not the case, that the ones that are already doing it electronically within themselves—if those fees are not lower than the rest that are doing it right now, then you can make the argument that even if we do this, the consumer is not going to see the benefit.
    Mr. FERGUSON. We have been reluctant to do that or cautious about doing it for a couple of reasons. What you have just identified, if you will let me put on my economics hat, is a very partial equilibrium story. The fact that a bank may have done this with one other bank or within a small community, or with a subset of its checks, and there are some banks that already are doing this on their own and have gotten these agreements, does not give you a strong sense of what it would look like when it becomes universal. Because the ability to increase services, to reduce fees, depends on having a broad ability, a broad acceptance of a particular approach, and not a narrow one for a small band of some of your checks. So while I am firmly convinced that there will be some cost savings and some increase in benefits to consumers in new services, I think it is important for us to let this go through and then we can observe exactly how it occurs once it becomes national law. Because you cannot generalize from the few cases that exist today, because those are all by definition special circumstances that are outside of what the current configuration and construction is.
    I know it is sort of a cautionary kind of Federal Reserve statement and you would like a firm definitive answer, but I have got to be very honest with you. I think there will be cost savings, but I have not attempted to multiply up what we see now, because I do not think it is necessarily fully reflective of what the cost savings could be once this becomes universal. I am comfortable, having seen what exists today, that there are not a new set of risks that emerge because the technology works pretty well. But exactly how banks are going to change their behavior and what new services they are going to provide I think are important.
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    There is somebody on your second panel, if I have read their testimony correctly, who can perhaps give you some insight into the kinds of new services they are thinking of providing if this Act or bill becomes law.
    Mr. GARRETT. Thank you very much.
    Chairman BACHUS. Thank you.
    Mr. Crowley?
    Mr. CROWLEY. Thank you, Mr. Chairman.
    Mr. Ferguson, if you can just walk me through this just a little bit. Taking a hypothetical approach to it, the 70-year-old male in my district who lost his wife five years earlier. She did all the books in the house. He now is doing that—and this may be a little self-exposing—but he is used to writing checks to his local grocery store, for instance. He lives in a small town, maybe—not from my district, then. He gets his canceled checks back in the mail and has been used to that process. There is a dispute at the local grocery as to whether or not his check went through or not. Right now, he is able to bring a canceled check and say, well, I do not know what the problem is; here is my canceled check. The bank has verified that I have made this payment; do not make my life any more difficult than it is right now; I am done.
    Who knows what happens to the relationship between himself and the local grocery store. What does that individual do now. In other words, under the truncation process, does he get a list of checks on one page, or does he just continue to get checks like this? Or does he get a list of truncated—even smaller versions of this? And is that a legal replacement for a canceled check?
    Mr. FERGUSON. The answer is, what he gets depends in some sense on what he wants and what his bank offers. He may get back checks like this, plus some originals, depending on which banks they have gone through. He may, for some banks, get an image of this check, front and back, plus an image of other checks. That happens to be what my bank delivers. There are some banks that offer service where you get your check number and the amount that was paid. The important thing, though, is that this substitute check would be, if this law goes through, the legal equivalent of the original check. So in your story the individual would take the substitute check, if that is what he got, and would say, here it is. And by the way, this is the legal equivalent, and there is—back to my Harvard law friend—a best evidence concept. This would be the best evidence available and it would suffice. This would be the legal equivalent.
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    If what the individual had gotten originally was an image of the check, then he could call up his bank and get the actual check itself, if he needed the legal equivalent, but this would be the legal equivalent and it would resolve these problems that you have just raised.
    Mr. CROWLEY. So is it possible that banks will not send back an image monthly?
    Mr. FERGUSON. It is possible that banks would not send back an image. They may simply send back a statement that has your check number and the amount. There are a range of practices that might emerge, but the image would be available.
    Mr. CROWLEY. That person would have to go through another process then in order to access that canceled check or the image of that canceled check.
    Mr. FERGUSON. Right. That would be, as one of your colleagues said, a phone call away today.
    Mr. CROWLEY. The onus would be on the person writing the check, as opposed to receiving the check—they do that?
    Mr. FERGUSON. The person writing the check is the one who would have the canceled check, if that is your question, if that makes sense. You are looking like I am not answering your question.
    Mr. CROWLEY. He says he paid the check—I paid for the bill.
    Mr. FERGUSON. Yes.
    Mr. CROWLEY. The grocer says, well, I did not get your money. The man says, well, I do not have a canceled check. I have to call my bank now to get the canceled check, to prove that I paid with this check. As opposed to in the past, he can walk up—I mean, it is just another step to have to go through.
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    Mr. FERGUSON. Well, it depends on what the services that the bank provides. If there is an individual who always wants to receive back canceled checks, then that would be the arrangement he would want to make with his bank, and the bank would send him his canceled checks if that is one of the services that they are offering. But all banks would offer the service of providing your canceled check or a substitute check, if that were required in order to handle this proof requirement.
    Mr. CROWLEY. I am going to yield 30 seconds to my friend from Tennessee.
    Mr. FERGUSON. Okay.
    Mr. FORD. Real quick, just to follow up, Mr. Ferguson, regarding this expedited re-credit. I know we may have a little bit of a difference on it. You talked about the need for it in Congress, that Congress should assess whether there is a demand or need for some kind of remedy here. And you talked about the costs associated with this new provision or perhaps this new right. I was just curious, what would the cost be, just out of curiosity, to the extent you can give me some educated guess as to what the costs would be. Because I tend to think it is an important part of the legislation; and two, would even be willing to support expanding it because the harm done in the new bill would be the same harm done for all check writers. So I hear your point, and perhaps this is a conversation for another time and I would love to pursue it with you. Because I ask from this vantage point, I think this is not related to this hearing, but I think some of the credit bureaus, the formal or standard they use for placing on your report an error does not seem to be that tall or high, but the standard to remove something from your credit report once you prove there is a problem is incredibly high. Sometimes they have made the argument in the past that you have to show us where there is a real problem; we know that we make mistakes, but we correct them.
    In this instance here, I understand your point about costs, and there is nothing that can be done in a vacuum. I did not go to Harvard, but I do know that there are people who when mistakes are made, whether you went to Harvard or Michigan where I went, if a mistake is made by a bank, you are $100 or $1,000 or $2,500 broker than you were before you wrote the check. So I am just curious as to what may be the costs and what added burden would that impose on the system that would create the kind of confusion or chaos or confusion that you mentioned.
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    Mr. FERGUSON. There are a couple of costs that come to mind immediately. One is that if you expand this right beyond individuals who receive their substitute checks back, you are going to be putting a burden on both the individual and their banks to go back through the process to see if there was ever a substitute check created. And it may well be that you will have a process in which a bank says, I do not want to receive substitute checks, but somebody down the line may have created a substitute check, and I have now got to go back and research through the process I have just laid out with two or three other banks, potentially, or a clearinghouse or something of that sort. So there is a process of getting information that actually would slow things down and would prove to be very costly.
    The other side obviously is you increase, I believe—again, there are bad people out there—you increase the possibility of banks having to worry about fraudulent claims. It is one thing if someone already has a substitute check and they can show exactly what happened. If there is no substitute check in place whatsoever, then you go through this whole process of expedited re-credit and one of the reasons that there is a time frame associated with it is to make sure that you minimize the risk of a fraudulent requirement for re-credit. As soon as you expand the universe of individuals for whom that credit may apply, you by definition raise another kind of risk that is associated with it.
    I also have some concern if you go much further down the path beyond what we had originally proposed, that you end up in the position where you are now creating a very heavy burden with respect to notices and notifications, and trying to explain what the rights are and how they might be different, and determining where you fall in this process. To be very clear, there are some risks for which the cost is worth bearing. As I have indicated many times, and you have heard me say it here, with a system that can be modernized but does not have a lot of these problems, and with the kinds of technology that underlay all of this, I do not think the risks are suddenly going to get much greater.
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    You also have the problem of then having, if you will, two kinds of check law. You have the check law for anybody who thinks they may have ever had a substitute check, and you have the check law for people who never had their check touched by a substitute check, and they know that because they get their original back. That cannot be, I think, a good use of societal resources, to have individuals trying to figure out what is the law under which I am now working. If you are going to try to create two kinds of check law, I would argue you should try to limit that new element of check law to a place where at least there is clarity around to whom it applies and when, which is what adding, for example, indemnities et cetera with respect to the physical substitute check might do. But if you go much beyond that, I think you are in an area where the risk of confusion goes up and the benefit that you are trying to get, if you will, frankly is not commensurate, I think, with the kinds of risks and costs that emerge.
    So this has a lot to do with the way one thinks about legislation, for sure, but it also has a lot to do with the fact that what you are proposing is an important step towards improving a system that needs to be improved, but not a step that has lots of new inherent risk or takes us into completely uncharted territory, because there are institutions that you will see are doing some of this kind of thing already.
    Chairman BACHUS. Thank you. We have actually gone over five minutes. Thank you.
    Mr. Feeney?
    Mr. FEENEY. Thank you, Mr. Chairman.
    Mr. Ferguson, I am interested in one of the suggested advantages of this piece of legislation to reduce the float. If this legislation is enacted successfully and becomes law, I suppose that the expectations of check writers out there, especially for certain transactions of a larger size where the overnight float is meaningful, the expectations will be that that float time will be dramatically reduced. Will there be some opportunities for mischief that will be legal under this legislation if enacted, for financial institutions or the Fed or other parties to take advantage of that are not currently available to them?
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    Mr. FERGUSON. I am not sure I get the gist of your question. Let me talk about what might happen in the float and see if I can get to your point. This law may allow for reduction in the float time, it is true.
    Mr. FEENEY. I guess my question goes to the fact that use of this is permissive and not mandatory.
    Mr. FERGUSON. Yes.
    Mr. FEENEY. And so if people get a certain level of expectations about reducing the float time, financial institutions will still have some discretion and will they be able to basically take advantage of that discretion, to the disadvantage of consumers and check writers?
    Mr. FERGUSON. I do not think to the disadvantage of consumers or check writers. We have an obligation under the Expedited Funds Availability Act to monitor what is happening in the world of availability, and to reduce the maximum allowable time, according to best market practice. So I think we have a role here to make sure that there are no banks that are outside of the realm of what appears to be acceptable or better practice—consistent again with this issue about checks being presented and then returned, which still will take a few days.
    So I do not see mischief emerging from banks taking advantage of consumers, because as you observed, consumers are aware of this. As I have already indicated, there are a number of banks even now that offer better funds availability than is required, because of competitive pressure, a desire to hold on to consumers, because banks think of this area of checks as an important linkage to consumers, and for many of them an important source of revenue. So I think they have a real incentive to play fair, if you will, with consumers and not take advantage. We have an obligation under the Expedited Funds Availability Act to monitor what is happening and determine whether or not there is opportunity to reduce the maximum amount of time that one can have as a hold on a check. So I do not see new elements of mischief emerging here in that regard.
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    Mr. FEENEY. Okay. The second advantage of the proposal is to reduce transaction costs. Does the Federal Reserve currently incorporate the overhead that is used in running check transportation between different institutions into the prices it charges banks for that transportation service? And would the Federal Reserve be opposed to disclosing all of its associated costs with transportation or transporting checks?
    Mr. FERGUSON. We have a unified service of check clearing, which is what I would describe as end to end, if you will. And that has all of our operations associated with it; all the overhead. With respect to the actual transportation, we do not have our own transportation force. We put that out for bid, and there are a number of firms that we use to provide that. When we do re-pricing, one of the obligations that we have under the Monetary Control Act, when we set our overall pricing under the Monetary Control Act, we have an obligation to, generally speaking, in not every specific service, but in general services and broad categories of services, to recover our cost. And we often combine costs together.
    So what we do, I think, is one, consistent with the Monetary Control Act; two, already relatively quite transparent. There is no new disclosure that I would want to give. We disclose to the public our check transportation costs, for example, to respond to your question. So I do not think there is any mystery about either what our cost structure is or what our pricing is, and I do not think there is any reason to use this Act to try to micro-manage what the Federal Reserve does in this area, because we offer already a full range of services and we think we offer them quite efficiently.
    Mr. FEENEY. So you are not anxious to, in this Act at least, disclose specifically the costs associated for transporting checks.
    Mr. FERGUSON. We already disclose to the public our check transportation costs. There is nothing new that we do not already disclose. So there is nothing that the Act needs to do with respect to transparency of the Federal Reserve in the world of check and check clearing.
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    Mr. FEENEY. Thank you.
    I yield back the balance of my time, Mr. Chairman.
    Chairman BACHUS. Thank you.
    The gentlelady from New York?
    Mrs. MALONEY. Thank you, Mr. Ferguson, and thank you for your work on check truncation and for your testimony today.
    I would like to follow up on some of the questions of Mr. Feeney. I have had, as you know, a long time interest in the payment system, and especially in the role of the Federal Reserve as a provider of services to the industry, and simultaneously as a regulator. The 1980 Monetary Control Act says the Federal Reserve has to have the revenue to match the costs when it competes with the private sector, the idea being that the Federal Reserve should not be able to use its status as a large governmental entity to undercut private industry. I just would like to know, what percentage of the nation's checks does the Fed transport today through the air?
    Mr. FERGUSON. Through the air?
    Mrs. MALONEY. Yes, that you fly.
    Mr. FERGUSON. I can tell you the percentage that we clear. I cannot respond based on my knowledge—I am not sure the staff knows exactly the number we transport through the air as opposed to ground transportation?
    Mrs. MALONEY. Yes.
    Mr. FERGUSON. We transport checks by truck and through the air as well.
    Mrs. MALONEY. Through the air, with the fleet.
    Mr. FERGUSON. Do we know? We will have to get back to you. I do not know the exact percent that we transport only through the air, as opposed to ground, and there are some checks that have both, by definition. Where you put them in a truck, take them to an airport, and fly them somewhere. And so to answer your specific question——
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    Mrs. MALONEY. Okay, but if you could get back to me. You said earlier that you let it out to bid for the transportation of the system. You do not own the planes.
    Mr. FERGUSON. No, we do not own the planes.
    Mrs. MALONEY. But what about the Check Relay in Atlanta—is that a private concern or is that a——
    Mr. FERGUSON. Check Relay is the name they give to the whole operation, but we do not own a plane. If we did, I would not fly.
    Mrs. MALONEY. But you competitively bid that.
    Mr. FERGUSON. I am sorry?
    Mrs. MALONEY. You competitively bid that.
    Mr. FERGUSON. We competitively bid it. We bid it in what we believe to be the interests of the country, which is that we bid it based on every route, and we try to find the best provider route by route, and we have managed to do that, and we believe it is, one, consistent with the Monetary Control Act; and two, in the long term and indeed I would say the day to day short term interest of the U.S. economy.
    Mrs. MALONEY. And you do not think that you in any way undercut the private sector when you do this?
    Mr. FERGUSON. Absolutely not. We cannot, because as you well know, because you have followed the Monetary Control Act quite accurately and quite aggressively, we have got to put in not just the recovery of our basic costs, but also as you know very well, the so-called PSAF, or private sector adjustment factor, which includes the kind of return that an institution would get in check, or in their broad operations, since it is hard to get the return in check per se, so we look at the return for a large number of bank holding companies. So we have to mirror what the private sector does by having this profit component added in and price towards that. We disclose whenever we think about any changes with respect to the PSAF, for example. We have a public comment period. GAO has looked at it and has commended us for it. They have recommended a few changes, which we have undertaken. So there is no way in which we are undercutting the private sector. It would be unlawful because it would violate the Monetary Control Act. It would be, I think, inappropriate in places where we compete, for us to do that. And we do not do it.
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    Mrs. MALONEY. Okay. I would like to read an excerpt from testimony in answer to a question from Representative Tiberi, from my hearing that we had last year, from Joel Biggerstaff, the CEO of AirNet Systems. And he said, and I quote, ''the Fed system and our system are basically duplicative at this time, operating from the same points of origin and serving the same end points at the same time. With capacity availability in both systems, it would be very easy for a single management structure to create significant efficiency and improve services of the system. I found it interesting earlier that I think the percentage of checks cleared overnight is 93 percent, as mentioned by the Federal Reserve. For those checks that flow through our system, we consistently average in excess of 98 percent in terms of on-time delivery and subsequent clearance of those financial instruments.''
    My question is, what percentage of checks does the Fed clear overnight, and given that this bill will facilitate increased presentment of checks electronically, at what point does the Fed anticipate to no longer operate aircraft through bid or whatever form for check clearing and leaving this business to the private sector?
    Mr. FERGUSON. First, let me be clear, the Federal Reserve is the only system that provides national service. If one wanted to talk about one very highly utilized route from one big city to another, and that is the service you provide, that is fine, but we provide national service. To answer your question, we clear well over 90 percent of our checks every night to remote end-points—up-state New York as well as New York City. To my friend from Vermont, I mentioned St. Albans. There are banks there and I am sure we clear checks to them as well.
    Secondly, we believe it is in the interest of the country to have a variety of different approaches for flying checks around. We, as I have said, put out our routes for bid. We choose the best bidder. There are people who do not win, because that is the way competition works. I do not think it is very wise to try to micro-manage the Federal Reserve's processes here for the benefit of an individual or a company that wants to attempt to monopolize something, and we are really trying to provide a broad national service. We think we do it extremely well. We have an obligation to compete fairly under the Monetary Control Act, and we will continue to do that. But I do not think you or anyone wants to have the Federal Reserve's day to day decisions about to whom we put out these contracts——
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    Mrs. MALONEY. I did not say that, and since my name was mentioned, I said competitively bid.
    Mr. FERGUSON. We do competitively bid.
    Mrs. MALONEY. I think it should be competitively bid. I am not promoting any company. I support competitively bidding.
    The second part of my question is electronically—when will the Fed move to electronically clearing checks? Is that in your plans?
    Mr. FERGUSON. We already present—let me get the facts here for you. We present electronically 21 percent of the check volume that we have. We truncate about 5 percent. We image about 8 percent. So I think we are already actively in the business of electronically presenting checks. We would like to do more. We have introduced a new service with respect to imaging, for example. So we are very much in the business of electronics, as well as flying paper checks around in the usual fashion.
    Mrs. MALONEY. So at some point, do you think that everything will be done electronically, and therefore there will be no need for any check clearing whatsoever with the aircraft—that it will be done electronically completely?
    Mr. FERGUSON. I cannot say that. I think it depends very much on this law, for example, passing, and how it evolves over time. I think there will be some individuals who will want their paper check, either the substitute check or the original. It would not surprise me to see some institutions, some banks that arise that focus on that segment. I think we will have more electronics, without question, but I do not know at what point we will have exclusively electronic, and I do not know if there will ever be a point at which we have exclusively electronics because there may be individuals that continue to want to have either a substitute check or some other form of check, but they will be able to get their substitute check.
    Mrs. MALONEY. Do you have a sense of how many banks are electronically processing checks now? Is it a large percentage or just a small percentage?
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    Mr. FERGUSON. It depends on how you mean ''electronically processing.'' All banks are electronically processing in the sense that they——
    Mrs. MALONEY. Not moving the checks electronically, though.
    Mr. FERGUSON. I have an estimate of the percentage of checks where there is some form of imaging, and I have seen different ranges for that number. All credit unions do that now. We estimate that perhaps as many as 20 percent, but I have seen banks estimate as many as 30 percent of checks are already imaged. So there is a great deal of evidence that this works pretty well already.
    Mrs. MALONEY. Thank you for your testimony. I will be supporting this bill.
    Mr. FERGUSON. Thank you very much. We appreciate your support.
    Chairman BACHUS. Thank you, Ms. Maloney.
    Vice Chairman Ferguson, we have one other question I want to ask you for the record, because it was a subject of discussion at the Senate hearing. It has not been touched on today, and that is the comparative negligence standard that is provided in this legislation for indemnification and for other claims. Under this comparative negligence standard, how do you believe that consumer rights would be affected or altered, between the current protections and the protections if this legislation became law?
    Mr. FERGUSON. I do not believe consumer rights would be affected at all. The reason that when we originally proposed this we put in a comparative negligence standard was not to adjust consumer rights at all, but rather to recognize that we put in warranties and indemnity language, and we wanted to make sure that the common law, well-established tort concept of comparative negligence that exists in the UCC today would also apply in exactly the same way to the warranty and indemnity provisions here. So I believe that it will keep things unchanged and would guarantee that the new obligations, warranty and indemnity that are embedded in this bill, would exist in a world of comparative negligence, this as the UCC currently does, but I see no changes whatsoever.
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    Chairman BACHUS. Thank you.
    At this time, there are no further questions. Mr. Ferguson, you are dismissed.
    Mr. FERGUSON. Thank you.
    Chairman BACHUS. Our second panel we will call at this time. We are not going to take a break at this time. We anticipate that at some time there may be votes, and we will take our break at that time.
    Ms. Hart is going to chair the beginning of the second panel. I have to be on the floor for a speech. She will take over the chair at this time.
    Ms. HART. [Presiding.] Okay, I would like to begin with panel two. Beginning with panel two we have six panelists and they are all ready, it looks like. Mr. C.R. Cloutier, President and CEO of MidSouth Bank, NA, ICBA Chairman on behalf of the Independent Community Bankers of America and America's Community Bankers. Thank you for joining us. Mr. Grant Cole, Senior Vice President and Senior Change Management Executive, Transaction Services, Bank of America, on behalf of the American Bankers Association, Consumer Bankers Association, the Electronic Check Clearing House Organization and the Financial Services Roundtable. Thank you for being here. Mr. Dale Dentlinger, Director of E*TRADE Access, E*TRADE Bank. Thank you for joining us as well. Ms. Janell Mayo Duncan, Legislative and Regulatory Counsel for the Consumers Union. And Mr. Joseph Kniceley, Vice President, Payment Solutions, for NCR Corporation. Thank you. And Ms. Celia Woodham, Director of Operations, Chartway FCU, on behalf of the Credit Union National Association. Without objection, your written statements will be made part of our record. You will each be recognized for a five-minute summary of your testimony. And now I will begin by recognizing Mr. Cloutier for your statement.

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    Mr. CLOUTIER. Chairman, Ranking Member Sanders and members of the committee, my name is Rusty Cloutier. I am Chairman of the Independent Community Bankers of America and President of MidSouth Bank, NA, a $394 million community bank located in Lafayette, Louisiana. I am pleased to appear today on behalf of the Independent Community Bankers of America and America's Community Bank to share with you our views on H.R. 1474. We strongly support the efforts to increase the efficiency of the nation's payment systems. We believe that through the proposed legislation Congress can create a significant cost savings and efficiencies that will benefit both consumers and financial institutions. I would also point out to the committee that the financial services trade associations are united in support of this legislation, which is a testament to the needs that this bill addresses for the entire industry and its consumers. I would first like to address the check clearing process in today's environment. Research conducted by the Federal Reserve Board shows that American consumers make more than 70 billion non-cash retail payments each year, and even though the number of transitional paper checks has been steady declining since the mid-1990s, they remain the non-cash payment of choice in the USA today. Processing checks has become extremely costly and highly burdensome for the nation's financial institutions. Current law generally requires that the original check move through the entire clearing process from the bank of first deposit to the paying bank. This is a labor intensive process of handling, sorting and physically transporting checks. Check truncation and electronic processing would significantly reduce this cost and burden. However, a major impediment is the legal requirement that a bank customer consent to not receiving their original check back after it is processed. Currently, the paying bank can truncate checks with the consent of its customers. However, because the first bank of the first deposit does not have a relationship with the paying bank's customer, it is prohibited from truncating the customer's check through electronic processing and it is forced to incur the cost of processing and transporting the paper check to the paying bank. This legislation will remove this impediment and facilitate check truncation and electronic check processing. Additionally, the proposed legislation authorized the use of a substitute check, which is a paper reproduction of the original check suitable for automated processing.
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    We have concerns that the existing definition of substitute check, which requires banks to include all MICRA line information on the original check, will create a number of technological challenges and dramatically slow down the implementation of the processing models envisioned under this legislation.
    As an alternative, we suggest a requirement that a substitute check contain MICRA information as prescribed by generally applicable industry standards.
    The imagining technology that will be promoted by this legislation will speed processing and improve services to customers.
    Many consumers are already enjoying the benefits and conveniences associated with check imaging. For example, rather than dealing with bundles of canceled checks, consumers receive convenient summaries of their transactions.
    It is important to note that this legislation does not mandate the processing or receipt of checks in electronic form. However, over time an increased number of financial institutions will recognize the benefits of electronic processing and will see less physical transportation, handling and sorting.
    Critics of the legislation have expressed concerns over heavy reliance on check imaging. Yet, the experiences of my institution and other community banks that offered image check statements demonstrate that these concerns are unfounded.
    MidSouth Bank implemented check imaging in June 1999 because we felt it would streamline the delivery of products and services to our customers, keep us competitive and generate a return on our investment. The benefits have been enormous. For the customer, we have improved the quality of statements, we are able to expedite statement delivery, account reconciliation has been simplified, and we can respond to inquires in minutes instead of hours. For the bank, imaging has led to significant cost reductions and we have simplified statement preparation, experienced improved productivity in item processing. Our customers' response has been overwhelmingly positive. But most importantly, since implementation, neither my bank nor account holders have been caused any losses.
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    Consumer groups argue that the consumers need protection beyond what is required today because they would be disadvantaged if they receive substitute checks rather than originals. However, these substitutes they cite in support of this argument have existed for years without adverse consequences to the consumers. We believe existing laws provide adequate protection to consumers for substitute checks authorized in the proposed legislation. There have been no significant consumer issues relating to the receipt of images or electronic representations of returned check items and there is no evidence to justify changing the existing law to provide for additional check protection.
    Finally, I would like to address the proposed expedited re-credit provision, as you heard Vice Chairman Ferguson speak about this morning. We believe that the new re-credit provisions are complicated and would only serve to confuse customers, create an unnecessary burden for banks and expose banks to sophisticated fraud schemes.
    In conclusion, we hope the committee will take this opportunity to approve the efficiency of the U.S. payment system by quick passage of the proposed legislation, which has broad support of the banking industry and the Federal Reserve Bank.
    Thank you for the opportunity to appear here today. An appropriate time I will be happy to answer any questions.

    [The prepared statement of C.R. Cloutier can be found on page 68 in the appendix.]

    Ms. HART. Thank you, Mr. Cloutier.
    Mr. Cole?

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    Mr. COLE. Thank you for inviting me to appear today in behalf of the Electronic Check Clearing House Organization, the Financial Services Roundtable, the American Bankers Association and the Community Bankers of America. My name is Grant Cole. I am a Senior Vice President at Bank of America in the Transaction processing division.
    The organizations I represent thank Representatives Hart, Ford and Ferguson for introducing H.R. 1474, the Check Clearing for the 21st Century Act. While we would like to see some improvements to the Check 21 bill, we believe that this legislation will serve as an excellent basis for final check modernization legislation that will benefit consumers, businesses, financial institutions and the economy as a whole.
    The check payment system relies heavily on an extensive network of physical check transportation. The Federal Reserve, depository institutions and third party vendors run multiple processing facilities throughout the country. This system is remarkably efficient given the large volumes and reliance on physical transportation of paper documents. However, I believe we are at a crossroads. For the 27 million Bank of America customers, checks are second only to cash as the most popular choice for making payments. However, Federal Reserve data indicates that the number of checks being written is declining, while the number of electronic payments is increasing. If this trend continues without check clearing modernization, it will dramatically change the cost structure of payments processing as checks will become more expensive to process. Promptly passing check modernization legislation is critical to protect the check payment system and allow those customers who choose to write checks to continue to do so. Substitute checks, which are image copies of checks, give customers more information than they get from one or two lines of information shown on their statements for Reg E type of conversions.
    The legislation will benefit consumers and businesses in many ways. First, the legislation will lead to streamlining of the collection and return processes. Consumers and businesses depositors will have information about fraudulent and NSF checks sooner. As a result, depositors will be better positioned to reduce the losses that they sometimes experience from bad checks.
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    With check imaging, customers can view checks just hours after the checks enter our banking system. Customers do not have to wait until the end of the month to see their paper checks, when they are returned to them in the mail. This helps customers and bankers identify and combat fraud. I should point out that the technology to provide check images to customers and to exchange the images between banks is highly secure. We use highly sophisticated firewalls and cryptology to deter hackers or other unauthorized persons from accessing customers' confidential check information. New fraud detection devices are being developed which will flag questionable items for further review as well.
    This legislation will lead to even better customer service. Imaging allows banks to respond to customer inquiries more quickly. By providing a new value proposition for imaging, this legislation will make imaging more common, which will increase the reach of this consumer-friendly technology. Another consumer benefit is that customers will have more deposit options or extended deposit cut-off hours. For example, a greater number of remote ATMs will offer deposit-taking because electronic processing will allow banks to wait longer between physical pick-ups of those checks. This would be particularly beneficial in rural areas where frequent collection of paper checks is quite difficult.
    While we support the concepts of H.R. 1474, we would like to point out several areas where we think this bill could be improved. First, we believe that the special re-credit rights included in section six are not necessary. Current check law, including regulation CC and the Uniform Commercial Code, already provide consumers with appropriate protections in the relatively few cases where consumers have problems with their checks. In the event that the committee and Congress leave the expedited re-credit section in the bill, it could be improved by lowering the amount of the re-credit from $2,500 per check to $1,500 per day. While most consumer checks are written for amounts well below $1,500, persons intending to commit fraud would be very aware of the maximum re-credit amount and take advantage of that.
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    Also, we strongly encourage the committee to change the definition of substitute checks to the definition in last year's bill. The addition of the language bears a micro-line containing all the information appearing on the micro-line of the original check would have the unintended effect of making it technologically impractical to process substitute checks. Our final suggestion would be to shorten the effective date of the bill from 18 months to one year. Having an effective date that is too long will unnecessarily delay the benefits the Act provides.
    Our final suggestion, we strongly oppose expanding the scope of the Act to impose protections or requirements on other check electronification programs that do not involve substitute checks. The special protections for substitute checks in the Act should only apply to situations where the customer actually receives a substitute check.
    Mr. Chairman and Ranking Member Sanders, thank you for inviting me to participate here today and allowing me to share my views and those of the views of the associations that I represent. Once again, I applaud the work of Representatives Hart, Ford and Ferguson and we look forward to working with the committee to enact this bill as soon as practical. I look forward to answering any questions that the committee may have.

    [The prepared statement of Grant Cole can be found on page 76 in the appendix.]

    Ms. HART. Thank you, Mr. Cole.
    Mr. Dentlinger?

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    Mr. DENTLINGER. Chairman and members of the subcommittee, thank you very much for the opportunity to testify on behalf of E*TRADE Financial today in support of H.R. 1474, the Check Clearing for the 21st Century Act. My name is Dale Dentlinger and I am president of E*TRADE Access, Incorporated. E*TRADE Access operates an independent network of more than 15,000 ATMs, making it the second-largest ATM network in the United States. E*TRADE Access and its parent, E*TRADE Bank are both subsidiaries of E*TRADE Group, Incorporated, a diversified financial services company that offers a wide range of financial products and services under the brand E*TRADE Financial.
    E*TRADE Financial's core strategy is to leverage technology to provide customers with superior, value-added, brokerage, banking and lending products, delivered primarily through electronic delivery channels. While E*TRADE Financial's banking group offers a full suite of deposit and lending products, it differs from most other banks in that it does not have traditional brick and mortar branch offices. Instead, our customers transact their banking business with us on the telephone, through the Internet, and at any of our many ATMs, which are located in all 50 states, including the top 20 major metropolitan areas in the U.S. This model allows us to operate efficiently and pass savings on to our customers.
    E*TRADE Bank's branchless structure and already-existing experience with check truncation and digital imaging give us a unique perspective on the Act and its many potential benefits to consumers. E*TRADE Financial believes that the Act will foster significant increase in the usage by banks of digital imaging and other new check processing technologies. By removing existing legal barriers to check truncation and reducing the payment system's reliance on paper checks, we expect the Act will provide a number of significant consumer benefits, including the four that I will briefly discuss today.
    Number one, this Act will increase consumer convenience by expanding the availability of deposit-taking ATMs. Today, only 56 or our 15,000 ATMs accept deposits because of the costly burden of deposit pickup and processing. Without the expense of daily courier pickups, E*TRADE Financial will be able to provide consumers many more choices and much greater convenience in terms of where, when and how they make bank deposits.
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    Number two, this Act will increase consumers' confidence that checks deposited at ATMs will be accurately credited to their accounts. With electronification technology, when a customer utilizes an ATM to make a deposit, the check that is deposited will be scanned and read, with an image appearing on the screen for customer verification and a reduced image printed on the receipt. With these additional assurances, we expect more consumers will find making deposits at an ATM to be a viable time-saving alternative to going to a teller's window at a bank's branch office.
    Number three, this Act will give consumers quicker access to funds deposited into their accounts. As Vice Chairman Ferguson of the Federal Reserve Board and a number of others have already observed, enabling banks in the settlement process to transmit digital images of checks, rather than the original checks, will produce a much more efficient payment system in this country. We anticipate that this faster check presentment and collection, as well as competitive pressures, will cause many banks to further reduce check hold times and give consumers even more rapid access to their funds.
    Number four, this Act will provide consumers with new cutting edge products and services such as real-time access to digital images of third party checks deposited into their accounts. Today, E*TRADE Bank customers receive images of their checks in their monthly statement, as well as the ability to view these images through the bank's Web site. With third party checks deposited into an account available as well through these same electronic channels, our customers will more easily be able to confirm transactions, spot and correct errors, and detect possible fraudulent transactions at their convenience.
    E*TRADE Financial strongly supports H.R. 1474, the Check Clearing for the 21st Century Act, and commends Representatives Hart, Ford and Ferguson for their leadership on this important piece of legislation, because it will lead to the widespread use of digital imaging and other innovative check truncation technologies that will benefit consumers in many important ways. This legislation will enable us to better meet the needs of our customers by increasing the number of deposit-taking ATMs in our network, giving customers quicker access to funds deposited in their accounts, and providing them with new value-added products and services.
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    Thank you again for inviting me to testify. I welcome any questions that you or other members of the subcommittee may have.

    [The prepared statement of Dale Dentlinger can be found on page 91 in the appendix.]

    Ms. HART. Thank you, Mr. Dentlinger.
    Ms. Duncan?


    Ms. DUNCAN. Good afternoon to the chair and other members of the subcommittee. Thank you for providing me the opportunity to come before you today. I am Janell Mayo Duncan, Legislative and Regulatory Counsel for Consumers Union. My testimony today on the Check Clearing Act for the 21st Century Act, H.R. 1474, is supported by the Consumer Federation of America, the U.S. Public Interest Research Group, and the National Consumer Law Center.
    The legislation will create a new negotiable instrument called the substitute check. It will authorize a new dual-processing of checks, where a check may be converted in and out of paper form during processing. The anticipated benefits include cost savings for banks and possible enhanced services for consumers. The potential risks include the double-processing of a single check or errors in reading the amount of or account number on a check, possibly resulting in losses to consumers.
    I appear before you today to comment on the consumer protection provisions in the legislation. First, we commend the sponsors of the legislation for including re-credit, a non-litigation remedy available to consumers to resolve disputes with their banks over funds debited from their account. However, we believe that re-credit should be available to all consumers because they are identically situated relating to potential risks involved in the dual electronic and paper processing of the check information.
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    Second, consumers unable to seek re-credit from banks are covered by state Uniform Commercial Code provisions and indemnity and warranty provisions in the legislation. We believe these remedies are inadequate because they require a lawsuit to enforce. Third, consumer protections in the legislation should be strengthened because they are weaker than protections that already exist for other types of electronic consumer transactions. Finally, the comparative negligence provisions should be eliminated because they are broader than in the current UCC law and could give banks an unfair ability to deter, delay or reduce consumers' claims for damages.
    The bill contains a loophole. Although section six of the legislation requires a bank to put up to $2,500 in disputed fund back into a consumer's account if the matter is not settled within 10 days, it would allow consumers to seek re-credit only if they receive a substitute check from their bank. Banks could prevent consumers from having the right of re-credit simply by not issuing them a substitute check. We believe that the re-credit provision should be mandatory and extended to all consumers regardless of whether or not he or she receives a substitute check.
    Consumers unable to seek re-credit would not be adequately protected because they would have to seek redress under weaker UCC provisions in State law, which do not require a bank to redeposit disputed funds and would require a lawsuit to enforce. This is too expensive and time consuming for most amounts likely to be at issue. Although the added warranty and indemnity provisions provide some protection, they would also require a consumer to sue his or her bank. Because consumers, all of them, are equally susceptible to harm from processing errors, the re-credit loophole in the bill should be closed and the right extended to apply in every case.
    Anti-fraud provisions. One argument made against extending the re-credit protections to all consumers involves concerns that wider availability of re-credit protections increases the exposure of banks to fraudulent claims. We believe the strong anti-fraud provisions in the legislation should minimize, if not eliminate, concerns relating to fraudulent claims. Under the legislation, a bank may delay re-credit of funds until it confirms that a claim is valid, up to 45 days for new accounts, accounts with repeated overdrafts or negative balances, or when the bank has a reasonable basis to believe the claim is fraudulent. In addition, a bank can remove re-credited funds without prior notice if it concludes that a re-credit was made unnecessarily.
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    Regulation E. Currently, consumers engaging in other electronic funds transfers, for example ATM cards or direct debits, are protected by Regulation E, which includes a 10-day right of re-credit with no dollar limit. We believe that protections in the legislation should be expanded and see no justification for having protections in the legislation that are weaker than those in Regulation E.
    Lastly, comparative negligence provisions. The bill contains comparative negligence provisions that would allow banks to reduce the amount of damages a consumer can recover by asserting that the consumer was somehow at fault. It is unlikely that a consumer could contribute to improper check processing and this provision could unfairly allow a bank to deter or delay a consumer's claim by asserting that the consumer was partly responsible. We therefore believe the comparative negligence standards should be removed from the bill.
    In our view, these are modest improvements that would go a long way towards improving and balancing this legislation.
    I thank the Chair and other members of the subcommittee for the opportunity to testify, and I look forward to answering any questions.

    [The prepared statement of Janell Mayo Duncan can be found on page 100 in the appendix.]

    Ms. HART. Thank you, Ms. Duncan.
    Mr. Kniceley?


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    Mr. KNICELEY. Madam Chairwoman and members of the subcommittee, my name is Joe Kniceley. I am the Vice President of the Americas region for NCR Corporation's payment solution business. I thank you for your invitation to offer testimony this morning.
    Dayton, Ohio-based NCR Corporation has provided solutions to process financial transactions for American consumers since our inception in 1884. Our corporate slogan, ''Transforming Transactions Into Relationships,'' summarizes the value we bring to our clients. We do this by automating financial transactions that occur at an ATM, bank branch teller, at the retail store point of sale, or by processing a mail check payment.
    Madam Chairwoman, NCR is also honored to be part of a larger consortium of information technology companies, including IBM, Unisys, EMC and EDS. We have worked closely with American National Standards Institute to ensure that the check image information will be secure and easily shared. ANSI Standard X9.37 defines the format and rules for electronic exchange of checks. This standard has a provision for applying digital signatures with each image being exchanged. This allows the receiving bank to validate the signature and determine that the image has not been altered. ANSI Standard X9.90 defines the image replacement document, and it is clear in its intent to maintain a high quality image, even after multiple image reproductions. It also requires the original check MICR lines to be printed on the image replacement document.
    Our coalition of IT companies can state that we wholly support H.R. 1474 without reservation or qualification. We believe the bill is well-crafted, providing adequate protections for consumers, financial institutions and other entities engaged in check acceptance, presentment and clearing. As a result, we believe that the nation's end-to-end payment systems will be much more efficient and reliable. Today, a check that is written at a grocery store or deposited at a bank may be handled more than 20 times before it reaches the bank upon which it is drawn. If the account has insufficient funds, the check has to be returned, repeating the process in reverse. This takes several days without the store owner being paid for the goods sold.
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    This costly, error-prone, fraud-ridden process started decades ago and the reengineering and improvement of this process has not kept up with advancements in technology. The application of H.R. 1474, used in conjunction with proven technology, will streamline these key financial transactions to benefit all parties involved. With this legislation, funds can be transferred within minutes, not days or weeks. Digital checks can be archived for seven years, and researched online by simply accessing the bank's Internet Web site. The elimination of moving paper checks around the country minimizes the impact of weather and logistics problems, not to mention the unforeseen crisis like the grounding of the nation's commercial air fleet during the events of 9-11.
    Consumers stand to benefit in many ways. Business and bank branch hours can be expanded when the window for clearing checks is not tied to a courier deadline. ATM users who make check deposits will be provided superior service by obtaining a receipt of their deposits that include a digital picture of each deposited check. These electronic deposits will be processed quickly, while the paper check still resides in even the most remote ATM location. A big benefit to the consumer will be the early availability of deposited funds and the convenience of having more efficient deposit-taking ATMs on every street corner. Imaging technology will allow financial institutions to eliminate the constraints of paper, improve customer service, lower check fraud losses and significantly lower costs associated with physically transporting paper from coast to coast.
    Our technology coalition is pleased to inform the committee that the IT industry is ready, willing and able to help our banking system deal with the realities of coast-to-coast consumer transactions. Check imaging was first put in production in the late 1980s. Most major banks, credit unions and nearly 50 percent of community banks have been using check imaging in one or more forms for many years. It is now time to bring the check clearing process into the 21st century. Our current rules for processing checks in the banking system were written at a time when items were cleared across town, not across the country. Over the past several years, banks have expanded to national scope, creating a paper check clearing logistics nightmare. Good business practice and the American consumer's ever-increasing demand for convenience, require us to free our banking system from the needless constraints of paper.
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    I would like to commend Governor Ferguson and his staff at the Federal Reserve for their efforts on this legislation. Through digital imaging technology and the proposed legislation, an American institution we call the checking account can now provide consumers, businesses and financial institutions new and improved benefits not previously enjoyed.
    Madam Chairwoman, thank you for the opportunity to testify this morning. I would be happy to answer any questions that you have.

    [The prepared statement of Joseph Kniceley can be found on page 119 in the appendix.]

    Ms. HART. Thank you, Mr. Kniceley.
    Ms. Woodham?


    Ms. WOODHAM. Congresswoman Hart and members of the subcommittee, I thank you for the opportunity to provide comments on H.R. 1474, the Check Clearing for the 21st Century Act, and on how check truncation has been working at credit unions for three decades. I am Celia Woodham, director of operations at Chartway Federal Credit Union in Virginia Beach, Virginia. I am testifying before you today on behalf of the Credit Union National Association.
    We would like to share with you information on the experience of credit unions' check truncation techniques and how it impacts fraud and privacy, and on the affect this legislation will have on the payment systems, credit unions and consumers.
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    Sixty-four percent of credit unions currently offer checking accounts. Of those credit unions, 91 percent truncate share drafts or checks. Among the credit unions that offer checking accounts, 7.1 percent also include images of checks within the statements that their members receive. Credit unions tend to truncate checks at the last step in the check collection process by not returning the original share draft to their credit union members.
    Credit unions, like other financial institutions, have seen check fraud escalate dramatically in recent years by over 200 percent. This broad increase in check fraud is not related to truncation, but it is more likely related to the ease with which people steal and counterfeit paper checks. At Chartway Federal Credit Union, most of our check fraud stems from stolen checks. At Chartway, we protect our members against check fraud by having tellers examine checks and educating our members on identify theft.
    There is a concern that double debits could be a result of this legislation if a paying financial institution receives a substitute check and an electronic file for the same item and posts both. Chartway Federal Credit Union has never received an electronic check and the paper check from its processing Federal Reserve Bank. We are confident that increased truncation will not raise the frequency of double debits. If it does, it can quickly be resolved by the consumer protection in the legislation.
    H.R. 1474 would help the payment system by removing legal barriers that currently discourage truncation. A financial institution currently cannot send electronic checks to another financial institution without a prior agreement. With this legislation, financial institutions would be able to send electronic checks without prior agreement. As a result, the increase in check truncation and electronic check processing would likely quicken the collection and return of checks, reduce the cost of processing checks, eliminate the need to physically transport checks, and reduce the susceptibility of our check system to attacks that affect our transportation networks.
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    Increased truncation will save money for credit unions also, but our savings will be passed on to our members as we have done in the past. At credit unions, truncation combined with check imaging has allowed some credit unions to post images online and increase the access their members have to their used checks. This allows credit union personnel to investigate complaints and resolve disputes more quickly.
    As a result of this bill, consumers would probably not receive their original checks back, yet the experience of credit unions is that our members rarely request or need originals from truncated share drafts or checks. In an informal survey in 2001, we found that of 1.1 billion checks, only about 480,000 requests or .04 percent, were made for an original check. In almost all cases, a good quality clear image of the check satisfies the member's needs.
    Moreover, H.R. 1474 would provide sufficient consumer protections to ensure that consumers are not disadvantaged. The bill provides specific expedited re-credit rights for those consumers who assert that the bank charged their account improperly. The re-credit procedure gives the member's credit union 10 days to investigate the claim before being required to re-credit the member, and 45 calendar days for certain unique circumstances. This section provides sufficient protections for consumers and the credit union. It allows a consumer to receive a re-credit quickly and it gives the credit union time to investigate the consumer's claim to avoid fraud losses.
    In conclusion, most credit unions truncate their share drafts or checks and have done so for decades. This legislation will increase electronic check processing that produces benefits for financial institutions and consumers. We look forward to working with the subcommittee, the Federal Reserve, and consumers in further strengthening the proposal.
    Thank you for this opportunity to comment, and I will be glad to answer any questions.

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    [The prepared statement of Celia C. Woodham can be found on page 126 in the appendix.]

    Ms. HART. Thank you, Ms. Woodham. I appreciate your testimony as well, and thanks to the entire panel.
    I would like to start questioning with Mr. Cloutier, since your institution has had success already with this process of check processing and imaging. I am interested in your customers, if you have had a reaction from the customers specifically regarding this at all. It sounds like they are happy with the system. Has there been any problem with losing customers or concerns about the technology from your customers—concerns about perhaps feeling like they must move to online banking or any concerns that have been expressed to the management regarding interaction with the institution under the new system? Anything like that?
    Mr. CLOUTIER. Ms. Hart, I will tell you from my personal experience with my bank, and believe me I am in a very competitive environment—there are about 21 banks in Lafayette—we have about six of them that are offering imaging checks. We have not lost any customers. They are very excited about it. The only problem we had early on was that at first we were printing 16 to a page; we went very quickly to eight to a page for people, as myself, who do not have great eyesight. We made that change very quickly. The customers have been extremely happy with it. It also has given them the advantage now that they can pull up their checks online. We do Internet banking and I know one of the members asked this morning about how long does it take to get a copy of the check. In my bank, you can pull it up and look at it and print it if you want and have it right there and available to you.
    So this technology is not new. As many consumers have told me, they appreciate it because they said for years their credit card bills, they have not been receiving back their original copies. They have been getting either images, as you get with American Express, or just the account numbers on Visa and whatever. So it has been very well received. To my knowledge, and we do a lot of focus groups and a lot of work with our customers, and we have not lost anyone due to image checks.
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    Ms. HART. I am glad to hear that. We had a couple of meetings with industry groups, some obviously representing you or organizations like you. They averred to us the same thing. Was the process for you of switching to the system—was it cumbersome or did it take a long period of time?
    Mr. CLOUTIER. It did not really take a long period of time. We went through an education process with our consumers who asked for it. I will tell you, less than 2 percent came into the bank and said, could you explain to me how this works and how do I use it. But we had CSRs, customer service representatives ready to talk to them and the process took very little time to implement. I will tell you, I think most people—I know I would personally—would have a great problem going back to dealing with paper checks and trying to find them. You know, when that bill is disputed, it is always about six months after you write the check and it is much quicker to get it.
    I would also mention it has been a big help to the government in us fulfilling subpoenas that we have gotten, as in example, divorce cases. Usually when that comes about, they want the records for the last two years and copies of all the checks. What used to take us two months to fulfill on the subpoena, we now can do in two hours.
    Ms. HART. It is hard to argue with that.
    I want to get to Ms. Duncan on an issue discussed in your testimony. You seek to include provisions related to electronic funds transfers as far as the legislation. It deals with negotiable instruments that rely heavily on well-settled check law. I do not see this legislation as dealing with electronic transfer of funds, but rather with the movement of negotiable instruments, which is made easier by removing the paper and allowing that to be done electronically. You seem to think that we are doing more than that, or we should do more than that. Why do you think Congress should tamper with the good law that relates to checks and check processing? This is very specific.
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    Ms. DUNCAN. Well, what we are looking at is the legislation as it is currently drafted. It does include a re-credit provision, which is reminiscent of Regulation E. The specific point that we were making is re-credit under Regulation E applies to all consumers. It is also 10 days. It also has no dollar limit, and that is not exactly what we are even speaking about or asking for. We are looking at the re-credit provision in the legislation and saying that if it is going to apply to some, it should apply to all consumers. So that is where that perspective comes from.
    Ms. HART. Okay. So you actually have it just for one provision of the law.
    Ms. DUNCAN. The specific part of Regulation E that I referred to was to the re-credit provision and the fact that it applies to all consumers, and I did refer that there is no re-credit dollar amount limit, but the concern is in the legislation, it does not apply to all consumers, and all consumers will be similarly situated under the legislation, so it should apply to all consumers regardless of whether or not they receive a substitute check.
    Ms. HART. Thank you. I am sorry. I see my time is up.
    Mr. Ford?
    Mr. FORD. Thank you, Ms. Hart.
    Let me ask just a couple of questions also, specifically for Mr. Cole and Mr. Cloutier, on this matter. Concerns have been raised about consumers who did not receive substitute checks, who are not eligible for the new expedited re-credit. What does current law say about how soon disputes have to be resolved and when funds have to be re-credited? Either of you, Mr. Cloutier or Mr. Cole—it does not matter. Anyone on the panel can address that. I would be interested in hearing one of you.
    Mr. COLE. I will tell you from my experience, I am not a Harvard lawyer so I probably do not know the legal answer to it, but in my experience the Uniform Commercial Code does not require any specific time frame for re-credit to a consumer's account. However, that has not been necessary, if you will take a look at what our consumers are saying, and the complaints that have been included, or the lack of complaints that have been included in the testimony that you have heard today and, indeed, in our experience at the bank.
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    It is a fact that banks are very competitive, and part of that competition is in customer service. We pride ourselves in reacting very quickly to exceptions.
    Mr. FORD. What is your process for resolving disputes? I hope you see where I am trying to go here, because I think some of the concerns that are being raised are legitimate ones, but I think they are ones that some of them might be addressed outside of the context of this hearing. I would appreciate Mr. Ferguson responding as he did, and I hope that perhaps we can sit and sort of talk through it a bit. But I am curious as to what steps do, or what processes did Bank of America have for resolving disputes? Are funds usually re-credited to consumers when a dispute has been resolved? How long does that ordinarily take?
    Mr. COLE. It depends on what the dispute is. On a dispute that is as common as, I wrote the check for $10 and it paid for $100——
    Mr. FORD. Notwithstanding the fact that my good friend Mr. Davis pays too much for pizzas, but I understand what you are saying.
    Mr. COLE. We do not know that that check was written for pizza until we look at it. That is not part of our database, so we do not know that. We do do in our fraud department some early detection of checks that are written outside of the normal pattern for a consumer. But to answer your question more specifically, when a consumer brings that kind of an issue to us, historically we went to our microfilm archives and got a picture of that item to be able to say, yes indeed, it was an error; that error can occur anywhere in the collection process, not only at the paying bank. That in the past took anywhere from two to five days, to go back in the archives and find a microfilm image.
    We are totally image-enabled now, and I am happy to say that 70 percent of the calls for information or for error resolution that used to require us to go back to the microfilm archives can now be handled on a single phone call because we are able in our call centers and in our customer service centers to be able to pull an image of that check up and verify it right on the spot that indeed that check was paid for the wrong amount.
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    Mr. FORD. There is no explicit right requiring you to do that right now. I mean, I understand there is liability on the bank's part for mistakes that are made, but there is no law requiring that you do that. You do that out of——
    Mr. COLE. There is no law except the law of competition and the ability to provide customer service.
    Mr. FORD. Right. That is it exactly.
    Mr. COLE. That is right. But we do not make money that way, and so it is in our best interest to be able to return that money as well, because if we did not do it as quickly as we were able to understand the issue and resolve the problem, the liability mounts very quickly.
    Mr. CLOUTIER. Mr. Ford, I could give you a good example. Friday morning I got a call from a district judge in Lafayette who claimed that in his election account, his money that he runs for every four years——
    Mr. FORD. I am familiar.
    Mr. CLOUTIER. ——had a deposit in it that he did not make, and he was very concerned about that. I will tell you, within 45 minutes we were able to resolve it. The bank did make a mistake. They put money in his account that was incorrectly put in there, and we got it moved back out. And you are very familiar with it—he wanted a letter stating that the bank made an error and then sent it on to the State so that there would not be any questions in the future. We have in our bank a department that deals with these questions very quickly. It can happen both ways. This was an example of a deposit being put in an account where it should not be. We do not say we do not make mistakes. I think a bank could be wrong in saying that, but we deal with them very quickly. It is competitive. But there are also good laws on the books now that we have to deal with re-crediting, and we do, as quickly as possible.
    Mr. FORD. One last comment—I know that my friend Mr. Sanders raised the point about the 80-year-old who is accustomed to receiving checks a certain way. I guess one of my concerns is that we preserve the ability of people to continue writing checks. I think some have commented how it is becoming more expensive to process checks. As we make this shift away from checks and toward electronic payments, what effect will that have on consumers, and particularly that example used by my colleague, Mr. Sanders—prolonging the ability to actually write checks or to continue making payments in that way?
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    Mr. COLE. I think checks are going to be around for a long time. People like them a great deal. To the extent that we can keep them from getting more expensive than the other payment mechanisms, those people that choose to use them I think will be able to use them for a long time to come. In terms of what our customers will see on the back end of this, the reason I believe that we did not suggest or that the Federal Reserve did not suggest that we just mandate check electronification was to be able to provide a piece of paper to a customer who wants to have it. Our bank provides that opportunity right now. With the electronification of some of those items under Regulation E, there is no paper returned. I would think that would be a bigger problem because the consumer still believes that they wrote a check. In the check truncation scenario or the transaction under this bill, the consumer can require that that bank in that account send them back that piece of paper that shows them a picture that has all the information on that piece of paper that was on the original item when they wrote it.
    Mr. CLOUTIER. Mr. Ford and Ms. Hart, I would just like to mention, you all asked me a question about our response from our consumers—customers that we dealt with when we put in the imaging. It was not the senior citizens who had a problem. I was amazed at how technologically advanced they are. It was the younger people who had more of a problem of understanding the substitute checks. So that is just kind of an interesting little footnote. I was amazed—75, 80, 85 year-old people, how well they do on the Internet.
    Ms. HART. There is intransigent youth for you.
    Thank you, Mr. Ford.
    Mr. FORD. Thank you, Ms. Hart.
    Ms. HART. Mr. Davis?
    Mr. DAVIS. Thank you, Ms. Hart.
    Ms. Cloutier, I am tempted to say that only in Louisiana do judges check their campaign accounts every few days to note that kind of thing.
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    I do not have any constituents in Louisiana.
    Let me try to make sure that I understand Ms. Duncan's argument and the points that she was making earlier. Ms. Duncan, is it your concern that under the re-credit provision that is currently drafted that the only way the provision can be triggered is if someone has a substitute check, ergo, if you do not have a substitute check in your possession, you cannot take advantage of it? Is that your concern in a nutshell?
    Ms. DUNCAN. Yes, that is our concern in a nutshell.
    Mr. DAVIS. All right. Now, I guess what I am trying to get a sense of, I would be probably a little bit more persuaded by that concern if there were a predictable kinds of bias that were built into the system in terms of some classes of consumers being more likely to have substitute checks, and other classes of consumers being less likely to have them. Is it your theory that there are some kinds of consumers who are typically disadvantaged and that they do not have access to substitute checks? Or would you think it is just more of a random thing in terms of who gets them and who does not?
    Ms. DUNCAN. Well, actually our focus really more is on what the protections are and who they apply to, and is there a good justification for not letting them apply to everyone. I mean, if we talk about the whole system—we are talking about the future. We have heard a lot of talk today about the present and imaging technology. When we look toward the future and the increased electronification of consumer check information, we also have to look towards the changes that banks might make in the electronic processing of information. There may be problems in those electronic transfers. So we are not looking to a specific class of consumer who might be more likely to get the substitute check. Instead, we are looking at the entire class of all consumers whose information will begin to be processed more in electronic form.
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    Mr. DAVIS. Let me tell you what I suspect that your colleagues on the panel would probably say in response to that. I assume that they would say that the whole thrust of the re-credit provision is that it catches up with the technology, in effect. Now that we have these substitute checks, the re-credit provision takes advantage of their ready access to enable people to resolve a dispute with their bank in terms of how a check was cut. So therefore, if the substitute check is not part of the process, if somebody does not have the substitute check in their hand, you really do not have that kind of an issue.
    Second of all, without the substitute check, you have really lost about the only verification means that you would have. As I guess someone pointed out earlier, if you typically call your bank and you say, I just called the 1-800 number and they are saying I wrote a check for $2,500 and I only wrote a check for $250, I would imagine there might be some scenarios in which your bank would say, Okay, that is fine; we will fix it if you are related to the bank president, or something like that. But absent that scenario, they are going to ask you for some verification. They are going to want something written from you, and the best evidence will obviously be ultimately that canceled check.
    So given that likelihood, I guess I am trying to get a sense of how this works in the real world. If you do not have a substitute check to facilitate resolution of the dispute, how can we expect the bank really to act within the 10-day period anyway?
    Ms. DUNCAN. We would expect the bank to use whatever best evidence they have of the transaction that takes place. I would say that if banks are not keeping track of the transactions that are taking place, it would be a very big problem.
    Mr. DAVIS. If that is the case, though, presumably again the substitute check—the fact that the provision requires people to have a substitute check in their hands—I am trying to get a sense of whether they are really bests-off or worse-off under this scenario. Because if they have to have a substitute check in their hands, is your concern that somehow they would be able to get something quicker if they did not have to have the substitute check? Is that the heart of your concern? Because if your theory is that they could simply call the bank and they could simply say to the bank, go check this, look at your microfilm, and the bank would say we have looked at our microfilm and you are right—I am trying to get a sense of how the substitute check fits into this. For example, are you suggesting that under this statute that if someone called a bank and said, I do not have a substitute check, but would you go and check your system to see if this check appears to be written for this amount, and they did that, and they agreed with you—are not suggesting that a bank would say, no, until we get that substitute check, we are not going to fix it. Or are you suggesting that a bank might say that?
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    Ms. DUNCAN. Well, what I am suggesting is that there are some very positive things in the re-credit provision and we would like them to apply to all consumers. So regardless of whether you have a substitute check, if you have a problem you go and you trigger a 10-day period in which the bank needs to start checking.
    Mr. DAVIS. Well, let me just quickly in the limited time—we have got to ask some other people on the panel for reaction to that. Those of you who run banks, if someone called you under this statute and said, look, I do not have a substitute check, but would you please look in your microfiche or your database, whatever you want to look in, and look at this amount. You made that kind of an inquiry; you agreed with the consumer. Would any one of you suggest that you would not honor the consumer's request at that point? Would any one of you stand on the requirement of a substitute check?
    Mr. DENTLINGER. Certainly not. You would be out of business.
    Mr. DAVIS. Pretty quickly, I would think.
    Ms. DUNCAN. I would like to make a quick point, and that would be, one of the issues here is, we are talking about the best evidence. Sometimes if we are talking about the reconversion of checks in and out of paper form, that bank will not have the best evidence. That is what the indemnity and warranty provisions are. They are going to have to go back up the process to see if they can find the best copy of that check in order to solve the consumer's problem. So that would be the difference under this scenario. The bank will not just look in their own records. They might have to go back further to find it out. This would just place the burden on the bank, not the consumer.
    Mr. DAVIS. Is there any best evidence superior to the substitute check in this kind of a scenario though?
    Ms. DUNCAN. If the original check has been kept, that would be best evidence. But what we are also talking about is if you are reconverting a check from electronic form to paper form—I will just do an analogy. Say you are printing it out—I mean, maybe somebody down here did not do such a good job and it is not quite as clear. So if you look at the warranty provisions, it also establishes between banks that if I come back looking for my better evidence or my better copy of the check, you need to provide it to me. So that is what we are talking about—that time delay that you might have moreso than you have under the current system.
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    Ms. HART. The gentleman's time has expired.
    Mr. Ford, do you have additional questions?
    Mr. FORD. I want to ask as follow-up, but let me yield to my friend Mr. Davis.
    Ms. HART. I will. I just want to give you an opportunity to ask questions.
    Mr. FORD. Sure. Just to follow-up, I see where my colleague is going. I guess this might be something we can discuss afterwards, because after listening to Vice Chair Ferguson, he raised the two points of whether or not there is a need here and whether or not we create more confusion with what we are doing. And based on what some of the witnesses have said, I am sensitive to what Ms. Duncan is proposing here, but it sounds as if there are few laws that sort of work to prevent this. Number one, most prevailing would probably be the power of the law of competition. And two, the notion of confusion being created here I think is a powerful point. After thinking long and hard about it, I see why earlier on I was not more adamant about the idea of making this apply to everyone, and not just on the substitute check side.
    That being the case, it might be an opportunity for us to deal with this outside of the context of this legislation. It might be important to figure out how, if it is important to actually create an explicit new set of rights here, and if so perhaps work with the banks and financial institutions, because I am not persuaded that creating a new set of rights will actually solve the problem. Part of what I was asking—how many complaints have you gotten over, say, the last five years, Mr. Cole, that would be affected by this provision of the bill in terms of disputed funds? Because according to Ferguson, there have not been many over the last several years. So what are we talking about in terms of need and solving a problem a here?
    Mr. COLE. In terms of not responding to a request for a re-credit to a customer on a mis-encoded item or an item that was double-posted, we have not had any complaints that I am aware of that we took too long to resolve the problem. Obviously, we do not use substituted documents today, but in terms of problem resolution, there has been no testimony or any evidence that I have seen in the last two years presented to say that there is a problem here. In my 32 years of banking, I have never heard that complaint—that we did not comply with re-crediting a customer on an item that was posted twice, or one that was mis-encoded.
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    Mr. FORD. In fact, do you think under the new legislation that we might discover faster if there is a problem, and actually adopt a problem solution strategy much quicker than we would under current law?
    Mr. COLE. To the extent that this makes imaging of checks more ubiquitous in our industry, the ability to——
    Mr. FORD. That is a Harvard word, I might add—ubiquitous.
    Mr. COLE. Thank you.
    To that extent, it provides great access to those images much more quickly. As I said, we can take a look at a customer's check and indeed the customer can, sometimes hours after it enters into the system. Whereas if I have to go find the original—we process 9.5 billion checks a year, so there are a lot of checks out there—and finding the original or going back to the old antiquated microfilm takes five times as long, at least.
    Mr. FORD. I yield to my colleague, Mr. Davis.
    Mr. DAVIS. Thank you, Mr. Ford.
    Let me follow-up, Mr. Cole, on what I think Ms. Duncan is getting at. Let me ask you a fairly basic question. Do you or Mr. Cloutier or anybody else on the panel think that the substitute check is an important instrument in resolving a dispute between a consumer and the bank, or resolving some issue as to the amount of how much a check was written for? Do any of you think that a substitute check is a necessary part or even a very helpful part in getting to the bottom of that kind of a question?
    Mr. COLE. Only to the extent that that is what is presented to our bank—if that is the evidence that we have. Now, we will also have that on microfilm, so it is very unimportant, actually. We will be using the records.
    Mr. DAVIS. So presumably what Ms. Duncan is saying is that obviously if someone walks in with a substitute check, that is a very strong argument in their quiver. But if they do not walk in with a substitute check, there are any number of other means for determining a dispute. That is presumably what she is saying. Now, given that, why isn't she correct? If the substitute check is not necessary to get to the bottom of a dispute between a consumer or customer and the bank, why should we differentiate between people who have a substitute check and those who do not with respect to the re-credit provisions?
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    Mr. CLOUTIER. Mr. Davis, I would add that we already do a lot of business electronically. We ACH a lot of payrolls. We do a lot of ACH work. We do a lot of stuff that is—let me give you a good example. If you ever went to the store and they just took your check and handed it back to you—they took the MICR off of it and gave it back to you, and turned that into an electronic document. Banks do a very good job of tracking things. We are in the business of tracking money. We watch it very carefully. So I can tell you that we will be very forthright in watching what we do and looking into this. Sometimes when the customer comes in with a dispute, I have a very large audit department that works these things very carefully, because we want to make sure that we do not have an internal problem within our bank also. So these things get very high coverage very quickly, and re-crediting to figure out where the money went or did not go becomes very important to us very, very quickly. So I would tell you that we will work very hard to make it work.
    Mr. DAVIS. Right. But I guess, given that that is the case, Mr. Cloutier, why isn't Ms. Duncan right? If banks have any number of capacities to get to the bottom of this kind of dispute almost instantaneously, why should there be any distinction in the re-credit provision whatsoever between someone who has got one of these things in his or her hand and someone who does not?
    Mr. COLE. I would like to say that I agree with you—there should not be any difference, and the current law takes care of the problem.
    Mr. DAVIS. Okay.
    Mr. CLOUTIER. We agree with that.
    Mr. DAVIS. Just to make one final point, if I could, Ms. Hart. Current law takes care of the problem, but I suppose Ms. Duncan's response to that would probably be you have got to go out and file some kind of a claim under current law to take advantage of it if your bank is recalcitrant; whereas the re-credit provision creates a non-litigative remedy that enables you to immediately get to the bottom of it. Is that your position, Ms. Duncan?
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    Ms. DUNCAN. That is our position, yes.
    Mr. DAVIS. Okay. All right. I do not have anything else.
    Ms. HART. All right. I thank the gentleman.
    The chair notes that some members may have additional questions for the panel, including the members here, which they may wish to submit in writing.
    Mr. FORD. Madam Chair, can we make a point to try to work with Ms. Duncan, perhaps the three of us in particular, or at least the two, and I imagine Mr. Davis is interested, if his comments are any indication. Perhaps we can work to try to, outside of the context of this hearing and this legislation, to try to address some of the concerns to the extent they can be addressed. Maybe even work with Mr. Cole and Mr. Cloutier and some of the others, because I think they are legitimate points.
    Ms. DUNCAN. We would welcome the opportunity.
    Ms. HART. That would be fine, Mr. Ford.
    Mr. FORD. Thank you, Ms. Hart.
    Ms. HART. Other members who are not present may also wish to submit questions. Without objection, the hearing record will remain open for 30 days, so that members can submit written questions to these witnesses and to place their responses on the record.
    I would like to thank the panel.
    This hearing is adjourned.
    [Whereupon, at 1:00 p.m., the subcommittee was adjourned.]