[Senate Report 108-79]
[From the U.S. Government Publishing Office]
Calendar No. 168
108th Congress Report
SENATE
1st Session 108-79
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CHECK TRUNCATION ACT OF 2003
_______
June 25, 2003.--Ordered to be printed
_______
Mr. Shelby, from the Committee on Banking, Housing, and Urban Affairs,
submitted the following
R E P O R T
[To accompany S. 1334]
[Including cost estimate of the Congressional Budget Office]
The Committee on Banking, Housing, and Urban Affairs,
reported an original bill (S. 1334) to facilitate check
truncation by authorizing substitute checks, to foster
innovation in the check collection system without mandating
receipt of checks in electronic form, and to improve the
overall efficiency of the Nation's payments system, and for
other purposes, having considered the same, reports favorably
thereon and recommends that the bill do pass.
INTRODUCTION
On June 18, 2002, the Senate Committee on Banking, Housing,
and Urban Affairs considered original legislation entitled
``The Check Truncation Act of 2003'', a bill to facilitate the
use of check truncation and the electronic collection and
return of checks. The Committee voted unanimously to report the
bill, as amended by a managers' amendment that was adopted by
voice vote, to the Senate for consideration.
PURPOSE OF THE LEGISLATION
Under current law, banks must physically present and return
original checks to receive payment unless the bank has an
agreement with another bank to do so by electronic means. The
electronic process for transmitting information allows banks
which have these voluntary agreements to stop, or truncate, the
flow of paper checks. Some banks have such agreements and have
been able to take advantage of electronic processing using
advanced imaging technology. However, since there are over
fifteen thousand banks, thrifts, and credit unions, it is
extremely difficult to obtain electronic agreements on a large
scale, which has hampered the industry's ability to achieve
substantial further improvements in the check collection and
return process. As a result, billions of checks continue to be
either trucked or flown across the country to complete the
clearing process. Given the availability of inexpensive
electronic transmissions media, this enormous dependence on
ground and air transportation systems makes very little sense.
The terrorist attacks on September 11, 2001, underscored the
importance of increasing flexibility in the payment system.
Truncation could be used to make the process less expensive
over the long term. While the bank must make an initial
technology investment, the bank saves money on processing and
transportation of paper checks.
This bill is designed to facilitate check truncation
without requiring banks to fully convert to an electronic
process on either end of the clearing process. The primary
change in current law is that banks could use electronics to
streamline the check collection and return process even in
cases in which they do not have electronic exchange agreements.
For those banks which do not choose to use an electronic
system, a new instrument or ``substitute check'' would be
created from the electronic check image for delivery to that
bank. The substitute check would be the legal equivalent of the
original check and could be processed by receiving banks just
as original paper checks are today. The substitute check, would
be machine readable and would bear a magnetic-ink character
(MICR) line. It would also include an image of the front and
the back of the original check. The bill also imposes warranty
and indemnity obligations, which are intended to compensate
consumers, banks, and other processors for losses caused by the
creation of the substitute check. Finally, the proposal also
provides an expedited recredit provision for consumer accounts
in cases where consumers make claims against their banks for
improper charges to their accounts for substitute checks that
are provided to the consumers.
The bill would apply existing check law, including the
Uniform Commercial Code (UCC) and the Federal Reserve Board's
Regulation CC, to substitute checks which would be legally
equivalent to the original checks.
The Federal Reserve Board believes that the proposed
legislation may result in substantial payments system benefits.
Banks could use substitute checks to collect and return checks
more quickly and to reduce the banking industry's reliance on
the physical transportation of checks. Banks might also be able
to reduce their infrastructure costs because their branch and
ATM networks would no longer need to be tied geographically to
their processing centers. Banks' customers may also benefit
from these infrastructure changes if they enable banks to offer
broader deposit options, later cutoff hours, more timely
information, and faster check collection and return.
Credit unions have been using a truncation process since
the mid-1970s. Of the checks written, credit unions process
roughly 10 percent. Of the credit unions that offer checking
(share draft) accounts, 91 percent truncate checks, according
to the Credit Union National Association (CUNA). For credit
unions, generally the check proceeds through the clearing
process to the point where it is truncated or held by either
the credit union or its corporate credit union or other
processor. At that point, the information on the draft is
stored electronically and printed on the member's monthly
statement. In some cases, electronic images of the draft are
returned with the statement, but that is not required.
HEARINGS
The Banking Committee's action followed a hearing on the
check truncation proposal. On April 3, 2003, the Committee
heard testimony regarding the Federal Reserve Board proposal on
Check Truncation. The witnesses testifying were Vice Chairman
Roger Ferguson, Board of Governors of the Federal Reserve
System; Ms. Lindsay Alexander, President and Chief Executive
Officer of the NIH Federal Credit Union, representing the
Credit Union National Association; Ms. Janell Mayo Duncan,
Legislative and Regulatory Counsel from Consumers Union; and
Mr. Danne Buchanan, Executive Vice President from Zions
Bancorporation, representing the American Bankers Association,
the Financial Services Roundtable, America's Community Bankers,
Independent Community Bankers of America and the Consumer
Bankers Association.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title; table of contents
The proposed Act is known as the Check Truncation Act of
2003.
Section 2. Findings and purposes
The purposes of this Act are to facilitate check truncation
by authorizing substitute checks; to foster innovation in the
check collection system without mandating receipt of checks in
electronic form; and to improve the overall efficiency of the
Nation's payments system.
Section 3. Definitions
This section defines the terms used in the Act including
``indemnifying bank'', ``MICR line'', ``reconverting bank'',
``truncate'' and ``substitute check''.
Section 4. General provisions governing substitute checks
This section permits a person to send a substitute check
without the agreement of the recipient and provides legal
authority for fully negotiable substitute checks to the extent
that a bank makes the substitute check warranties pursuant to
the requirement as of Section 5. A substitute check that
complies with the requirements of this section is the legal
equivalent of the original check. Substitute checks will be
subject to the Uniform Commercial Code, Reg. CC and other
applicable Federal or State law.
Section 5. Substitute check warranties
The section creates warranties pertaining to substitute
checks. A bank that transfers, presents or returns a substitute
check and receives payment, warrants that: the check complies
with the requirements for legal equivalence under Section 4 of
the Act, and; the person that makes payment based on receipt of
the substitute check will not receive another version of that
check for payment.
Section 6. Indemnity
This section provides indemnities for banks or consumers
who receive substitute checks. Any bank that creates a
substitute check, and any bank that receives payment for
transfer of either an electronic or paper version of that check
indemnifies all subsequent persons who receive the substitute
check and incur a loss due to the receipt of the substitute
check instead of an original check. Damages are limited to the
amount of the check (along with interest and attorney fees)
unless the indemnifying bank breaches a warranty imposed under
Section 5, at which point the claimant is entitled to receive
the amount of the loss proximately caused by the breach.
Comparative negligence can be counter-claimed to limit damages.
This Act provides a comparative negligence standard for a
person making an indemnity claim under this section or seeking
damages under section 9. If the person's losses resulted in
whole or in part from that person's own negligence or failure
to act in good faith, then the damages due to that person are
reduced in proportion to the amount of negligence or bad faith
attributable to that person.
These comparative negligence provisions are not intended to
reduce the rights of a consumer or any other person under the
UCC. Rather, these provisions are intended to clarify that the
same principles that are currently incorporated in existing
law, such as Regulation CC, the UCC, and common law, will
continue to apply under the Act. The Congress anticipates that,
in the absence of fraud, the comparative negligence provisions
generally will not be applicable to consumer check users.
Section 7. Expedited recredit for consumers
This section provides that a consumer may make a claim for
a recredit if he or she asserts that the bank charged the
consumer's account improperly or the consumer has a warranty
claim with respect to the substitute check that was provided to
the consumer. The consumer must show that he or she suffered a
loss and that the production of the original or a better copy
of the original is necessary to determine the validity of the
claim.
The consumer is required to make a claim for expedited
recredit within 40 days after the financial institution
transmits the periodic statement or receipt of the substitute
check, whichever is later. Under extenuating circumstances,
including extended travel or illness of the consumer, the
financial institution shall extend the period for a reasonable
amount of time.
A bank must recredit a consumer's account within one day of
determining that the consumer's claim is valid. If the bank has
not determined the validity of the claim within 10 business
days, the bank must recredit the lesser of the amount charged,
or $2,500 plus accrued interest, and any remaining amount must
be recredited within 45 calendar days.
A bank may delay the availability of the recredit on claims
made on new accounts, on accounts that have repeated
overdrafts, when a bank has a reasonable cause to believe that
the claim is fraudulent, or in emergency situations. A bank
that delays the availability of or reverses a recredit must
notify the customer promptly. Notices of invalid claims,
recredit and reversal of recredit must be made to consumers no
later than the day following the day on which the bank makes
these determinations.
Section 8. Expedited recredit procedures for banks
Section 8 authorizes a bank to make a claim against an
indemnifying bank for an expedited recredit if the claimant
bank's customer has made a claim for recredit; the claimant
bank has suffered a loss; and production of the original check
or a better copy of the original check is necessary to
determine the validity of the charge. The claim must be made
within 120 days of the transaction and the indemnifying bank
has 10 business days to produce the original check or a better
copy of the original check. The indemnifying bank must also
recredit the amount to the claimant bank, or provide
information as to why the indemnifying bank does not have to
provide a recredit. A recredit does not abrogate other
liabilities the indemnifying bank may incur.
Section 9. Delays in an emergency
This section permits banks to delay the time limits
prescribed in the Act, if the payment system or
telecommunications networks are interrupted by an emergency
beyond the control of the bank, if the bank uses such diligence
as circumstances require.
Section 10. Measure of damages
This section sets out that, except as provided in Section
6, damages are limited to the lesser of the amount of the
check, or amount of loss suffered due to violation of the Act,
plus interest and expenses. Comparative negligence applies, and
this subsection does not affect the rights of the consumer
under the UCC or other applicable Federal or State law.
Section 11. Statute of limitations and notice of claim
This section requires that an action must be brought within
one year of when the claimant learned, or should have learned,
of the facts and circumstances giving rise to the action.
Notice of claim must be given to the bank within 30 days of
when a person has reason to know of the claim. A recredit claim
under Section 7 constitutes notice for the purposes of this
Section.
Section 12. Consumer awareness
The section requires that banks must provide customers that
receive original checks or substitute checks with a brief
informative notice for the first three years that the Act is in
effect. This notice will make customers aware of the legal
status of substitute checks and the framework for the recredit
process. By three months prior to the effective date of this
Act, the Fed will make available model forms of such notice
that banks may use.
Section 13. Effect on other law
This section preempts any provision of Federal or State law
only to the extent of the inconsistency.
Section 14. Regulations
This section authorizes the Federal Reserve Board to
promulgate final regulations necessary for implementation of
this Act. Although the CTA gives the Board authority to adopt
implementing regulations, the Committee recognizes that the
Secretary of the Treasury has broad and long-standing authority
to establish and administer the rules that govern payments
disbursed by Treasury, including Treasury checks. The CTA does
not affect the Secretary's authority to regulate Treasury
checks, to the extent those regulations are not inconsistent
with this Act. The Treasury cannot adopt regulations, for
example, that would condition the payment of a substitute
Treasury check on the subsequent delivery of the original
check.
The Committee acknowledges the Department of Treasury's
concern about the legislation's impact on its ability to
continue complying with its ongoing responsibilities and court
orders in the Cobell et al v. Norton et al case. Treasury is
currently operating under a Court order that it retain, among
other documents, original Treasury checks for the duration of
the litigation unless, and until, relieved of that obligation
by the Court. Noting that no judicial relief has yet been
granted, Treasury views as problematic the Act's provisions
permitting banks, at their discretion, to retain only digital
images of checks while destroying original paper checks.
Section 15. Study and report on funds availability
No later than 30 months following the effective date of
this Act, the Federal Reserve will provide the Congress with an
evaluation of the implementation and impact of this Act. The
study will address issues that the Federal Reserve monitors as
part of its regulatory responsibilities under the Expedited
Funds Availability Act.
Section 16. Evaluation and report by the Comptroller General
The Comptroller General will also report on the
implementation and administration of this Act, no later than
five years after enactment.
Section 17. Variation by agreement
This section provides that only provisions of section 8 may
be varied by the banks involved. That is, banks could
contractually vary the interbank recredit provisions and only
those provisions.
Section 18. Effective date
This Act shall become effective one year after the date of
enactment.
CHANGES IN EXISTING LAW
On June 18, 2003, the Committee unanimously approved a
motion by Senator Shelby to waive the Cordon rule. Thus, in the
opinion of the Committee, it is necessary to dispense with the
requirement of section 12 of rule XXVI of the Standing Rules of
the Senate in order to expedite the business of the Senate.
REGULATORY IMPACT STATEMENT
In accordance with paragraph 11(b), rule XXVI, of the
Standing Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact of the bill.
The Act establishes a framework which would enable banks to
achieve many of the benefits of electronic check processing
without mandating that any bank receive checks in electronic
form. Banks would be able to truncate, or stop, the flow of
checks, process them electronically, and create machine-
readable substitute checks, if necessary, that would be the
legal equivalent of the original checks. Substitute checks
could be processed by receiving banks just as original paper
checks are today, thereby not significantly affecting the
operations of banks that do not wish to participate in the
electronic collection or return of checks. By permitting choice
of processing method, the Act represents regulatory reform and
should result in reduced costs to the financial services
industry and consumers over the long term.
Congress intends this Act to leave a bank and its customer
in substantially the same legal and practical position
regardless of whether or not a substitute check is used. The
Act's warranty, indemnity, and expedited recredit provisions,
which provide rights to recipients of substitute checks in the
event that they incur a loss due to the receipt of a substitute
check instead of the original check, accomplish this purpose.
The Act will improve the efficiency of the payments system
by enabling banks to expand the use of electronics in the
collection and return of checks, reducing the industry's
reliance on transportation to move checks across the nation.
Had the provisions of this proposed Act been in effect when air
traffic came to a standstill due to the terrorist attacks on
September 11, 2001, banks would have been able to reduce the
impact of the disruption in air transportation on the check
collection system. Because the Act seeks to provide choice of
clearing mechanism and update the clearing process, the
Committee believes that this legislation will have a favorable
regulatory impact.
COST OF LEGISLATION
Section 11(b) of rule XXVI of the Standing Rules of the
Senate, and Section 403 of the Congressional Budget Impoundment
and Control Act, require that each committee report on a bill
contain a statement estimating the cost of the proposed
legislation. The Congressional Budget Office has provided the
following cost estimate and estimate of costs of private-sector
mandates.
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 24, 2003.
Hon. Richard C. Shelby,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for the Check Truncation
Act of 2003.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Mark Booth
(for revenues), Matthew Pickford (for spending), and Victoria
Heid Hall and Greg Waring (for the state and local government
impact).
Sincerely,
Douglas Holtz-Eakin, Director.
Enclosure.
Check Truncation Act of 2003
The Check Truncation Act of 2003 would alter the process of
clearing checks. It would allow a depository institution that
has a check presented to it to choose on its own to provide to
the paying depository institution a paper copy of the check,
called a ``substitute check,'' rather than the original check
itself. The substitute check would be the legal equivalent of
the original check. Under current law, the depository
institution presented with the check must transmit the original
check to the paying institution for settlement, unless the two
institutions have entered into an agreement for transmission of
a paper copy of the check or the electronic information from
the check. In addition, the bill would require the Board of
Governors of the Federal Reserve System and the General
Accounting Office (GAO) to conduct studies on aspects of the
check-clearing process and the implementation of this
legislation.
CBO estimates that enacting the bill would have a
negligible effect on federal revenues through its effects on
the Federal Reserve's income and expenses from its check-
processing operations and its expenses in producing the
mandated study. The Federal Reserve remits its net income to
the Treasury, and those payments are classified as governmental
receipts, or revenues, in the federal budget. Any additional
income or costs to the Federal Reserve, therefore, can affect
the federal budget. By reducing the transportation costs
associated with clearing checks, the bill would reduce the
costs that the Federal Reserve incurs in providing check-
processing services to depository institutions. It would change
the Federal Reserve's costs of processing checks in other ways,
as well. However, the Federal Reserve is required by law to
charge the depository institutions for its check-processing
services. Based on information provided by the Board of
Governors of the Federal Reserve System, CBO estimates that any
reductions to the Federal Reserve's costs of check clearing as
a result of the bill would result in a nearly equal reduction
in its income. Furthermore, CBO estimates that any additional
expenses incurred by the Federal Reserve in order to produce
the mandated report would be negligible. As a result, CBO
estimates that the bill would have a negligible effect on the
Federal Reserve's net income and, hence, on federal revenues.
In addition to mandating that the Federal Reserve produce a
study, the legislation would require GAO to report on the
implementation of this bill, including gains in economic
efficiency and benefits to consumers and financial institutions
made possible from check truncation. Based on information from
GAO, CBO expects that new reporting requirements would cost
less than $500,000, assuming the availability of appropriated
funds.
The bill provides that a substitute check would be the
legal equivalent of the original check under any provision of
federal or state law. It would thereby preempt state laws,
including the Uniform Commercial Code, to the extent that such
laws require an original check. Such a preemption of state law
is a mandate under the Unfunded Mandates Reform Act (UMRA). CBO
estimates that enacting this mandate would impose no costs on
state, local, or tribal governments and that its cost,
therefore, would not exceed the threshold established in UMRA
($59 million in 2003, adjusted for inflation). The bill
contains no new private-sector mandates as defined in UMRA.
On May 30, 2003, CBO transmitted a cost estimate for H.R.
1474, the Check Clearing for the 21st Century Act, as reported
by the House Committee on Financial Services. CBO estimated
that, like the Check Truncation Act of 2003, H.R. 1474 also
would have a negligible effect on the federal budget.
The CBO staff contacts for this estimate are Mark Booth
(for federal revenues), Matthew Pickford (for federal
spending), and Victoria Heid Hall and Greg Waring (for the
state and local government impact). This estimate was approved
by G. Thomas Woodward, Assistant Director for Tax Analysis, and
Peter H. Fontaine, Deputy Assistant Director for Budget
Analysis.