Checks in the Balance

"Check 21," the House version of the bill for the Check Clearing for the 21st Century Act, would permit participants in the chain of collection to create and use substitute checks, which are paper reproductions of the original.

Legal sanction of image replacement documents, or IRDs, represents merely "the tail-light on the caboose," said J.D. (Denny) Carreker, CEO of Carreker, Dallas, Tex. "It's more than a decade-long progression." Other pertinent laws and regulations for e-check proponents include Regulation CC, the E-SIGN Act and the Uniform Commercial Code (UCC). As such, Check 21 doesn't exist in isolation.

Indeed, existing laws and regulations may frame the debate on the consumer protection aspects of the bill.

In the Check 21 bill presented to the House Financial Services Committee, consumers and banks would be able to file claims for "expedited recredit" of improperly charged transactions. Consumers would have 30 days to file a claim following the transaction. The bank, in turn, would have 10 business days to demonstrate that the account had been charged correctly, or "recredit" up to $2,500, plus interest. Larger amounts would have to be recredited within 45 calendar days.

A similar provision for banks seeking recredit of an improperly charged transaction would require claims between banks to be filed within 120 days, with full recredit provided within 10 days.

David Walker, president of the Electronic Check Clearinghouse Organization (ECCHO), considers the recredit provisions unnecessary for the purpose of consumer protection. "We think it's adequately covered already in the Uniform Commercial Code, which is where the majority of check law actually is," said Walker. "They're protected under the UCC, as it is now, against unauthorized debits, whether it's a duplicate check, whether its fraudulent or for whatever reason."

Suppose fraudulent copies of a single check, either originals or substitutes, were presented simultaneously at several different depository institutions. "They'll obviously all meet up eventually at the paying bank," said Walker. "And if the paying bank actually pays all those, then they've paid them inappropriately."

Such inappropriate payments could have financial consequences to the bank beyond the face value of the bogus check. If a bank refused payment on a subsequent legitimate check because it had failed to detect a fraudulent check, it would bear potential liability for "proximate" damages. So if the bank bounces your payment for mortgage insurance just before the house burns down, then "the bank's got to buy you a house," said Walker. "That's pretty severe risk and responsibility for the paying bank to recognize when those checks are not properly authorized."

"That seems to be pretty adequate incentive for the bank to make sure its not handling those kind of inappropriate postings," added Walker.

For additional coverage of Check 21, make sure to read the upcoming story in the December 2002 issue of BS&T.