Industry Groups Give Blessing To Truncation

Banking industry groups have come out in favor of legislation to promote efficiency and cost savings through greater use of check truncation.

"The banking and financial services trade associations believe that removing the legal impediments to the expanded use of electronics for check clearing and settlement will improve the efficiency of our nation's payments system and provide benefits to consumers as well as banks," said Curtis L. Hage, chairman of America's Community Bankers, testifying at a hearing of the House Financial Institutions Subcommittee. Hage was also speaking on behalf of the American Bankers Association, the Consumer Bankers Association, the Financial Services Roundtable and the Independent Community Bankers of America. Hage is also chairman and CEO, Home Federal Bank, Sioux Falls, S.D.

The groups support the general principles outlined in the Check Clearing for the 21st Century Act to facilitate innovation in the check collection system without mandating receipt of checks in electronic form, he said.

The bill, which was introduced by Reps. Michael Ferguson, R-N.J., and Harold Ford, D-Tenn., is based on recommendations of the Federal Reserve Board's payments system development committee, with input from the banking industry, consumer groups, check clearinghouses, processors and others.

"By providing financial institutions with clear authority to use substitute checks to reach banks and their customers not currently participating in check image programs, Congress can help drive significant cost savings and efficiencies that will benefit both customers and financial institutions," Hage said.

The legislation would allow a collecting bank to remove, or truncate, the original paper check from the check collection or return process. "The proposal would enable the banking industry to use electronic images to process and clear checks," Hage said.

For banks choosing to continue processing paper checks, the proposal allows for creation of a substitute check that would retain the legal equivalence of the original check.

"Most importantly," said Hage, "the proposal does not require the banking industry to adopt a fully electronic check clearing system; rather it provides the industry with the flexibility to adapt to electronic check clearing over time." He recommended that the bill's effective date be moved up from 2006.

Hage expressed concern, however, over the bill's proposed expedited recredit provision, which would allow a consumer suffering a loss from a substitute check to receive a recredit of up to $2,500 within 10 days of the claim. He recommended retaining the check collection system's existing body of law and regulation.

"The banking and financial services trade associations believe this provision is unnecessary and may result in unintended consequences," said Hage. "Today, banks respond to customer claims of check fraud or processing errors in a timely and effective manner. Complaints are rare."