"How The Check 21 Law Affects You"

Any civics teacher looking for a glaring real-life example of Congress listening to lobbyists and forgetting about we the people need look no further than the new "Check 21" law that kicked into action in late October.

In a big fat wet kiss to the banking industry, Congress has authorized electronic processing of all the personal checks you and I write, meaning banks no longer have to physically exchange checks with each other before they take the money out of our accounts. That cuts the processing time down from a few days to as little as a few hours. One industry group estimates the faster processing will save banks $2 billion a year in administrative costs. It's a lot cheaper to zap checks electronically to each other than to deliver them by train, plane, and truck.

I'm all for efficiency, but surprise, surprise, there's absolutely no provision that requires one penny of that savings to be shared with consumers in the form of lower fees. Worse, there's a good chance this new bill is going to end up costing a lot of us a bunch of money. Because our checks are clearing so much faster, consumer watchdogs predict that there is also going to be a barrage of bounced checks flying through the system, further boosting the bottom line of the banks at the expense of our wallets.

We are a nation of master floaters. You know what I am talking about: you write your checks on Monday to pay the rent, cable, and utility bills—even though you aren't getting paid until Wednesday. No worries, you figure, because by the time the checks have cleared through the banking system your paycheck will have arrived in your account.  Congratulations, you've played the float. But that's not gonna work with the new system; any checks you write will now typically clear within one day. So if your paycheck doesn't get deposited for two days, you've just bounced a bunch of checks. Consumers Union estimates that this new twist could cause 7 million more bounced checks a month, generating $170 million in bounced-check fees for the banks.

Which you might say amounts to $170 million stripped from unsuspecting customers. You'd think, while handing out such a boon for the bankers, that our representatives in Congress would have at least kept an eye out for the little guy by, say, requiring banks to conduct an educational campaign to notify customers about the switch, or, heaven forbid, insisting on a brief phase—in period where banks would waive the fees for bounced checks under the new system.

You know, just something to give consumers a heads up.

Check your statement this month; you may be in for a bouncing shock.

And It Gets Worse…
When Congress took away consumers' ability to play the float, however, it didn't bother to take away the banks' float as well. Congress didn't touch how long banks can hold onto our deposits before making the money available to us. So they get to keep playing the float on deposits, while squeezing us out of the same game on the checks we write.

Here's the deal: While paycheck direct deposits and government checks are typically available within one day, all other deposits can take between two days (for local checks) and five days (for out-of-town checks) to clear. And any amount above $5,000 can take up to 11 days to clear. So checks you write are going to clear super-fast, but deposits you make are still going to be tied up in the banks' systems for a couple of days-days when you can't touch the money but the bank can earn interest on it.

Oh sure, there's a provision in the new law that requires the Federal Reserve to take a look at this issue-in 30 months. And just what does the wonderful provision call for exactly? Well, believe it or not, it says that the Fed can consider shortening the hold period on our deposits if, in its examination of the issue, it finds that banks are voluntarily shortening the holds anyway. Now there's some proactive consumer protection! Shorten the hold period if the banks are already doing it themselves. Hello, what if the banks aren't? And what about the next 30 months anyway? Almost makes me want to invest in bank stocks; this new float game is bound to produce a pretty sweet revenue stream for the banks.

Bouncing All the Way to the Banks' Bottom Lines
And of course right when more consumers could unwittingly start bouncing checks, the banking industry has figured out a clever way to maximize its fees from our missteps. Some banks now offer "automatic" overdraft coverage when you write a bad check. If one of your checks—or a debit card transaction—is big enough to trigger a bounce, these oh-so-helpful banks nevertheless enable the transaction go through by using their own dough to make up the difference.

I'm not talking here about old-fashioned standard overdraft coverage, where you pay an annual fee to enroll in a program so the bank will automatically take money out of your savings account to cover bounces in your checking account. That's an overdraft plan you choose to participate in. This new courtesy plan isn't anything you sign up for, or even pay for upfront. It's just a nice little service the bank provides. It fronts the money out of its own pocket to cover your bad check.

I hope you aren't foolish enough to think it's really as chivalrous as it sounds. What happens is that when the bank steps in and covers a bad check for you, they will then hit you with a $25 to $30 fee per bounce. Then there's the matter of having to pay the bank back for the amount of the shortfall. You could get hit with a daily fee of $5 or so until you pay back the money. Just another easy score for the banks' bottom lines.

And again, don't expect the bank to stop after one bounced check. They will keep covering your bad checks up to a set dollar limit of $1,000 or so, rather than give you a call and tell you to get some money into the account ASAP.

The Check is Not in the Mail
The new law also allows banks to stop sending back original checks to customers. To be honest, that's not such a big deal since most of us haven't been getting the originals back for years. But under the new law if we have a dispute over a check we have written, and need to produce evidence of it, we'll now need to get a "substitute" check rather than the typical photocopy available through many banking websites. And there's nothing keeping the bank from charging to produce that substitute check.