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Check 21Takes Effect

November 4, 2004

Check 21, a new federal law allowing banks to process all checks electronically, took effect on October 28. The law will greatly speed processing times and reduce costs for banks, but some consumer groups fear that consumers and other businesses may not benefit--and may be hurt.

Key issues that may impact colleges and universities include concerns that consumers (such as students and parents) will be unaccustomed to how quickly checks clear and therefore more likely to bounce checks. Another issue is that  while the law greatly reduces the amount of time it takes for a check to be deducted from the check writer's account, it does not change the length of time that banks can hold deposited checks before making the funds available. Putting a hold on deposits will further increase the likelihood of bounced checks and will allow banks rather than their customers to make money on the float. 

Although most banks already credit deposits more quickly, banks are allowed to hold deposited checks for up to two days for local checks, five days for nonlocal, and as long as 11 days for checks greater than $5,000. In light of the expedited processing times under Check 21, colleges and universities should review their availability schedule with their banks and may want to renegotiate the terms to ensure that deposits will be credited to their accounts in a timely manner.

Colleges may also want to make an effort to educate students about the changes and caution them about bouncing checks. Consumers also need to be aware of the new rules for correcting errors in electronic processing, as some consumer protections are not available unless the consumer gets a copy of the substitute check. 

Consumers Union and the Consumer Federation of America have prepared materials to explain Check 21 to consumers and have lobbied banks to adopt voluntarily consumer-friendly policies.

Other resources on Check 21 include:

• American Bankers Association,  Check 21 Resource Center
• Federal Reserve Board Consumer Guidance
• NACHA -- The Electronic Payments Association