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Faith Checks vs. Check 21


Overdraft protection and careful expense tracking are good practices that can help the average person keep his or her finances in order. However, there are a number of people that will still end up overdrawing their checking accounts, either because of irresponsibility or willful intent. This is another instance where the traditional paper check system fails. Some people write checks knowing that they do not have enough money in their checking account to cover the check. They float their checks, depending on the bank's 2 to 3 day processing time before cashing the check to give them a window during which they can deposit the necessary money. Such checks are called faith checks. Despite people's best intentions (or magical hopes), there are inevitably a number of instances where they fail to deposit money in time and end up bouncing checks and going into overdraft. Banks have responded to the threat of faith checks (which they don't like) by using technology to help lessen their losses. Many banks now use a check verification system that can electronically determine if a person writing a check has sufficient funds to cover the check before the check is accepted.

Many banks have taken other measures to help them control check processing costs as well. Traditionally, banks used to mail paper checks to the other banks which held the accounts against which each check was written. It took time for checks to go through the mail; two to three days, in fact. This is the where the original 2-3 day delay from check presentment to negotiation (cashing) came from. Physically mailing checks was relatively slow and the cost of shipping checks back and forth across the country was quite high.

In October 2004, the old paper check system was replaced with a new electronic check processing system called Check 21. This new system was enabled by a change in federal law that allowed banks to make an electronic copy of a check submitted for cashing and destroy the original check at their discretion. Since there is no need to send the original check to the bank of the person that wrote the check, the turnaround time from when the check is submitted to when it is actually cashed is a lot shorter. In some instances it can be as fast as 24 hours.

One result of Check 21 is substitute checks. A substitute check is a copy of the front and back of the original check. Consumers who receive canceled checks with their statements will now receive substitute checks as well. A substitute check is slightly larger than your original check. It will contain the same information as a regular check, and it will also include the statement "This is a legal copy of your check. You can use it the same way you would use the original check." The substitute check offers consumers the same rights as an original check. It can serve as valid proof of payment and can be used for bookkeeping. Also, consumers may receive a substitute check in lieu of an original check if they request a check copy from their bank. In fact, since banks are not required to keep original checks, it may not be possible to get the original check back. However, as stated above, a substitute check is a legal copy of your original check and will provide you with the same rights.

If there is a problem with the way a check was processed, be sure to get an actual substitute check. It offers you more rights than a plain copy of the check. A substitute check allows consumers to receive what is called an "expedited credit" of up to $2,500 within 10 days. Consumers are eligible for this credit if their account was charged twice for the same check, if the amount paid was incorrect, or if the check was paid in error. These rights do not necessarily apply in cases where a substitute check was not issued. State law would then determine what rights a consumer would have.

There are other downsides to Check 21. Because of the quicker turnaround time between writing and cashing checks, more people now end up bouncing checks and become subject to overdraft NSF fees. The best way to avoid ever having to pay such fees is to make sure sufficient funds are available in your account when you write checks.

Another downside to Check 21 is that when you deposit a check, your bank gets the money (from the other bank containing the account the check was written on) sooner than they used to, but is not required to make that money available to you any sooner than they used to. This is to say, although banks are getting the money sooner, they may still require you to wait 3-5 days before funds are made available to you. The Expedited Funds Availability Act is the law that outlines the maximum time banks can hold onto funds before making the available. Check 21 does not address these hold times. However, this law does require that the Federal Reserve Board insure that the pace at which funds are made available is on par with actual check processing time frames So, it is possible the funds will become available sooner some time in the future.