Retailers May Pay the Most for New Check Rules

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<i> Times Staff Writer</i>

Side effects of a new federal law designed to provide consumers with faster access to their bank deposits are threatening to cause a major headache next month for the nation’s retailers.

“We are getting absolute panic calls from all over the country because merchants cannot comply,” said Hardy L. Nathan, chief lobbyist in Washington for the nation’s supermarket industry. “There is going to be chaos on Sept. 1.”

The furor is caused by a new federal regulation, which creates the nation’s first standard for placing endorsements on the back of checks, and by the way financial institutions are interpreting the changes. The regulation is aimed at banks and thrifts, but it will affect all businesses that accept checks from customers.


Representatives of the nation’s retailers fear that businesses will have to pay millions of dollars to retrain employees and adjust or replace equipment for approving or endorsing checks. A Midwestern supermarket chain said it will cost $4.5 million to buy new cash registers for the 76 of its 600 stores that will need them to comply with the endorsement standard.

In addition, some banks have told business customers that they will not accept checks endorsed improperly. Others are telling businesses that liability for bad checks will be shifted back to the business that accepted a check if a misplaced endorsement delays its processing.

Special Bulletin Issued

Business representatives have appealed to the Federal Reserve Board, which created the regulation, to delay its implementation. The Fed has refused, saying that the law requires the change to go into effect Sept. 1.

The regulators did, however, put out a special bulletin last week intended to clarify the endorsement requirements and clear up confusion and misinformation among financial institutions and customers.

Here is how the guidelines on endorsements are supposed to work. A customer with a personal checking account at Bank X writes a check for groceries at Supermarket Y. The supermarket endorses the check and deposits it in its account at Bank Z. Bank Z endorses the check again in an area on the back of the check set aside for the bank of first deposit under the new guidelines.

Bank Z then sends the check to Bank X, the grocery customer’s bank, to collect the actual funds. The method of sending the check to Bank X may actually involve other destinations, such as banks that serve as central clearing houses for checks or the Federal Reserve Bank for the district. This creates additional endorsement stamps.


If Bank X finds insufficient funds to cover the check, it must notify the bank of first deposit, in this case Bank Z, within a certain deadline. Bank Z then notifies the supermarket, which must try to collect on the bad check for its own account. The liability rests with the supermarket.

Under the new guidelines, Bank X will become liable for the potential loss on the check if it does not return a bad check to the bank of first deposit, Bank Z, within the deadline. The Fed wants to keep the specific spot on the back of the check clear so the bank of first deposit can be easily identified and Bank Z can receive a bad check back quickly.

Banks are concerned that they will not be able to meet the new processing deadline if businesses place endorsements and other identifying information, such as the driver’s license and telephone numbers, on the back of the check and obscure the reserved space.

As a result, many banks have told their business customers that the businesses will be responsible for any losses that the banks suffer related to bank-of-first-deposit endorsements obscured by the merchant endorsement and information. While no one says they expect this situation to occur often, banks are facing an unknown, and they have tried to protect themselves by shifting the risk to businesses.

“We think that a lot of reactions by banks have been in large part overreactions,” said Louise L. Roseman, an assistant director of the Federal Reserve in Washington.

Easier to Stop Hot Checks

Financial institutions have the right to refuse checks or pass on liability to business customers, but such moves are not legally mandated, Roseman said. In fact, she said, there is no penalty in the law for retailers who do not comply.


“It is in the best interests of the retailer to avoid the area on the (back of the) check reserved for the depository bank because it will make it faster and easier to stop someone who is bouncing checks,” Roseman said in a telephone interview. “But we place the liability upon the banks, and it is up to the banks to determine how they allocate liability.”

The origin of the ruckus is a law passed by Congress last year in response to complaints from consumer organizations about the long holds--delays in making funds available to the customer--that banks and thrifts placed on checks deposited in customer accounts, particularly at East Coast institutions.

The legislation was modeled on a four-year-old California law and a New York law, and it is not expected to have a great effect on consumers here.

The law requires banks and savings and loans to provide customers with access to their funds in three business days on deposits of local checks and seven business days on deposits of non-local checks. Government checks, direct electronic deposits and cash deposits must be available the day after they are deposited.

The institutions will be required to notify a customer any time a hold is placed on a check beyond the federal guidelines. Banks and S&Ls; must also disclose their standards to customers in writing before Oct. 1.

In 1990, the maximum hold times on checks will be reduced to two business days on local checks and five days on non-local checks.


“Not much will change for the consumers in California,” said Gregory O. Wilhelm, a vice president at Wells Fargo Bank in San Francisco and an expert on the issue. But “inside banks, it is a revolution in terms of our business.”

Fear of Increased Fraud

Responsibility for drawing up the rules to implement the law was given to the Fed.

One issue the Fed had to address was the financial industry’s fear of increased fraud losses because funds will be available faster. The response led to the new standards for processing checks faster to ensure that a check is good before the funds are paid out.

The spot the Fed has reserved on the back of the check solely for the endorsement and nine-digit identifying number of the bank where the check is first deposited begins one and a half inches from the top end of the check and extends to a point three inches from the bottom end.

Only the bank that gets the check first can put its endorsement there, and it must use black or purple ink. Banks are required to comply; retailers are simply encouraged to avoid the area.

For merchants, the solution can be as simple as getting new stamps for cashiers to use when they record numbers from a driver’s license or credit card on a check, or modifying its electronic check-approval terminals or cash registers. For instance, Lucky Stores is adjusting a guide on its cash registers to keep the endorsement outside the reserved area.

Vons Cos., another California supermarket chain, is modifying equipment and will provide new stamps to its stores that do not use electronic equipment, said Virginia L. Miller, the treasurer. While the cost has not been determined, she said, “There will certainly be an inconvenience and an added expense.”


Some brands of cash registers cannot be adjusted easily or at all, so some businesses face tremendous costs for new equipment if they are going to comply, said Nathan, the supermarket industry lobbyist.

The problem will be most acute at supermarkets, which handle 3.5 billion checks a year, the most of any retail sector. And even simple adjustments will require adjustments by cashiers unfamiliar with the new requirements.

“This means it may take a little longer at the checkout counter, where people get incensed if they have to wait an extra 10 seconds” Nathan said.

Nonetheless, some banks have notified business customers that they will have to comply with the new standards.

“We decided if a customer puts a lot of material on the back of the check that obscures the bank of first deposit space and if there is a loss on the check, which will be rare, that it will be the customer’s liability,” said Martha C. Campbell, a senior vice president at B of A’s San Francisco headquarters. “We have notified our customers of this.”