Checks About to Be Put on Fast Track

New federal banking rules that become law next month will affect just about everyone with a checkbook. Bankers and consumer groups agree that the so-called Check 21 regulations will usher in a new era, but they are sharply divided on whether the changes will help or hurt customers.

Check 21 -- short for the Check Clearing for the 21st Century Act -- will eliminate check-clearing delays caused by such things as severe weather and terrorism, bankers say. But consumer groups worry that it could also lead to many more bank customers bouncing checks.

Here is a question-and- answer look at how Check 21 might affect your bottom line:

Question: What is Check 21?

Answer: It’s a financial modernization act that was passed after the 9/11 terrorist attacks. The biggest change is that banks will be able to transmit and clear checks by electronic facsimile.

Under the current rules, checks must be physically transported to the banks that issued them to be cleared for payment -- even if that means flying the checks across the country. The disruption of commercial aviation after the 9/11 terror attacks helped provide the impetus for the new law.

Q: How will consumers be affected?

A: First, banks will not need to return the original checks to customers. They can return photo images of the checks instead.

More important, checks will clear much faster -- sometimes in a matter of hours. You could write a check to your dry cleaners in the morning and see the money debited from your account by that afternoon.

This effectively eliminates the “float” time, or the informal grace period of a day or more that now exists between the time a check is written and the time the funds are actually tapped. Consumer advocates contend that this change could result in millions of bounced checks.

Q: But we’re all grown-ups, right? Shouldn’t everyone know that you can’t write checks against money you don’t have in your account?

A: True, but consumer activists point out that, just as check writers have floats, banks have their own benefit known as deposit “holds.”

Under certain circumstances, banks are allowed to place holds on deposited funds. If this happens to a bank customer, money he thought he had in his account to cover his checks may not be available for days -- sometimes longer. Holds are covered under the Federal Reserve Board’s Regulation CC, which Check 21 does not affect.

“There is no change in the funds availability rules,” said Gail Hillebrand, senior attorney with Consumers Union in San Francisco. “It could be possible that you could deposit a check and write a check on the same day. The one you write could clear and the one you deposited would not, causing you to bounce a check when you had the funds in your account.”

Q: How long can a bank legally hold a deposit?

A: That depends on the type of check that was deposited and whether there are extenuating circumstances, said John Hall, spokesman for the American Bankers Assn. in Washington.

Regulation CC allows banks to hold local checks -- those issued by banks in the same metropolitan area where they are deposited -- for as long as two days. Out-of-town checks can be held for at most five days.

However, large checks (those for $5,000 or more), checks drawn on new accounts and those drawn on accounts that are consistently overdrawn can be held longer -- for as long as 30 days, Hall said.

Q: So a bank could bounce your checks -- and charge overdraft fees -- when you actually have the money in your account?

A: Yes. But there is a difference between what a bank can do and what it will do, Hall said. There are more than 9,000 banks in the United States, and most are fighting for business. It’s unlikely that a bank would be slow to credit customers for their deposits, Hall said, because those banks would lose customers to banks that are more consumer-friendly.

Q: What about the issue of returned checks? I like to get my checks back because I use them to substantiate charitable contributions for my tax records, for instance. What do I use if I can’t get checks back?

A: The law allows for bank- issued “substitute checks” (essentially certified photocopies) to have the same legal standing as canceled checks, said Laura Schulte, president of Wells Fargo Bank of California. That means these check images must be accepted by courts and tax authorities as proof of payment.

Notably, because banks are adding imaging systems to accommodate the new law, they are likely to provide check images online too, Schulte said. That would allow bank customers to view and print check copies at any time.

Technically, the copies printed off your computer are not legal “substitute checks,” Hall noted. But most courts and tax officials accept them now regardless, he said.

Q: What will happen to the original checks?

A: That will vary by bank, but banks are likely to shred or incinerate them.

Q: What happens if somebody forges or changes a check? How can I prove it was a fake without the actual copy of the check?

A: Check 21 actually improves current consumer law on this count, Hillebrand of Consumers Union said. Under current law, if a customer says she has been hit by a check forgery -- or even a costly bank error -- the bank does not need to credit her account until it completes an investigation. Under Check 21, the bank must prove within 10 days that it didn’t err. After that, the customer must be credited with the disputed amount, even if the bank’s investigation is incomplete.

There is also a “right of indemnity” under the law that says that if the reason you couldn’t prove a check was forged was that the original was unavailable, you get the money back, Hillebrand noted.

Q: When does the law go into effect?

A: On Oct. 28. But not all banks will change how they do things right away, Hall of the bankers association said. The law does not mandate electronic clearing; it simply makes it possible. Some banks don’t have the technology in place to clear checks electronically, and they may choose to clear checks the old-fashioned way. But most major banks are expected to put the rules in place this fall.

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Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past columns, visit latimes.com/kristof.