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Check Clearing Law Reduces "Float" Time

Written by on Wednesday, 29 September 2004 7:00 pm

In another month, checks are likely to bounce much sooner than before if you write them with insufficient funds in your checking account.

If that check is a mortgage payment, not only will you risk an insufficient funds fee for the bounce, but your credit standing can be at risk and the lender could have the right to put your mortgage loan in default.

A check "bounces" when you don't have enough money in your checking account to cover the amount written on the check. That can happen because you over estimated the "float" time -- the period between when you write the check and when your bank actually cashes it.

Float time can vary widely depending upon how a consumer handles the check, how he or she sends it to the payee and how the lender processes it. The time includes how long you hold it after you write it, mailing time and processing time at one or more banks.

Float is not legally sanctioned, nor is it prohibited by law, but the widely used and somewhat risky grace period is ill-advised, now more than ever.

A product of the Technology Age, "Check Clearing for the 21st Century Act" also known as "Check 21" is a money-saving proposition for banks because it will allow them to process checks faster and do away with reams of paper work.

Effective Oct. 28, 2004, Check 21 will allow banks to electronically process checks -- which will allow not only the paying bank (your bank) but other banks, including those earlier along the processing route, to "truncate" or stop your checks as paid and allow only an electronic image, a legal substitute of your check, to continue on down the line.

Today most check truncation takes place at the paying bank. When you opened your checking account you told the bank when to truncate your checks by signing off for a statement that included getting the original checks returned, receiving check images only or receiving only a line statement showing each check paid.

Under the new law, the bank won't need your permission where to truncate your checks and you won't get your original check back. The bank that stops it will be free to destroy it.

All banks are not yet equipped to handle the new law, which only gives them permission to change the check handling procedure without mandating it. Once banks do change, and they will, the new procedure should speed up the check clearing process and shorten the float time, once it arrives at the first bank, to a maximum of two to three days.

If you are accustomed to longer float periods you'll have to change your habit or expect often to pay some hefty insufficient funds fees for bounced checks.

If a check for your mortgage payment bounces, by the time you learn of the bounce and have it covered, a full month could have elapsed and that could put a credit ding on your credit report. Some loan terms also come with payment grace periods of, say, 15 days after which you must include a late payment penalty with your payment.

While lenders don't typically begin foreclosing proceedings until months after missed payments, your lender may find you in default after a single month, especially if it gets to be a habit.

Publisher of Consumer Reports, Consumers Union, and other consumer advocates, offer these and other suggestions to help you cope with the new law:

  • Obviously, as has always been the case, don't write a check until your account has sufficient funds to cover it.

  • Get overdraft protection. Open a new account (say, an equity line) or tie your checking account to an existing account that can be automatically tapped if a check generates red ink on your checking account balance. Depending upon the lender and the type of accounts you have, the overdraft protection could also come with a fee levied each time the protection is triggered.

  • Use direct deposit. Your employer or other source of income may offer to directly deposit your payroll or other income check into your checking account automatically which is likely sooner than you'd manage to get to the bank or automatic teller machine to make the deposit yourself.

  • Use technology. Consider originating your payments electronically and use online banking services to check your account regularly. Both can save time and money.

    First, you typically can't complete electronic payments if you don't have the cash in the designated account tapped to make the payment. Choose to have the payment made conveniently and automatically on the same day every month or maintain more control over the process by making the payment electronically yourself each month, in both cases, provided the bank or electronic payment service you use offers such options.

    Handling accounts electronically also allow you to overcome the monthly wait for printed statements, by giving you the option of monitoring them more frequently so you are quickly aware of any problems.

  • Get substitute checks. Many banks may stop providing original canceled checks with your monthly statement. If so, ask for the new official copies called "substitute checks" which are the legal equivalent of original canceled checks. Your lender may charge you, but under Check 21, the new canceled checks gives you the right to have your bank credit funds of up to $2,500 to your account within 10 days if it incorrectly paid out amounts.

  • Don't volunteer for check truncation. Decline invitations from your bank for voluntary check truncation. Your rights are limited under the voluntary non-return of your checks and it will take you longer to retrieve a copy of your check if you don't regularly receive the new substitute version.

  • Use your credit card to get back some float. If your credit card has a sufficient grace period before interest is levied after a purchase, consider using it, especially for larger purchases, and then paying it off within the grace period, with a check fully backed by funds in your checking account.
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  About the author, Broderick Perkins

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.