In a significant victory for consumers, legislation requiring banks to make funds from certain checks available to customers the day after deposit passed a House subcommittee yesterday by a vote of 23 to 6. The full House Banking Committee is expected to approve it next week.
The measure, according to chairman Fernand St Germain (D-Ill.), is intended to cut the "bonanzas for the financial institutions that play the float game." Until funds are credited, banks have the use of the money without paying interest. Some depository institutions restrict access to funds from out-of-state checks for as long as three weeks, ostensibly to prevent fraud.
The legislation calls for a phased reduction of "holds" on checks over the next three years. Starting 90 days after enactment, a maximum hold of one business day would be placed on checks of $100 or less; on all checks drawn on a local bank or on an in-state branch of the same institution, and on U.S. Treasury, state and local goverment, cashier and certified checks endorsed only by the payee listed on the check.
Next-day availability also would apply to cash deposits and wire transfers, which aren't recorded as received by the bank until the close of business. Banks could hold checks written on out-of-state institutions for six business days.
The major exceptions to the check-hold limits would be new accounts and frequently overdrawn accounts. The limits also would apply only to the first $5,000 of a check for more than that amount.
In any case, institutions would have to start paying interest immediately on deposits in interest bearing accounts.
Savings institutions and credit unions, which usually present checks for collection through correspondent banks, would have an extra day beyond the limits set for banks. This differential would end in three years.
Congress would give the Federal Reserve three years in which to develop the technology for a check-clearing system that would make all funds available one business day after deposit for local checks, and not more than three days for all other checks. The committee asked the Fed to report before then on how the temporary program is going.
Democrats led by St Germain handily overrode Republican protests that setting a national minimum on check holds would increase processing costs that would then be passed on to customers. The Federal Reserve, as well as banking organizations, also had opposed the bill.
However, after a long debate, the legislators declined to give the Fed the power it sought to extend its regulations on the clearing system to all participants -- including nonbank banks and savings institutions -- involved in the process in addition to those banks it now regulates. A Fed spokesman argued that such authority was needed to protect the safety and soundness of the clearing system.
The committee also defeated a bid to limit the civil liabilities of institutions that fail to abide by the check-hold limits when class actions and other suits are brought by customers.