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New law changes check processing

Thanks to a new federal law that went into effect Thursday, consumers will have to be more careful with their checking accounts. The law - the Check Clearing for the 21st Century Act, or Check 21 for short - allows banks to reduce the time and expense of processing checks. Paper checks now can be transformed into electronic images and those images can be used to close transactions much more quickly. Here's what you need to know:

By LAURA T. COFFEY
Published October 31, 2004

1. BEWARE OF BOUNCING CHECKS. The "float," or the time between when one of your checks arrives at a destination and when money is taken out of your account, stands to shrink considerably. Be especially careful to write checks only for money you have in your account.

2. OPT FOR DIRECT DEPOSIT. One way to make sure your paychecks land in your account as quickly as possible is to have them deposited directly by your employer. This can make it easier for you to avoid hefty check-bouncing fees, as well as most standard checking account fees at many banks.

3. BE ESPECIALLY CAREFUL WITH NONLOCAL BILLS. Many people are accustomed to having local checks clear quickly, but they gamble on bills paid to out-of-state companies. Any lag time you may have observed in the past could shrink to just 24 hours.

4. SAY GOODBYE TO CANCELED CHECKS. Under the new law, banks will move away from returning canceled checks, as they already have done with about 64 percent of checking account customers. That change may not happen overnight, but it's coming.

5. KNOW WHAT TO EXPECT INSTEAD. Instead of the original canceled checks, you should be able to request "substitute checks," images of the originals, or a line-item checking account statement. At this early stage, some consumer advocates are concerned about how hard it might be for customers to get specific substitute checks or images they might need, so consider asking your bank about the matter.

6. HOW MUCH DO YOU NEED THE "REAL" CHECKS? It's often recommended that you hang on to canceled checks for up to six years in case the Internal Revenue Service comes knocking. But if you don't itemize your deductions, you don't need such proof of expenses. And if you do, the most common deductions - mortgage interest, real estate taxes and charitable donations - can be proved by other means.

7. PROTECT YOURSELF FROM ERRORS AND FRAUD. Canceled checks also can be used as evidence in cases of forgery or disputed payments. If you spot such problems under the new arrangement, you'll have to ask your bank for a substitute check or a check image, and then use that as evidence to get recredited.

8. RECOGNIZE A "REAL" SUBSTITUTE CHECK. A substitute must bear these words: "This is a copy of your check. You can use it the same way you would use the original check." This detail can be significant if you must produce substitute checks, rather than check images, to fight fraud or mistakes.

9. EXPECT QUICK RESULTS. If you can produce a substitute check, the law promises that your account will be recredited promptly if the bank double-debits you or pays an incorrect amount. If the issue can't be resolved right away, the bank must recredit the first $2,500 within 10 days and the rest by the 45th day - similar to protections for debit card purchases.

10. YOU MAY NOT NOTICE ANY CHANGES RIGHT AWAY. Thursday was not a deadline for banks to implement new procedures. Switching over to all-electronic processing can be costly, and many large banks are planning to ease into it gradually. To find out where things stand at your bank, call and ask.

Sources: Bankrate.com (www.bankrate.com) Consumer Reports (www.consumerreports.org)

[Last modified October 31, 2004, 00:55:19]

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