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For release on delivery
Expected about 9:30 a.m. EDT
September 28, 1983

Statement by

Preston Martin

Vice Chairman

Board of Governors of the Federal Reserve System

before the

Subcommittee on Consumer Affairs

of the

Committee on Banking, Housing and Urban Affairs

United States Senate

September 28, 1983

I am pleased to appear before this subcommittee to present the views
of the Federal Reserve Board on S. 573 —

the "Fair Deposit Availability Act of

This bill addresses the practice of depository institutions prohibiting

a depositor from withdrawing funds represented by a newly deposited check
for some period.

This is often referred to as "delayed availability."

The bill

requires disclosure of an institution's policy regarding delayed availability,
calculation of interest from the time the institution receives provisional
credit for a check deposited into an interest-bearing account, use of standard
endorsement procedures, and prompt notification of a decision not to pay because
of insufficient funds or other reasons.
Although the Board's surveys of consumers and the recording of
consumer complaints do not indicate that a majority of consumers have frequent
problems with delayed availability, our information does not indicate that the
problems are in any way trivial.

The problems caused by delayed availability

range from minor inconvenience, to service charges for checks written before
deposits are deemed "good," to hardships caused by the depositor's inability
to use needed funds.

Two states, New York and California, have already passed

legislation on the subject.

These laws, which go further than S.573, not

only require the disclosure of "hold" policies, but also direct state officials
to establish, by regulation, what constitutes reasonable delays under different
ci rcumstances.
I have changed residence enough to understand the concerns that have
been expressed about certain delayed funds availability policies, and am sympa­
thetic to the problems that customers, particularly new depositors, can experience.
As I see it there are two situations giving rise to problems -- those instances




in which the practice is not disclosed in advance, and those times when an
institution's policy can be construed as so inflexible or unreasonable that it
imposes an undue hardship on its customers.
In considering the question of delayed funds availability, it is
important, however, to recognize that the practice in some form is inherent
within the structure of our check payment system.

Since the passage of the

Monetary Control Act of 1980 there has been considerable impetus within the
financial industry to arrive at greater efficiency in the collection of checks.
Notwithstanding this progress, it still takes up to two days for an institution
to receive provisional credit for a check.

In addition to this delay, it may

take several days longer for a check that is not honored by the paying institu­
tion to be returned.

Without going into the details of that system, which are

outlined in Attachment A, these delays give rise to the argument that insti­
tutions are exposed to risk of loss in releasing funds before allowing for
the time for an unpaid check to be returned.

As long as the payments system

involves the movement of paper checks from one point to another, there will be
delays in the check collection process that may justify an institution delaying
availability of funds to some depositors on some items to protect against such
ri sks.
In conjunction with- our responsibilities under the Monetary Control
Act, the Federal Reserve has made a number of operational changes in our check
collection operations, several of which offer the promise of accelerating

These include improving our transportation system to speed the

physical movement of checks and establishing later hours during which insti­
tutions can deposit checks for collection and for us to present them for payment.
We have also proposed a program to accelerate collection of checks drawn on
high dollar volume institutions located in cities remote from a Federal Reserve

- 3 -

check processing office.

This proposal would prevent the delays in collection

arising from shifts in check clearing volume away from institutions located
in cities with a Federal Reserve check processing office.

Although it is our

belief that these new procedures can greatly benefit the efficiency of checks
as a payments mechanism, it is too early to tell the extent to which these
changes will positively affect industry practices in regard to delayed funds
Though I believe there is some justification for some of the practice
of delayed availability, I also believe that there is a need for financial
industry action, and for additional operational improvements which could alleviate
much of the problem.

Specifically, I am encouraged by a recent call by industry

groups, such as the American Bankers Association, for voluntary action on the
delayed funds issue by their members.

The president of the ABA has written

all member banks urging a written policy concerning delayed funds availability,
and disclosure of that policy to customers.

In addition, the ABA has provided

institutions with a model policy and disclosure form.
As an example of possible additional operational improvements now
being pursued, we are pleased with the early results of a pilot program of the
Dallas Federal Reserve Bank with regard to processing returned checks.


pilot program will help to determine the feasibility of establishing a nationwide
service for the direct return of unpaid checks to the institution of first
deposit, thereby shortening the chain of institutions in the return process
and accelerating funds availability.

A nationwide system for prompt return of

checks would provide a framework for institutions to provide faster funds
availability to their customers.

- 4 -

There are two reasons for promoting greater disclosure of funds
availability policies.

The first is simply the fairness of alerting the

public to practices which may affect them adversely.
that disclosure can have on the practice itself.

The second is the impact

As institution management

formalizes its policies and prepares disclosures, it is likely to reexamine the
necessity and reasonableness of existing practices.
Of course, the reasonableness of a particular institution's policy
with respect to delaying availability is difficult to determine.

Many factors

go into an institution's or a bank employee's decision to delay availability
and the length of the delay.

Some institutions with short or no delays compen­

sate for their risk of loss through increased service charges.

Some institutions

may establish blanket hold policies for certain categories of checks as the
most operationally efficient hold policy.

Other institutions may place holds

on an individual basis, a more costly, but also generally a more equitable

Whether or not an institution's policy can be considered reasonable

is best left up to its customers and the discipline of the marketplace.


this requires that customers be informed about their institution's policy.
Without disclosure by management, customers will not be able to judge the
reasonableness of policies, and competition in the marketplace will not be
able to impact the decisions of individual institutions.
In contemplation of the recent action by the ABA, and in order to
provide a benchmark for measuring the effectiveness of this effort, the
Board conducted a survey of consumers in March of this year to determine
the level of consumer awareness of their institution's policy and the inci­
dence of consumer problems with delayed availability.
summarizes the results.

Attachment B

We plan to conduct a similar survey next year to

- 5 -

measure any increase in awareness as a result of the ABA's suggestion.


addition, we are considering conducting a survey of financial institutions
sometime next year to determine the number of institutions that are, in fact,
disclosing their policies.

The information from these surveys will be valuable

in determining whether the banking industry has responded to the challenge of
voluntarily dealing with the issue and whether disclosures, if made, result
in an improvement in consumer awareness.
Of course, the problem of delayed funds is not limited to commercial

It involves all types of institutions, including credit unions, savings

banks, savings and loan associations, and money market mutual funds.

The effec­

tiveness of a voluntary disclosure program will ultimately depend on the
willingness of other industry groups and associations to encourage their
members to also make voluntary disclosures.

It would be our hope and it has

been our advice to the industry that they pursue their efforts with all due

If successful, these efforts will be the most effective answer for

customers in allowing them to determine whether their institution's policies
are reasonable and, if not, allowing them to take action to avoid problems.

Federal Reserve Program
The Federal Reserve Bank of Dallas is currently conducting a pilot pro­
gram to test the feasibility of the Federal Reserve System returning a dishonored
check directly to the bank of first deposit rather than back through each step
in the initial collection route.

It includes having the Federal Reserve provide

wire notice to the last endorsing institution of nonpayment of checks in the
amount of $2,500 or more during the first phase of the pilot, and in a later
phase directly to the institution of first deposit.

Direct returns could

- 6 provide the framework for enabling depository institutions to provide faster
availability to their customers.

(Attachment C contains a more detailed

discussion of the Dallas Return Item Project.)
The Dallas project is, however, currently limited to providing direct
return of certain checks originally collected through the Dallas Reserve Bank
to certain banks in the Dallas Reserve District and there may be operational
and legal obstacles to expanding the pilot further.

For example, five states

and the District of Columbia do not permit the direct return of checks.


Federal Reserve is contacting the appropriate officials in those states to
explore the possibility of stimulating changes in their laws to permit direct

If the results of the Dallas pilot demonstrate that direct returns

will enhance payments mechanism efficiency and these state laws continue to
be an obstacle, federal legislation could be appropriate to enable direct
returns to be implemented on a nationwide basis.
Even if a nationwide system of direct returns can successfully be
implemented, i is still somewhat unclear whether such a system would auto­
matically result in better availability for the institution's customers.
For example, if a direct return approach is to be effective in providing a
framework for improved funds availability, it may have to be universal.
That is, even if some or even most returned checks are sent back directly
and quickly, if others are not, the institution of first deposit will not
know in advance which items will be returned directly and which will be
returned by the present indirect, time-consuming manner.

As a result, insti­

tutions may be reluctant to provide the earlier availability that the direct
return concept may facilitate.

Because of this potential problem, an incentive

may need to be established for institutions to use the direct return system
or some method instituted to minimize the risk of loss to the institution

- 7 -

of first deposit.

Although many of the issues of operational and practical

feasibility of direct returns are still unknown, the Dallas pilot should pro­
vide a great deal of information that will be useful in providing answers to
questions on delayed funds availability.

In conclusion, the Board is very sympathetic to the need for disclosures
by institutions to their customers.

However, the industry is currently involved

in efforts to accomplish this and we think the voluntary industry action should
be given a chance to work.

We know from experience that disclosure laws are

easy to conceptualize but far more difficult to implement and, to the extent
laws like this may impose unnecessary costs by forcing industry activity into
a few approved formats, the customer may ultimately be the loser.
In the next year we will be gaining additional experience with our
pilot project to speed up the return item processing, and will be in a better
position to gauge the extent to which this program may ultimately reduce the
delayed funds problem.

Perhaps a federal disclosure law will ultimately be

necessary, but given the industry's recent first step toward self-correction
of the problem and this pilot program, we suggest that the Congress defer adopt­
ing formal legislation until an assessment can be made of their effectiveness.
The delayed funds problem should diminish as customers become more
familiar with alternative forms of payments other than checks.

Many payments,

especially those that recur regularly such as salary, dividends, and Sociat
Security, can be received through automated clearing houses, and others can be
handled as wire transfers.

We believe that electronic payments represent a

more efficient, faster, and more reliable means of payment than paper trans­

We just published for comment several proposed enhancements to the




automated clearing house service and are inviting the public to comment on how
we can improve this service further.

In essence, electronic payments are the

only real solution to the problem of delayed availability.

The Federal Reserve

continues to be committed -- as it has been in the past -- to promoting the
efficiency of the nation's payments mechanism through the development of
electronic payments.

Attachment A

The Check Collection System
The check collection system in the United States frequently involves
many handlings of a check between its deposit in one depository institution and
its payment by the payor depository institution.

Checks deposited to accounts

in the same institution at which they are to be paid account for about 30 percent
of all checks written.

The remaining 70 percent of the checks must be collected

by sending them to:

a correspondent bank;— /


a Federal Reserve office;— /


a check clearinghouse;— /


the payor depository institution directly; or


some combination of the above (the most likely alternative).

Most checks are collected within one or two business days and the
bulk of the remaining checks are collected within three business days.


actual time required depends on the number and location of intermediary insti­
tutions involved and whether problems are encountered, such as mechanical
breakdowns in transportation or sorting equipment, human error, or bad weather.
Upon receipt of the check, the payor institution deducts funds equal to the
amount of the check from the balance in the drawer's account if the check is
properly drawn and endorsed, funds are available, and there is no stop payment


A correspondent bank is any depository institution that provides services
and holds balances for other depository institutions.


Federal Reserve Banks process approximately 35 percent of all checks


A check clearinghouse is usually an association of depository institutions
which may serve many needs of its member institutions including the exchange
or clearing of checks.

- A2 -


If any of these criteria are not met, the payor institution sends the

check back to its immediately prior endorsing institution.

When a payor insti­

tution returns a check, it must do so by midnight of the banking day after the
banking day it receives the check.
The process whereby the unpaid check is returned to the institution
of first deposit is, at the present time, quite complex and slow.

Article 4

of the Uniform Commercial Code, which has been adopted in all states, governs
check clearing, including the return of unpaid items.

Most of the state laws

include a provision that permits the payor or collecting institution to return
a check directly to the institution of first deposit.
discourage the use of the direct return procedure.
adopted the IJ.C.C.'s direct return provision.£/

Several factors, however,

Several states have not

If either the institution of

first deposit or payor institution is located in one of those states, the
payor must obtain the institution of first deposit's agreement to a direct
return -- itself a costly and time consuming process.

Further, if the institu­

tion of first deposit and payor institutions do not have accounts with each
other or with a mutual correspondent, it may be difficult for the payor to get
a refund for the check; under such circumstances, it is far simpler to return
the check to the presenting institution and charge back the amount.


of these factors, institutions almost universally return dishonored checks to
the immediately preceding institution in the collection chain.

Thus, if several

institutions were involved in the clearing process, each of these institutions
will also handle the check as it is returned to the depositor.

— f All states except Nebraska, Nevada, New Jersey, Oregon, Wisconsin, and
the District of Columbia have adopted the optional provision of the U.C.C.
allowing direct return of dishonored checks.


Although the processing of return items is the reverse of the original
processing for collection, this process is much more labor intensive.


machine readable coding at the bottom of the check allows for collection routing
through the use of computer controlled high speed check sorters.

A check

being returned, however, must be processed manually because each endorsement
stamp on the back of the check must be read to determine the institution to
which the check should be returned.

These endorsements are not machine readable.

As a result, return routing might typically require twice as much time as
collection routing.

For example, a check requiring two days to be delivered

to the paying institution might require four additional days to be returned to
the institution of first deposit.
Approximately 1 percent of all checks the Federal Reserve collects—
about one-half million checks per day— are returned unpaid.

Unfortunately, at

the time a check is first deposited, there is no way of knowing whether it will
be paid or returned.
Correspondent institutions and the Federal Reserve grant depository
institutions credit for checks that they receive for collection using an avail­
ability schedule which reflects the normal processing and transportation time

However, reflecting the uncertainty regarding a check being paid or

returned, the credit granted is provisional, and the institution receiving the
credit must be prepared to give it up immediately should the check be returned

Likewise, depository institutions' depositors must also be prepared

to make restitution of any funds credited to their account should a deposited
check be returned unpaid.

This is true, even though a delay in availability

may have been imposed and even though that delay period has expired and the
customer no longer has the funds in the account.

Attachment B

Summary of Survey Research Center Survey
of Consumer Experience with
Delayed Funds Availability

Several questions probing consumer experience with delayed availability
of funds deposited in checking, savings, and money market deposit accounts
were included in the March 1983 Survey of Consumer Attitudes conducted by the
Survey Research Center (SRC) of the University of Michigan under the Board's
contract with SRC.

This summary reports the results of the March survey and

compares the March data with results from similar surveys conducted during
1977 and 1981.

The March 1983 survey indicates that the large majority of deposit
account holders did not have delayed availability problems in the past few

Of the respondents who had problems, few reported that the problems

occurred frequently; most indicated that delayed availability problems occurred
very infrequently.
The proportion of deposit holders with frequent delayed availability
problems has not increased since 1981, while the proportion of deposit holders
reporting occasional problems decreased slightly.

Respondents to the 1983

survey were less likely to report that the problems were associated with new
accounts than respondents to the November 1981 survey.
One-quarter of deposit holders reported that they have accounts
at financial institutions that have delayed availability policies.


of these respondents learned about the policy when they had problems, but

- B2 most learned about the policy from a written disclosure, verbally from the
teller, from a friend or relative, or some other way.

The remaining three-

quarters of deposit holders reported that the institutions where they have
accounts do not have delayed availability policies or that they did not know
whether any of the institutions where they have accounts have such policies.

Reported Problems With Delayed Availability of Deposited Funds
Eleven percent of respondents to the March 1983 survey who had checking,
savings, or money market deposit accounts reported problems with delayed avail­
ability of deposited funds in the last few years (Table 1).

However, only 2

percent of deposit holders indicated that they had delayed availability problems
frequently (once a month or more).

In comparison, 20 percent of deposit holders

responding to the August and November 1981 Surveys of Consumer Attitudes and
12 percent of checking account holders responding to the 1977 Consumer Credit
Survey reported delayed availability problems.

Four percent of deposit holders

in 1981 and 2 percent of checking account holders in 1977 said that delayed
availability problems occurred frequently.J./

Experiences With Delayed Availability Problems
In 1983, two-thirds of the respondents who reported delayed availability
problems indicated that the problems occurred once a year, only one or two
times, or one time only in the last few years (Table 2).

Forty-three percent

In 1977 and 1981, respondents were asked whether delayed funds
availability policies caused them to have problems frequently, sometimes,
hardly ever, or never. Respondents to the November 1981 survey were also
asked to indicate whether the problems occurred once a month, once a
year, only one or two times, or some other number of times.
respondents who reported frequent delayed availability problems said that
the problems occurred once a month or more.

- B3 of the respondents who had problems said that the problems occurred because
they were unaware of the policy.

Other reasons mentioned included record

keeping mistakes by respondents, errors by financial institutions, and out of
state checks.

Fifteen percent of respondents with problems indicated that the

difficulties were with new accounts.

Sixty-three percent of respondents with

problems contacted the financial institution about the problem.

Of these,

nearly half reported that the institution was helpful in solving the problem.
Responses to questions about the frequency and reasons for delayed
availability problems in the November 1981 survey were nearly identical to
those in the 1983 survey.

However, problems were more than twice as likely to

have been with new accounts in 1981.

In addition, respondents to the November

1981 survey discussed the problem with the financial institutions more often
and were more likely to report that the institution was helpful in solving the

Awareness of Delayed Availability Policies
The 1983 survey contained additional questions on awareness of delayed
availability policies.

Twenty-five percent of the deposit holders responding

to the survey reported that they have accounts at financial institutions that
have delayed availability policies; 64 percent reported that the institutions
where they have accounts do not have delayed availability policies. (Table 3).
The remaining 12 percent of deposit holders said that they did not know whether
any of the institutions where they have accounts have delayed availability

Of the 147 respondents who reported having accounts at institutions

with delayed availability policies, 46 percent learned about the policy when
they had problems, 19 percent were informed verbally about the policy by a
teller, 13 percent learned about the policy from a friend or relative, and 12
percent received a written disclosure.
ways of learning about the policy.

The remainder reported various other

- B4 -

Table 1
Reported Problems With Delayed Availability
of Deposited Funds, 1977-1983

1977-1/ 1981"
Had delayed availability


Percent of deposit
account holders
1 W













Did not have delayed
availability problems














Had frequent delayed
availability problems ZJ


Question asked only of checking account holders.

2/ In 1977 and 1981 response to question was frequently had problems.
1983 response to question was had problems once a month or more.


- B5 -

Table 2
Experiences with Delayed Availability
Problems, 1981 and 1983


Percent of respondents who had
delayed availability problems





































Frequency of delayed
availability problems
Once a month or more
Few times a year
Once a year
Only one or two times
One time only
Not ascertained
Reasons for problems
Unaware of policy
All other
Do not know, not





Whether delayed availa­
bility problem was with
a new account
Do not know, not


Whether institution
was helpful in solving
the problem
Yes, helpful
No, not helpful
Did not discuss
problem with
Not ascertained

*Less than 0.5 percent




- 86 -

Table 3
Awareness of Delayed Availability Policies, 1983







Institution has a delayed
availability policy
Do not know
How respondents learned
about policy
Had problem
Received written disclosure
Verbally from teller
Friend or relative
Worked at financial institution
All other
Not ascertained

Attachment C

The Dallas Return Item Pilot Project

The Dallas return item pilot, which began on February 24, 1983,
consists of the following three phases:

Phase I
Under Phase I the Dallas Federal Reserve Bank began separately
charging the payor institution for processing returned checks collected
originally through the Federal Reserve.

In addition, the Dallas Reserve

Bank began notifying the last endorsing institution by wire that such
checks of $2,500 or more were being returned unpaid.
Phase I demonstrated the operational feasibility of separately
charging and providing wire notice for return items collected originally
through the Federal Reserve System.

Additionally, Phase I of the pilot

program has been favorably received by payor institutions within the Dallas
Federal Reserve District.

Phase II
Phase II consists of two stages.
and continue through the end of 1983.

The first stage will begin shortly

During this stage, the Dallas Reserve

Bank will continue processing and charging payor institutions for return
checks previously handled by the Federal Reserve and continue to provide
wire notifications.

In addition, in this stage the Dallas Reserve Bank will

do the following:

In the case where both the returning institution and the
institution of first deposit are located within the Dallas
Federal Reserve District, the Federal Reserve will return
the item and provide wire notification of large dollar items
directly to the institution of first deposit.

- c? -


To encourage automation of return item handling, the Dallas
Federal Reserve Bank will offer a special price for return
items which have been specially prepared for processing on an
automated basis.

In the second stage of Phase II, the Dallas Reserve Bank would expand
the pilot to include checks collected originally outside the Federal Reserve
if both the institution of first deposit and the returning institution are
located within the Dallas Federal Reserve District.

Prior to beginning the

second stage, the Dallas Reserve Bank will obtain written agreements from
collecting institutions within its District (with which the Bank has an
account relationship) to accept returned checks collected originally outside
the Federal Reserve and to pay for these items in immediately available

Phase III
Phase III would open the pilot to all items.

Where the bank of first

deposit is located outside the Dallas Federal Reserve District; the check would
be returned to the Federal Reserve office serving the institution of first