2004 FALL FORUM – Savannah, Georgia, December 7-10, 2004

The NCSL Financial Services Standing Committee will meet December 7-10, 2004, in Savannah, Georgia.  The Fall Forum agenda includes a variety of timely financial services-related programs, such as:  Bank Mergers & Acquisitions; The Community Reinvestment Act:  Only for Big Banks Anymore?; The SMART Act:  What Now?; How Do You Get Short-Term Money Without Robbing a Bank?; Insurance Bid Rigging:  The Tip of the Iceberg?; Buying Insurance After a Hurricane and The Uniform Securities Act.  These programs are open to all who are interested in attending, and attendees do not need to be a member of the Committee to attend the sessions.  Registration and housing information are available through the NCSL Web site at www.ncsl.org/programs/seminars/forum/Index.htm.

Hotel rooms for the Fall Forum are filling up and participants should make their reservations as soon as possible.  Information regarding the Savannah hotels is available at www.ncsl.org/programs/seminars/forum/registration.htm#hotel.

For additional information about the Financial Services Committee or the Fall Forum, please contact the NCSL Committee staff, Heather Morton or Cheye Calvo.

Check 21 vs. Electronic Check Conversion

The Check Clearing for the 21^st Century Act (Check 21) was signed into law on October 28, 2003, and became effective on October 28, 2004.  The law is designed to enhance efficiency by allowing financial institutions to handle checks electronically, instead of physically moving the original paper checks from the bank where the checks are deposited to the bank that pays them.  Now, banks can capture a picture of the front and back of the check along with the associated payment information and transmit this information electronically.  If a receiving bank or its customer requires a paper check, the bank can use the electronic picture and payment information to create a paper "substitute check." In order to qualify as a "substitute check," the substitute must state on the front:  "This is a legal copy of your check.  You can use it the same way you would use the original check."  Consumers who received the original checks back with their monthly statements will see changes, because now they may start receiving substitute checks.

As a result of transmitting the check information electronically, checks will clear accounts faster.  As financial institutions gradually convert to processing checks electronically, checks could clear accounts on the same day they are written, thus eliminating any "float" time.  The Federal Reserve Board recommends that all consumers ensure that checking accounts contain enough money to cover each check written on the account.

Laws governing checks still protect consumers from erroneous or unauthorized check payments; however, Check 21 contains new protections.  Check 21 provides for a special refund procedure, called expedited recredit, if a bank makes a check processing error.  Consumers must request a substitute check in writing in order for the expedited recredit procedure to apply.  However, check laws still protect consumers from improper check charges regardless of whether the consumer receives an original check, substitute check, image statement or a line item on the account statement.

In contrast to Check 21, some financial institutions have been using electronic check conversion.  Electronic check conversion is a process in which a check is used as a source of information—for the check number, the consumer’s account number and the number that identifies the financial institution.  The information is then used to make a one-time electronic  payment from the consumer’s account as an electronic funds transfer.  The check itself is not the method of payment.  Since the check is converted into an electronic funds transfer, the laws governing electronic funds transfers apply to these transactions and consumers have different rights in these circumstances.  Consumers must be given notice that information from their checks will be used to make an electronic payment from their accounts.  The notice is required by the federal law that applies to electronic fund transfers—the Electronic Fund Transfer Act and the Federal Reserve Board’s Regulation E.  Just as with Check 21, consumers’ transactions may clear faster.

The Federal Reserve Board has additional information regarding Check 21 available at http://www.federalreserve.gov/paymentsystems/truncation/default.htm and electronic check conversion available at: www.federalreserve.gov/pubs/checkconv/default.htm.

NCSL Takes Action on Federal Preemptions

At the recent NCSL Annual Meeting, the nation's state lawmakers renewed their fight against the federal preemption of states' rights by enacting policies that will guide NCSL’s lobbying activity on Capitol Hill.  "Over the last several years, state legislatures have faced a number of public policy challenges - not the least of which has been the ongoing budget crisis," said incoming NCSL President John Hurson, a member of the Maryland House of Delegates.  "The last things states need to deal with at this point is continued federal preemption and unfunded mandates.  The policies strengthen NCSL's position as the premier advocate for states' rights and gives us the tools to work with our colleagues on Capitol Hill." 

The Financial Services Committee adopted three resolutions related to financial services issues that are threatened by federal preemption:

• State-Federal Framework for Insurance Regulatory Modernization—This resolution establishes NCSL’s commitment to work with Congress on the creation of a state-federal framework for insurance regulation.  The resolution also renews NCSL’s belief that insurance regulation is a function of state government and states should continue their effort to modernize and streamline the regulatory process.  The Committee and the full NCSL unanimously adopted the policy.
• Banking Regulation—The NCSL Banking Regulation resolution renews state lawmakers commitment to the dual banking system which preserves the states’ right to charter and regulate banks and thrifts.  The Committee and the full NCSL unanimously adopted the policy.
• State Sovereignty in Financial Services—This resolution affirms the states’ right to regulate banking, insurance, securities and credit unions in order to meet the needs of local economies and respond to the values and concerns of local citizens.  The Committee and the full NCSL unanimously adopted the policy.

Credit Scores:  Are They Understood?

Ever wonder how a creditor decides whether to grant you a credit card or a mortgage loan?  For years, creditors have been using credit scoring systems to determine whether consumers are a good risk or a bad risk for credit cards, car loans and mortgages.  And credit scores are increasingly being used for insurance, employment and utility services.  According to a recent study developed by the Consumer Federation of America (CFA) and Providian Financial, most Americans do not understand credit scores even when they think their knowledge of credit is good.

A credit score is a number that predicts how likely a consumer is to pay bills based on a mathematical algorithm using information from a consumer’s credit report.  "Many consumers may not have taken the time to learn more about credit scores because they do not know how scores affect the availability and price of credit," said Providian Senior Vice President Alan Elias. 

CFA and Providian Financial surveyed 1027 adults in late July.  Only 34 percent, or about one-third of respondents, correctly understand that credit scores indicate the risk of not repaying a loan, and not factors like financial resources to pay back loans or knowledge of consumer credit.  And only 12 percent correctly identified the low 600s as the level below which they would be denied credit or have to pay a higher, subprime rate.  "Now that credit scores are increasingly used by utilities, insurers and employers, as well as creditors, it is essential for consumers to learn their score and what it means," said CFA Executive Director Stephen Brobeck.  "The cost of not knowing your score and its significance could be not only denial of credit but also difficulty obtaining needed services and even a job."