CUNA Comment Letter

April 24, 2000

Subgroup on Legal Barriers to Electronic Commerce
U.S. Department of Commerce
14th Street and Constitution Avenue, NW
Room 2815
Washington, D.C. 20230

Dear Subgroup on Legal Barriers to Electronic Commerce:

The Credit Union National Association (CUNA) appreciates the opportunity to respond to your requests for comments on ways to adapt policies, laws or regulation to eliminate barriers to and promote electronic commerce, electronic services, and electronic transactions. The original notice appeared in the Federal Register on February 1 and was republished on March 24. CUNA represents more than 90 percent of the nation’s over 10,600 state and federal credit unions and has solicited the opinions of credit unions on these issues.

CUNA suggests that four initiatives may be undertaken to promote the use of check images in the check collection process or check truncation - the conversion of paper checks into electronic form. These four initiatives include: adoption of The Uniform Electronic Transactions Act (UETA); adoption of the Electronic Signatures in Global and National Commerce Act (H.R. 1714); amendments to the Federal Reserve Board of Governors’ (the Federal Reserve) Regulation CC; and the Federal Reserve’s assistance in prohibiting discrimination against payments instruments that are drawn on or issued by credit unions.

CUNA encourages the Subgroup on Legal Barriers to Electronic Commerce (Subgroup) to support adoption of UETA, a model state law, in every state because it will help ensure that state laws recognize the validity of check images in the payments system. UETA establishes that an equivalent electronic record satisfies any requirement for a record of a transaction. In addition, UETA expressly states that if a state law requires that a check be retained, then that requirement is satisfied by retention of an electronic record of the information on the front and back of the check. See UETA Section 111 12(e). UETA is a model state law proposed by the National Conference of Commissioners on Uniform State Laws; as a result, it must be adopted by each and every state.

CUNA encourages the Subgroup to assist with passage of this law in every state, as it will help financial institutions and consumers. Financial institutions are helped because as check processing becomes more electronic it becomes cheaper and faster. Consumers are helped when the check collection process is more efficient. Consumers are also helped because they may have to use check images as proof of payment in court. Currently, some state courts require paper checks under the best evidence rule.

CUNA also recommends that the Subgroup support H.R. 1714 as passed by the House of Representatives in 1999 because it complements UETA and ensures use of check images nationwide. UETA applies only to the states. H.R. 1714 would be a federal law that would validate check images under federal law, for federal tax, federal bankruptcy and other purposes. Similar to UETA, H. R. 1714 establishes that an equivalent electronic record satisfies any requirement for a record of a transaction. In addition, H.R. 1714 expressly states that if a state law requires that a check be retained, then that requirement is satisfied by retention of an electronic record of the information on the front and back of the check. See Section 101 (c). As a result, H.R. 1714 also helps credit unions and their members, just as UETA does.

CUNA recommends that the Subgroup work with the Federal Reserve to achieve legislative changes to the Expedited Funds Availability Act to make it easier to utilize check images in the check collection process. This Act and Regulation CC establish the legal federal rules for check processing for financial institutions. Unlike the Uniform Commercial Code adopted by all states, however, Regulation CC does not grant clearing houses the right under state law to bind to the clearing houses’ rules all parties interested in the checks collected under those rules. In order to be bound by clearinghouse rules, the person or party in question must agree to those clearing house rules or otherwise be bound (See 12 C.F.R. 229.37). Consequently, there will be a risk to the financial institution participating in the electronic check program that they will be held liable by a third party indorser who did not agree to the program. A third party indorser is someone who endorses the check who is not a customer of either the paying bank or the depository bank.

CUNA believes that some merchants and financial institutions are using the web and or emerging technologies to create barriers to electronic transactions. Recently, CUNA has found that an online brokerage provides an “eCheck-- payment option for new customers to open accounts. This payment option accepts basic check information from any account with check-writing privileges; however, it excludes accounts drawn on credit unions, while including bank accounts. Another Web site for an online discount ticket company makes the following assertion: “We suggest that you only use a credit card that is issued through a bank since not all credit unions will provide verification.-- None of these practices is based on any reasonably significant differences between credit unions and banks; they are designed to discriminate against credit unions.

While CUNA is addressing these issues with the relevant vendors and institutions, this is not merely a dispute between private parties. The refusal to accept checks or credit cards issued by credit unions severely limits access to the payments system for the 80 million members that belong to credit unions and produces a significant barrier to electronic commerce.

To eliminate this barrier, CUNA suggests that the Subgroup work with the Federal Reserve to ensure the Federal Reserve uses its legal authority to enforce nationwide access to the electronic payment system as it amends its legal authority to make electronic payments more prevalent. The Federal Reserve has adopted standards pursuant to the Monetary Control Act of 1980 that govern its role in the payments system. According to this policy:

The Federal Reserve will continue to bring to payments markets an overall concern for safety and soundness, promotion of operating efficiency, and equitable access (emphasis added). Indeed, those considerations relating to integrity, efficiency, and access (emphasis added) to the payments system will remain at the core of the Federal Reserve’s role and responsibilities regarding the operation of the payments system. Federal Reserve Regulatory Service 7-140.

The Federal Reserve also sees preserving the public confidence in the payments system as its underlying responsibility. See Federal Reserve Regulatory Service 7-146.1. The Federal Reserve can uphold these principles by stopping these practices that unfairly exclude 80 million credit union members from electronic services and are designed to reduce public confidence in the 11,000 credit unions and their payments instruments. CUNA has already brought this matter of great concern to the Federal Reserve Board and will press it further in future correspondence with the Board.

In closing, CUNA strongly commends the Subgroup for undertaking this review of ways to eliminate barriers to electronic commerce, and recommends that the Subgroup support UETA, H.R 1714, revisions to The Expedited Funds Availability Act and accessibility for credit unions in the electronic payments system. If you have any questions, please contact Mary Dunn, Senior Vice President and Associate General Counsel or me at (202) 682-4200.


Michelle Profit
Assistant General Counsel