FIGHT BACK : FED'S REQUEST FOR MORE TIME MAY BE TOUGH SELL.

Byline: David Horowitz 

By federal law, banks have two days to clear a local check and deposit the funds in your account - five days if the check is drawn on an out-of-town bank. That means that if the check's no good, the clearing house has only two days (or five) to shortstop it.

In fact, you usually don't have to wait that long for checks to clear. Electronic fund transfers and modern banking technology mean that checks often clear on a same-day basis. So, why is the Federal Reserve asking Congress to allow banks to hold onto funds for an extra day before crediting deposits to their customers' accounts?

It's because according to the Fed, two days is simply not enough time to catch fraudulent checks and return them to the check-writer's bank. Fewer than half of all bad checks are identified within the time limit. What happens then is that the bank that received it ends up stuck for the amount of the check. The Fed says that extra day could help cut losses from check fraud significantly. (The five-day rule on out-of-town checks doesn't seem to be a problem.)

But there may be more to this than simply helping banks ``improve their risk management.'' The Federal Reserve competes with private companies in the business of processing checks. Right now, it handles about a quarter of all the checks written in this country.

But critics say the Federal Reserve hasn't kept up with the latest technology. It's still passing pieces of paper from bank to bank. The Fed admits it returns only about 15 percent of fraudulent checks within two days, compared to 48 percent for its private competitors. And yet, the Fed doesn't charge the banks any less for its check-clearing services. Maybe an extra day would help the Federal Reserve compete for business in major financial markets like New York and Chicago.

The banks wouldn't mind holding onto that money for another day, either. Funds on hold can be invested by the day at around 5 percent interest. By some estimates, holding deposits for one more day would earn the country's banks as much as $300 million a day. And then there are the additional fees banks would make on bounced checks.

That's the issue that concerns consumer groups. They say that keeping people from having access to their money, even for one day, will mean that many won't be able to make their rent and other payments on time without the risk of their own checks bouncing. Low-income people may be forced to give up banks and use expensive check-cashing services - just so they can have immediate use of their own money.

Consumer advocates also question the basic assumption that one more day would make any real difference in stopping bad checks. They point out that most check fraud involves forged signatures - something only the originating bank can identify, not the clearing house.

The Federal Reserve's requests for clean-up legislation don't usually attract much public attention - or opposition on Capitol Hill. But this proposal may be a very tough sell when it comes before the Congress.

One way to reduce the risk of bouncing checks is to sign up for direct deposit of wages, expense reimbursements, tax refunds and Social Security or retirement benefits. The money goes directly into your bank account. No trips to your bank, no waiting for the check to clear, and the money is there when it's supposed to be.