It is likely that most financial institutions will, at some point in time, receive a substitute check that is subject to the Check 21 Act and subpart D of the Federal Reserve Board’s Regulation CC, which implements the Check 21 Act. This is true whether or not a financial institution chooses to create substitute checks. Some financial institutions will rapidly migrate toward electronic check exchange. Others will proceed more hesitantly. Regardless, all banks must be prepared to accept a substitute check in place of the original after the Act’s effective date of October 28, 2004. Because the Check 21 Act provides that a properly prepared substitute check is the “legal equivalent of the original check for all purposes,” a bank cannot refuse to pay a check based solely on the fact that it was presented with a substitute check instead of the original check. The banking industry and consumer groups therefore worked with the Board of Governors of the Federal Reserve System (the Federal Reserve Board), and later with Congress, to develop legislation that would facilitate the ability of banks to exchange checks electronically without requiring any bank to change its check processing methods. This legislation, known as the Check Clearing for the 21st Century Act (Check 21 Act or Check 21 or the Act), was enacted on October 28, 2003, and becomes effective on October 28, 2004. The Check 21 Act authorizes a new negotiable instrument called a “ substitute check,” which is a paper reproduction of an original check, and provides that a properly prepared substitute check is the legal equivalent of an original check. The Act facilitates electronic check exchange by enabling banks to sort and deliver checks electronically and, where necessary, to create legally equivalent substitute checks for presentment to banks that have not agreed to accept checks electronically. The economics of the check business is changing. Declining check volumes and a largely fixed-cost-based check processing infrastructure have caused banks’ unit costs for processing paper checks to rise. Accordingly, many banks have begun to seek less costly alternatives to sorting paper checks and transporting them physically around the country on a daily basis. For example, some banks have begun to exchange electronic images of checks. However, under current check law, a bank must present the original paper check for payment unless the paying bank has agreed to accept electronic presentment. Because of the large number of banks and the unwillingness of some paying banks to receive checks electronically, it is difficult, if not impossible, for a bank to obtain electronic presentment agreements with all other banks. As a result, banks that want to engage in electronic check exchange on a widespread basis have been hampered in their ability to do so.
Check Clearing for the 21st Century Act: Foundation for Check 21 Compliance Trainingįoundation for Check 21 Compliance Training BACKGROUND.Consumer Compliance Issues (10 minutes).Check Clearing Under Check 21 (3 minutes).Overview of the Act and Final Regulation.
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