Check 21 – What is it and how will it affect your Banking Services?

By Wally Webster IIThe Check Clearing for the 21st Century Act, more commonly known as “Check 21”, is a federal law that goes into effect on October 28, 2004. Check 21 allows banks to create legally equivalent check replicas called substitute checks. The legislation encourages the use of electronic image exchange of checks by empowering banks to truncate checks, process them electronically and, where necessary, provide paper substitute checks.Check 21 legislation received momentum in the Congress after the horrific terrorist attacks on 9/11. Airplanes, which transport checks and other negotiable items from one bank to another, were grounded for several days, which nearly brought the world’s largest financial system to a stand still. To prevent this type of tragedy from having a similar impacting our financial system, and to improve efficiency in check collections, Congress passed Check 21, which removed barriers that prevented banks from transmitting checks electronically.What does this mean to you as a consumer? For one thing, your original check may be truncated — that means converted — to an electronic image. You may not be able to get the original check back, but you may be able to get either an image copy of your check or a substitute check to document your transaction. In the case of an image copy, it can be used for information and documentation of your transaction.However, a substitute check is a legal copy of your check. It accurately represents all the information on the original check, bears the legend “This is a legal copy of your check,” includes all endorsements (paper or electronic) and includes identification of the party that created the check. The consumer can use the substitute check in the same way he or she would use the original cancelled check. In today’s environment, the consumer must give permission for the bank to truncate his or her original checks. It’s known in many banks as “check safekeeping.” Check 21 allows the banks to change the consumer’s original check to an image to be truncated without permission.Check 21 permits any bank in the check collection chain to truncate a check. Since the original check may not be returned to the consumer’s bank, it is likely that the consumer will not get all his or her original paper checks returned with the monthly statements. Instead, consumers who get their checks enclosed with their monthly statements may receive a mixture of substitute checks and original checks. Of course, many consumers already have opted for statements without original checks returned, with their bank keeping records to allow retrieval when necessary.Check 21 will affect consumers in another way — checks may clear their account faster. To avoid overdraft (OD) and non-sufficient funds (NSF) fees, consumers are advised the make sure available funds are already in their account before the check is written.Check 21 provides safeguards for consumers whose original checks were truncated into substitute checks. In certain cases, if a substitute is improperly charged to a consumer’s account and the image is not legible enough to validate the correct amount of the original check, Check 21 would require your bank to establish an “expedited recredit” process to resolve your claim that the substitute checks was posted for an amount different from your original check. To make an expedited recredit claim, the consumer has 40 days from the statement date or the date the substitute check is made available, whichever is later. This date may be extended for a “reasonable time” in extenuating circumstances (including extended travel or illness).When errors occur, the consumer must provide the bank with the following information: 1) a description of the error; 2) an explanation of why substitute check was not properly charged to account; 3) a statement of loss and estimated loss amount; 4) the reason why original or better copy of check is necessary; and 5) sufficient information to identify the check and investigate claim.The bank generally has 10 business days after receiving the claim to complete its investigation and respond or it must recredit the consumer’s account, up to $2500 per check, pending completion of the investigation. To protect the consumer, all claims must be recredited within 45 calendar days if payment of the substitute check cannot be validated. If the bank obtains a better copy or the original check and determines the check actually posted properly, the credit may be reversed.In Summary, o Checks may begin to clear checking accounts more quickly than today.o Consumers should not write a check without available funds in the checking account.o Consumers currently receiving checks as statement enclosures may start receiving substitute checks in place of original checks.o The consumer may have a legal right to make a claim with his or her bank, if an error was made in posting the correct amount of the check to the consumer’s account due to converting the original check to an image copy.o In certain cases, the consumer’s bank may be legally obligated to research and resolve valid claims, including reimbursement of any fees associated with the error, within ten days for amounts up to $2,500 and 45 days for the remaining amount greater than $2,500.Wally Webster II is Treasurer, Pacific Northwest Bankers Association& Senior Vice President, Bank of America