The Heart of Check 21 – the Benefits

At the heart of the Check 21 Act is what has been dubbed the ‘substitute check.’ A substitute check is a replacement check that contains the same information and has the same legal status as the original. This means an institution can truncate a check, make an image of it, use the image to create a substitute check, and then process the substitute check as though it were the original. In other words, the physical transportation of the original check is no longer necessary.

Some observers have commented that the events of Sept. 11, 2001 provided impetus to the legislation because the airline shut down severely crippled the banking industry’s ability to transport and process checks. But now, with the ability to move checks through the system electronically, the impact of things like bad weather, the biggest factor in delaying a check’s processing, will be greatly reduced. Overall, the legislation is expected to accelerate the time it takes to process a check as well as to reduce check processing costs.

Some Trade-Offs

The benefits to the banking industry don’t come without some trade-offs, however. Namely, the Act also includes provisions relating to expedited recrediting for consumers as well as consumer disclosure provisions. The Federal Reserve also has broad authority to promulgate regulations to implement or facilitate compliance with the Act.

What this Means to You

The result of this legislation means that financial institutions are going to want to gear up for the changes the law will bring relating to the creation and acceptance of substitute checks. This may mean purchasing imaging equipment for institutions that intend to create substitute checks. But there are also a number of other aspects of this legislation which institutions should become familiar with.

The Disclosure Requirements

For example, institutions will need to ready themselves to provide the newly required consumer disclosure. In short, the disclosure needs to describe for consumer customers: 1) that the substitute check is the legal equivalent of the original; and 2) the consumer’s recrediting rights under the Act. As for the wording of the disclosure, the Act mandates model text to be developed by the Federal Reserve within nine months of the effective date of the Act. This is important because using the model language will provide a safe harbor if it accurately describes the institution’s actual policies and practices.

As for distribution, the disclosure only needs to be provided to consumer customers that receive original or substitute checks. Institutions will need to provide existing consumer customers with the disclosure no later than the first regularly scheduled communication with the consumer after the effective date of the Act. New customers, on the other hand, will need to receive the disclosure at the time the customer relationship is established.

Note that in addition to providing the disclosure to new and existing customers, the Act also includes subsequent disclosure requirements. Specifically, the Act requires the disclosure to be provided to each consumer customer that requests a copy of the check and receives a substitute check at the time of the request.

Recrediting Procedures, Training and Customer Education

The recrediting procedures are designed to protect consumers in instances where the original check or a better copy of the original is necessary to determine the validity of a consumer’s claim. The Act dictates specific procedures for filing a claim, recrediting the consumer’s account, and providing the consumer with the appropriate notice. Of course, the latter will depend upon what action the institution takes. Institutions will want to become familiar with and train their employees in the recrediting process. Institutions may also want to go a step further and use the opportunity to educate consumers about the legislation.

Summary

In summary, the Check 21 Act was sign into law today and many predict it will have a profound impact on the future of check processing. Expected benefits to the banking industry include accelerated check processing times and reduced costs. Some of the trade-offs include expedited recrediting procedures and consumer disclosure provisions. Financial institutions are going to want to gear up for the changes this Act will surely bring.