Financial Update (Fourth Quarter 2003)



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Check 21 Becomes Law

On Oct. 28, 2003, President Bush signed into law the Check Clearing for the 21st Century Act (Check 21). Check 21 reduces some of the impediments to check truncation — the capture and delivery of digital images of paper checks. Check truncation makes it possible to move checks through the collection process digitally rather than by the more costly and slower physical transportation of paper checks by trucks and airplanes.

An acceptable substitute
The new law, which takes effect a year from its enactment, facilitates check truncation by creating a new negotiable instrument called a substitute check — a paper printout of a digital image. A substitute check is the legal equivalent of the original check and includes all the information contained on the original.

How does the addition of a new piece of paper, the substitute check, support electronic check processing? Before Check 21’s passage, truncation could occur only by agreement among the banks involved. In the absence of agreements, paper checks still had to be presented and returned. Under Check 21, banks can create electronic images of all deposited checks and send the images to a check processor such as the Federal Reserve. The check processor can then present truncated checks to paying banks that have agreed to accept images and can reconvert the images into substitute checks to present to paying banks that want only paper checks.

While Check 21 requires paying banks to accept substitute checks presented to them, it does not require banks to accept checks in electronic form or to create substitute checks.

The Fed prepares for Check 21
“Check 21 promises more choices, increased efficiencies and greater innovations for banks,” says Atlanta Fed Senior Vice President Fred Herr. “The Federal Reserve is committed to providing our customers with solutions to help them take advantage of these benefits and pass them along to their own customers.”

During the one-year period preceding Check 21’s implementation, Reserve Banks will finalize their check modernization initiative, which upgrades the Fed’s check processing infrastructure. Reserve Banks also plan to offer their customers a new suite of services that allow banks to take advantage of the full scope of Check 21’s processing efficiencies.

Members of the Federal Reserve Board’s staff are currently drafting the regulation to implement Check 21. The regulation will include model disclosure language for banks to use in notifying consumers of their legal rights under the new law, which adds new warranty and indemnity provisions for substitute checks and specific expedited recredit provisions for consumers.

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