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Check 21

Check Clearing 
for the 21st Century Act




Purpose & Summary

H.R. 1474, the Check Clearing for the 21st Century Act, or `Check-21,' modernizes the U.S. payments system by making it easier for check images to be transported electronically between financial institutions for payment. The legislation provides for the creation of a new negotiable instrument, the substitute check, which will facilitate electronic presentment of checks while also ensuring that individuals or banks that do not wish to accept electronic images can receive a paper check.

H.R. 1474 will facilitate the electronic transfer of images for presentment, obviating the need for physical transfer of the original check. The legislation authorizes banks to create substitute checks, which would be utilized in place of an original paper check that has been truncated when an individual or a bank does not agree to accept an electronic image. The legislation requires that a substitute check accurately represent all the information on the front and back of the original check as of the time it was truncated. Additionally, a substitute check must bear all the endorsements of the banks that handled the original check or the electronic image and must clearly indicate that it is a legal copy of the original.

Under the bill, a bank that transfers, presents or returns a substitute check and receives payment, warrants to the depositor, or any subsequent collecting bank, that the substitute check is legally equivalent to the original and that no one will receive presentment on a check that has already been paid. This will help prevent double debiting by providing consumers with assurances that they will not be required to pay on a check more than once, and requiring banks to develop systems to limit double debits.

Additionally, the legislation requires a bank to indemnify, or make whole, a consumer who suffers a loss due to the receipt of a substitute check instead of the original.

H.R. 1474 also provides for a right of expedited recredit if a customer asserts that the electronic check or substitute check was improperly charged against their account. The legislation spells out specific procedures for banks to follow when evaluating and granting a recredit.



It is estimated that 42.5 billion checks are processed in the United States every year. While some are processed electronically, millions of paper checks are physically transported between banks every day for processing and presentment. This system relies on the steady flow of air and ground traffic in order to ensure that checks reach paying banks in a timely manner. The events of September 11, 2001, halted air traffic in the United States, and as a result hundreds of millions of checks did not move, stalling the U.S. payment system.

Today electronic presentment often occurs through `on us' payments, where banks clear checks within their own organization. A bank may create electronic copies of checks and then send them from the recipient branch to the paying branch within the same financial institution. Additionally, banks owned by different parent institutions can agree to exchange checks electronically eliminating the need for physical presentment. The complexity of check truncation agreements, and the difficulty in achieving uniformity, has limited their widespread implementation.

H.R. 1474 was introduced by Representatives Hart, Ford and Ferguson after consultation with the U.S. Federal Reserve (Fed), financial institutions, technology providers, and consumer groups.

By encouraging electronic imaging, Check 21 will significantly reduce the cost of presentment of checks and will enable the payments system to operate more effectively. Expediting this process through electronic presentment will give payees access to their funds more quickly and float will be reduced. Further, by providing for the creation of substitute checks, H.R. 1474 enables institutions that do not have the desire or the technological capacity to move to an electronic check presentment system to continue to process payments uninterrupted.

There are many consumer benefits which should result from the implementation of H.R. 1474. Under the current system banks are limited in their ability to place ATMs in remote locations because any checks deposited at these machines must be picked up and transported on a daily basis. Under Check 21 there is a reduced need for the physical transportation of checks, which will encourage banks to place ATMs that scan deposited checks and electronically transport them in geographically remote locations. With a greater number of checks imaged and posted on the web site of a bank, more customers will be able to review their accounts on a near `real time' basis, enhancing fraud prevention and consumer convenience.

Finally, it is important to note that consumer protections relating to checks are spelled out in part 229 of title 12 of the Code of Federal Regulations and articles 3 and 4 of the Uniform Commercial Code (U.C.C.). Under H.R. 1474, these protections, and all other settled check law, will continue to apply to substitute checks. The provision for the measure of damages in the bill mirrors part 229 of title 12 of the Code of Federal Regulations and the Uniform Commercial Code. Additionally, under the indemnity provisions, a person will be covered for the amount of any loss proximately caused by the breach of warranty. In the absence of a breach of warranty the indemnity will be the amount of the loss up to the substitute check and any interest and expenses.






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