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What is the purpose of the Act?
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The primary purpose of the Act is to allow an institution to make a unilateral
decision to truncate all paper checks without agreements with any other party.
The Act enables this by authorizing the creator of a substitute check from an
electronic record (image) of the check for those banks and customers who have
not agreed to accept the electronic record (image).
Does the Act require the acceptance of electronic records (images) of checks?
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No. An institution is not required to accept electronic records (images) of
checks.
If an institution can unilaterally determine to truncate all paper checks and other institutions are not required to accept electronic records (images) of checks, how can this be accomplished?
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The Act provides for the creation of a new paper legal instrument, substitute
check, that is the legal equivalent of the original check for all purposes and
that can be processed as if it were the original check. (Substitute checks defined
below.) The substitute check can be created from the electronic record (image)
of the check for those banks and customers who have not agreed to accept the electronic
record (image).
Are any checks not eligible for conversion to a substitute checks?
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No. All checks
are eligible for conversion to a substitute check. This includes, for example,
but is not limited to consumer checks, commercial checks, money orders, travelers
checks, treasury checks, etc.
Does an institution have to accept substitute checks presented to it for collection or returned to it as unpaid?
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Yes. Substitute checks are the legal equivalent of the original paper check
for all purposes and all institutions must accept them as if they were the original
checks.
Can institutions or their customers "opt out" of Check 21?
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No. Under the Act no institution or any its customers may "opt out"
of the Act; they all must accept the substitute check in lieu of the original
paper check. This includes all depository financial institutions (OFI) as defined
by the Federal Reserve Act and includes every customer of a OF!. This includes,
for example, but is not limited to consumer customers, corporate customers and
governmental agencies.
Does Check 21 provide legal rules or recognition for image exchanges between banks?
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No. Check 21 provides legal recognition and equivalency for substitute checks
only. Additional agreements and/or rules are required for image exchanges. The
Act does not govern image exchanges, and therefore image exchanges still need
to be performed under agreement between the parties.
What is a substitute check?
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A substitute check is a paper reproduction of an electronic record (image)
of an original paper check that was previously truncated. Substitute checks must
meet industry standards that include, but are not limited to, the standard paper
weight and size for paper checks, full MICR line information to facilitate automated
processing as if they were the original paper checks, all endorsements, etc. Substitute
checks are designed to minimize the impact of check imaging on institutions and
their customers that wish to continue to receive paper checks for processing and
for their customers' statements.
What is the relationship between check images and Check 21?
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Check 21 authorizes the creation of the substitute check from images of the
front and back of the original paper check. Check 21 complements image technology
by enabling banks to unilaterally determine to truncate all paper checks and provide
substitute checks to those banks and customers who have not agreed to accept the
electronic records (images) of original paper checks.
Does Check 21 require all checks to be truncated?
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Check 21 does not require (mandate) that any check be truncated. The Act only
allows for the production and legal equivalency of a substitute check for parties
that choose to truncate the original check and replace it with a substitute check.
Since the Act only covers substitute checks, what is the point of the Act and how will it help the banking industry?
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The Act allows banks to make unilateral decisions to truncate all checks and
replace them with substitute checks. The significance of Check 21 is not that
it allows the conversion of one paper check to another paper check but rather
that it encourages the use of technology to improve the overall efficiency of
the check payment system. By promoting the use of image technology, the Act promotes
the elimination of many costly processing steps. Under the Act, a depositary bank
could, for example, image capture a deposited check at the earliest point of entry
into the bank, for example at the branch, and never process the original check
again. For deposited on-us items for which the drawing customer wishes to receive
paper documents in their statements, the depositary bank (also paying bank in
this example) could print substitute checks in the appropriate sequence at the
time of statement preparation and no additional physical sorting would be required.
Beyond Check 21, the use of image technology can facilitate the development of
numerous improvements to bank operations and also for new or improved customer
products and services.
Does the Act apply to all types of customer accounts or to only consumer accounts?
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Every check is eligible for conversion to a substitute check and the Act applies
to every check that is converted into a substitute check. The term "check"
under the Act is defined to mean a draft payable on demand and drawn on or payable
through or at an office of a bank, whether or not negotiable, that is handled
for forward collection or return, including a substitute check and a traveler's
check. There are certain provisions in the Act, such as the expedited recredit
procedures for bank customers and the customer education requirements, that only
apply to consumers, but the overall scope of the Act applies to all bank customers.
Congress did not exclude any type of customers or accounts from the Act.
Can state warrants be converted to substitute checks?
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Many states and other municipalities pay their obligations with warrants.
These documents are considered non-negotiable instruments. Even so those state
warrants that come within the definition of "check" (see description
above) may be converted into a substitute check under the Act. Since warrants
vary from state to state, banks processing such warrants should consult with their
legal counsel as appropriate to determine coverage of warrants under the Act.
If today a customer gets their original paid checks back in their statement, can they refuse to accept substitute checks and demand the original paper checks?
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No. The substitute check is the legal equivalent of the original check and
neither the customer nor the customer's bank can refuse to accept a substitute
check because it is a substitute check and not the original check.
What kind of agreement is needed for image exchange?
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Banks need an agreement to exchange images and to specify under what provisions
those exchanges will occur. These agreements can be clearing house rules (e.g.
ECCHO Rules), Federal Reserve Operating Circular or other bilateral/multilateral
agreements among banks. Bilateral/multilateral agreements that are not under clearing
house rules will bind only those parties that have made those agreements. Other
parties that have an interest in the check that are not a party to the agreement
are not bound by those rules. The normal collection and return of checks typically
includes multiple parties such as the depositing customer, the depositary bank,
one or more intermediary collecting or returning banks, the paying bank and the
drawing customer. There also is often one or more other non-bank intermediary
endorsers. Agreements between the depositary bank and paying bank outside of clearinghouse
rules will bind only the two institutions and not all of the other interested
parties.
What provisions might be included in these agreements?
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An exchange agreement might include but not be limited to the following: definition
of when presentment would occur; identification of items eligible for the exchange;
timeframes for receipt of ECP (if banks will be exchanging electronic information
about the checks in addition to the images); the timeframes for receipt of images
and return items; assignment of liabilities among the parties; retrieval/request
processes; retention requirements; image endorsement requirements; incorporation
of other applicable law; and others provisions.
What are the warranties and indemnifications provided for in the Act?
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Under the Act, the bank that creates the substitute check, called the Reconverting
Bank, and any bank that subsequently transfers, presents, or returns a substitute
check for consideration provides the warranties prescribed in the Act, and an
indemnity. The two warranties in the Act are: 1) that the substitute check meets
all requirements for legal equivalence (that is, the substitute check accurately
represents the information from the front and back of the original check and includes
the required legend identifying it as a legal copy of the original check), and
2) that no bank will be asked to make payment on an item that it has already paid
(no double debit). The warranties travel with the substitute check and any subsequent
image of a substitute check, and apply regardless of whether a subsequent party
receives the substitute check or an image of the substitute check.
The indemnity is provided to all parties in the collection or return stream
for a loss that occurred due to the receipt of a substitute check that would not
have occurred with the original check. The indemnity also runs with the substitute
check, but unlike the warranties the indemnity only applies to a person that has
received the substitute check.
Is there the potential for consequential damages under Check 21 and who would be responsible for those damages?
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Yes. Any bank that provides a substitute check is potentially liable to an
indemnified party for consequential damages when there is a breach of warranty.
What other financial liability is incurred under the indemnity?
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The indemnity amount for a non-breach of warranty is for the amount of the
loss up to the amount of the check plus interest and expense.
What is a substitute check under the Act?
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A substitute check means a paper reproduction of the original check that:
Contains an image of the front and back of the original check
Bears a MICR line containing all the information appearing on the MICR line
of the original check, except as provided under applicable industry standards
Conforms, in paper stock, dimension and otherwise, with generally applicable
industry standards for substitute checks, and Is suitable for automated processing
in the same manner as the original check
How does a substitute check become the legal equivalent of the original check?
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In addition to meeting the above criteria for substitute checks, the check
must also accurately represent all of the information on the front and back of
the original check as of the time the original check was truncated and must bear
the legend: 'This is a legal copy of your check. You can use it the same way you
would use the original check'.
What is a reconverting bank under the Act?
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A reconverting bank is the bank that creates the substitute check, or if a
substitute check is created by a person other than a bank, the first bank that
transfers or presents that substitute check.
Are there any other reconverting bank responsibilities when creating substitute check under the Act?
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Yes. The substitute check also must bear all the endorsements applied by any
party previously handling the check, whether in electronic or paper form, for
either a forward collection or return. The bank that created the substitute check,
called the reconverting bank, also must be identified on the substitute check.
Does a bank have to accept a substitute check?
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Under the Act, any person or bank may deposit, present or send for collection
or return a substitute check without an agreement with the recipient if the bank
has made the warranties set forth in the Act. The warranties need not be affirmatively
made, because they automatically attach through the act of transferring, presenting,
or returning a substitute check for consideration.
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