The Check Clearing for the 21st Century Act (Check 21) was signed into law on October 28, 2003, and became effective on October 28, 2004. Check 21 is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation. The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks. A substitute check is the legal equivalent of the original check and includes all the information contained on the original check. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create substitute checks.
The Federal Reserve Board has released the final rule to implement Check 21, including the model disclosure language for depository institutions to use in notifying consumers of their rights under the law.
I. General
II. Substitute Checks
III. Original Checks
IV. Consumer Protection
What is Check 21 and what is its basic purpose?
Check 21 is a federal law that is designed to enable banks to handle more checks electronically, which should make check processing faster and more efficient. Today, banks often must physically move original paper checks from the bank where the checks are deposited to the bank that pays them. This transportation can be inefficient and costly. Check 21 became effective on October 28, 2004.
How will Check 21 make check processing more efficient?
Instead of physically moving paper checks from one bank to another, Check 21 will allow banks to process more checks electronically. Banks can capture a picture of the front and back of the check along with the associated payment information and transmit this information electronically. If a receiving bank or its customer requires a paper check, the bank can use the electronic picture and payment information to create a paper "substitute check." This process enables banks to reduce the cost of physically handling and transporting original paper checks, which can be very expensive.
Is electronic check processing secure?
Electronic check processing is not new to the financial industry and is a safe and reliable way of processing payments. It uses technology that has been developed and tested to process your check information securely.
Does Check 21 mean that customers can't get their checks back in their account statements?
No. Check 21 does not require customers to stop receiving checks back in their account statements. The contents of an account statement will continue to be governed by the account agreement between the bank and its customer. Rather, when banks have agreed to provide paid checks in statements, Check 21 permits the bank to provide either the original check or a substitute check.
What changes can I expect when Check 21 goes into effect?
If you are among the many customers of banks that do not receive your canceled checks with your account statement, you likely will not notice any change when Check 21 goes into effect on October 28, 2004. You will notice a change only if you receive a substitute check when you were expecting an original check. For example, if you receive canceled checks with your account statement, you might begin to receive a mixture of canceled original and substitute checks. If you receive image statements (pictures of several checks on a single page), you also may notice that some of the pictures are of substitute checks.
Will Check 21 increase the speed with which checks are cleared between banks?
The speed of check-processing already has increased in response to check-system improvements other than Check 21. Thus, even now, once a check is deposited with a bank, it is almost always delivered overnight to the paying bank and debited from the checkwriter's account the next business day. Check-processing speeds should continue to increase, over time, as banks make further operational changes in response to Check 21. That means money may be deducted from your checking account faster. Before you write a check, it's always best to make sure your checking account has enough money in it to cover the check.
Will Check 21 change how fast my bank must make my check deposits available for withdrawal?
Another federal check law (the Expedited Funds Availability Act) specifies the maximum times by which your bank must make funds available to you, though most banks make funds available faster than required. Check 21 did not change these maximum hold times. However, the Expedited Funds Availability Act requires the Federal Reserve Board to reduce maximum hold times in step with reductions in actual check-processing times. Thus, over the longer term, if Check 21 sufficiently increases the speed of check processing, the Board will reduce maximum hold times.
A bank's decision to place a hold on funds you deposit by check does not affect the interest that you receive on the deposited funds. Specifically, if you deposit a check into an interest bearing checking account, your bank is generally required to begin to credit interest to your account no later than the business day on which the bank receives credit for the funds.
What is the difference between Check 21 and programs that convert checks to electronic payments?
A check you write may be processed as a check. In that case, your rights are governed by check laws and regulations. Some merchants, however, may use your check as a source of information to create an electronic fund transfer. You must receive notice that your check may be processed this way. Electronic fund transfers are governed by different laws and have different consumer rights than check payments.
What is a substitute check?
A substitute check is a paper copy of the front and back of the original check. A substitute check is slightly larger than a standard personal check so that it can contain a picture of your original check. A substitute check must be printed in accordance with very specific standards so that the substitute check can be used in the same way as the original check. If you receive a substitute check that appears to have a problem, such as it contains a bad picture of your original check, contact your bank.
Front view of a substitute check
Back view of a substitute check
When is a substitute check legally the same as the original check?
A substitute check is legally the same as the original check if it accurately represents the information on the original check and includes the following statement: "This is a legal copy of your check. You can use it the same way you would use the original check." The substitute check must also have been handled by a bank.
If you receive a substitute check that is not legally the same as the original check and you suffer a loss related to the substitute check, Check 21 provides you with a special procedure that you can use to get your money back.
Can I use a substitute check as proof of payment?
Yes. You can use a substitute check as proof of payment because it is legally the same as the original check. For instance, the IRS will accept your substitute check as proof of payment. If you do not have a substitute check but have a copy of an original check or a copy of a substitute check, you usually can use these documents as proof of payment.
How are image statements different from substitute checks?
Instead of providing canceled checks, some banks provide customers with image statements that show multiple pictures of canceled checks per page. The pictures on the image statement could represent an original check or a substitute check. Whether the consumer receives an original check, a substitute check, an image statement, or a line item on his or her account statement, check law protects consumers against erroneous and unauthorized check payments. In addition, Check 21 provides a special refund procedure (called "expedited recredit"), if you receive a substitute check. For more information, see the consumer protection section below or contact your bank.
Can I demand a substitute check from my bank instead of a copy?
Your bank may provide you with a substitute check, but it is not required by law to do so. If your bank does not provide you with a substitute check, you usually can use a copy of an original check or a copy of a substitute check as your proof of payment.
What should I do if something is wrong with the substitute check that I receive?
A substitute check must show the front and back of the original check and be printed in accordance with very specific standards. If you receive a substitute check that appears to have a problem, such as it contains a bad picture of your original check, contact your bank. If you suffered a loss related to a substitute check you received, see the consumer protection section below or contact your bank.
Is my bank required to tell me about substitute checks?
Under Check 21, banks are required to provide a disclosure to their consumer customers who receive canceled checks with their monthly statements. The disclosure describes substitute checks and consumer rights regarding substitute checks. Banks must provide this disclosure to existing customers not later than the first statement mailing after Check 21 becomes effective on October 28, 2004. After October 28, 2004, banks must provide this disclosure to new customers at the time the customer relationship is established. If you receive canceled checks with your account statement but did not receive the required disclosure within the timeframes described above, please request one from your bank.
Banks must also provide this disclosure when a consumer requests an original check or copy of a check and receives a substitute check. In addition, the bank must provide this disclosure if a check the consumer has deposited is returned unpaid to the consumer in the form of a substitute check.
Can I still get my canceled checks back?
If you get your canceled checks back with your account statements today, you will continue to receive canceled checks unless your bank notifies you otherwise. The only difference will be that some of the canceled checks that you receive may be substitute checks. You can use a substitute check the same way you would use an original check, such as for recordkeeping and proof-of-payment purposes.
Can I get my original check if I need it?
Banks are not required currently to keep your original check for any specific length of time, and Check 21 does not add any new retention requirements. In many cases, the original check may be destroyed. If you request your original check from your bank, your bank may provide you with the original check, a substitute check, or a copy of the check.
Can I prevent others from using my original check to create a substitute check?
No. Generally, any check can be used to create a substitute check, except a foreign check. Banks and their customers must accept a substitute check as if it were the original check because the substitute check is legally the same as the original check.
What if I receive a substitute check representing a fraudulent original check?
Check law provides protections against fraudulent checks so that generally you are not responsible if you notify the bank in a timely fashion. This is the case whether you receive an original check, a substitute check, an image statement, or a line item on your account statement. If you receive a substitute check of a fraudulent original check, you may have additional rights under Check 21. Contact your bank for more information.
Do I need to use magnetic ink or toner when printing checks?
To process checks, banks' automated check sorting equipment relies on numeric information that appears at the bottom of checks and is printed in magnetic ink. This information is known as the check's magnetic ink character recognition line, or MICR line, and contains information such as the routing number of the bank on which the check is drawn, the account number on which the check is drawn, and the check serial number. Generally applicable industry standards for original checks long have required the MICR line to be printed in magnetic ink; the need for magnetic ink on original checks is not the result of the Check 21 Act. Only the MICR line of a check must be printed in magnetic ink. The rest of the information on the check, such as the date, the payee name, and the amount, can be printed in regular, non-magnetic ink.
If you make payments by printing checks at home and the checks you use have pre-printed MICR lines, then the rest of the information that you print on the checks need not be in magnetic ink. By contrast, if you must print a check's MICR line because it is not preprinted on the check, you should print the MICR line in magnetic ink.
How am I protected under Check 21?
Check law protects you against erroneous and unauthorized check payments. In addition, Check 21 contains a number of new protections for consumers. For example, Check 21 contains a special refund procedure (called "expedited recredit") for a consumer who suffers a loss related to a substitute check he or she received.
What protections do I have if I receive image statements, access pictures of my checks online, or receive an account statement with descriptive information about my canceled checks?
Years ago, many banks stopped providing customers with canceled checks and, as an alternative, began providing customers with documentation showing which checks were paid. Regardless of the form of documentation you receive, check law protects you against erroneous and unauthorized check payments.
If I suffer a loss related to a substitute check I received, can I file a claim with my bank?
Yes. If you have received a substitute check, you can file a special claim with your bank for a refund (called an "expedited recredit") if you believe that
Does the special refund procedure apply if I receive an image statement with a picture of a substitute check but do not receive the actual substitute check?
No. The special refund procedure applies only if you actually received a substitute check. However, check law protects you from improper check charges regardless of whether you receive an original check, substitute check, image statement, or a line item on your account statement. If you feel an error was made to your account, contact your bank immediately.
How do I make a claim under the Check 21 refund procedure?
If you believe that you have suffered a loss relating to a substitute check that you received, you should contact your bank as soon as possible but no later than 40 days from when your bank mailed or delivered your account statement. Your bank will ask you to provide information it needs to investigate your claim, which could include a description of the problem, an estimate of your loss, and information about the substitute check.
How quickly must my bank handle my claim, and when will my account be refunded?
Your bank should investigate your claim promptly. If your bank finds that it incorrectly charged your account, the bank must refund the amount of your claim (up to the amount of the substitute check, plus interest if your account earns interest) within one business day of making that decision.
If your bank is unable to determine the validity of your claim within 10 business days after receiving it, your bank on that day must refund the amount of your loss up to the lesser of amount of the substitute check or $2,500, plus interest (if your account earns interest). Unless your bank determines that your claim is not valid, it must refund to your account any remaining amount of your loss, up to the amount of the substitute check, plus interest, no later than the 45th calendar day after the bank received your claim.
If your bank later determines that your claim was not valid, it may reverse the refund and interest it has paid to you.
How will I know if my bank has refunded my account?
If your bank refunds your account, it will send you a notice by the next business day that tells you the amount of your refund and the date on which you may withdraw those funds. Normally, you may withdraw your refund on the business day after your bank refunds your account.
Can my bank delay my ability to withdraw the amount that it refunds?
If your bank is still investigating your claim, it may delay your ability to withdraw up to the first $2,500 of the refund if (1) you are a new accountholder, (2) your account is repeatedly overdrawn, or (3) the bank has reason to believe the claim is fraudulent. In these cases, your bank must allow you to withdraw the funds after determining that your claim is valid or on the 45th calendar day after the day that you submitted your claim, whichever occurs first.
What happens if my bank says it charged my account correctly?
If your bank determines that it correctly charged your account, it will send you a notice by the next business day that explains the reason for that decision and will include either the original check or a copy of the original check that is sufficient to determine the validity of your claim. Your bank will also either include the documentation the bank used in making its determination or will explain that you can request such documentation.