Effective October 28, 2004, the Check Clearing for the 21st Century Act (Check 21) generally authorizes banks to exchange and process check information electronically, thereby avoiding the delay of physically transporting paper checks. Specifically, Check 21 authorizes banks to create and accept a new instrument called a "substitute check" in place of original paper checks. In general terms, a "substitute check" is a paper copy of an original check that can be processed as if it was an original check.
Triggered by the tragedy of September 11, 2001, which resulted in the grounding of air carriers and a delay in the transfer of checks between financial institutions, Check 21 is designed to prevent the kind of disruption that banks were subjected to in the wake of September 11th.
"Substitute Checks"
Prior to the enactment of Check 21, the law required banks to present original paper checks for payment, unless the paying bank had agreed to accept "presentment" in an alternative form (e.g., electronic format). Generally, presentment is the production of a bill of exchange to a person that is contractually bound to pay. Although the former law allowed banks to engage in electronic presentment, presenting banks needed electronic presentment agreements with each bank to which it presented its checks in order to be authorized to present anything other than original paper checks for payment.
However, under Check 21, banks now have the authority to create and accept "substitute checks," which are special paper reproductions of original checks. Made from an electronic image of an original check, a substitute check contains an image of the front and back of the original check, and is specially formatted so that it can be processed as an original check. In fact, the front of a substitute check will typically state, "This is a legal copy of your check. You can use it the same way you would use the original check." If accurately prepared, a substitute check will serve as the legal equivalent of the original check for all purposes.
Implementing Check 21
While Check 21 does not require banks to accept checks in electronic form or to use the new authority to create substitute checks, banks that choose to engage in the electronic transfer of check information and/or to prepare or receive substitute checks can effectively avoid the delay of processing and transporting original checks across the country.
For example, pursuant to Check 21, a bank in California that receives a check drawn on a bank in New York could transfer the check information electronically to a collecting bank in New York (with which it has an agreement to do so). The New York collecting bank could create a substitute check to present to the New York paying bank. Able to process the substitute check to the same extent as the original, the California bank could collect its money using New York transport only.
Effect of Check 21 on Consumers
Because Check 21 fosters the faster processing of checks, money can be deducted faster from consumer checking accounts. Accordingly, Check 21 heightens the responsibility of some consumers to maintain a sufficient balance in their checking accounts to cover checks when they write them.
Another effect of Check 21 on consumers is that banks may start sending a combination of original checks and substitute checks to consumers who typically receive canceled checks with their account statements. In such cases, the consumer may use a canceled substitute check as proof of payment, just like an original check. Other circumstances when a bank may provide a substitute check include:
- If a consumer asks to have a particular canceled check returned to them to prove payment
- When returning a bounced check deposited by the consumer into his or her account
Protecting Substitute Check Recipients
In order to protect substitute check recipients, Check 21 includes new warranties, an indemnity provision, and expedited recredit procedures. Specifically, Check 21 requires banks that transfer, present or return a substitute check for consideration to warrant that:
- The substitute check contains an accurate image of the front and back of the original check and a legend stating that it is the legal equivalent of the original check, and
- No depositary bank, drawee, drawer or endorser will be asked to pay a check that it has already been paid.
Further, banks are responsible for indemnifying any individual who suffers a loss due to receipt of a substitute check. In addition, a special process under Check 21 allows consumers who believe there is an error because of a substitute check to claim a refund, limited to the amount of the loss or the amount of the substitute check received, whichever is less (plus interest on that amount).
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