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Check 21

Frequently Asked Questions (FAQ)


Below is a list of frequently asked questions based upon:

Check Clearing for the 21st Century Act - Signed by President Bush on October 28, 2003
Regulation CC (12 CFR Part 229) - Issued by the Federal Reserve Board on July 26, 2004
Regulation J (12 CFR Part 210) - Issued by Federal Reserve Board on October 22, 2004
ANSI X9.100-140-2004 - Issued by Accredited Standard Committee X9, Inc. on October 1, 2004

This document is provided for informational purpose only. Nothing in this document should be considered, or relied upon, as legal, regulatory or operational advice. ECCHO and its members, employees and agents make no representations or warranties regarding the information contained in this document. Banks and other persons with legal, interpretive, operational or other questions regarding the Check 21 Act and substitute checks should seek their own legal or business counsel on such matters.

Use of Terms: The term "substitute check" is used in Check 21 to identify the new negotiable instrument created by the Act. The term "Image Replacement Document" or "IRD" is defined in the industry standard developed for substitute checks. The IRD and substitute check are essentially the same.

A Purpose of the Act

A.1. Q. What is the purpose of the Act?
  A. 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 creation of a paper 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).
A.2. Q. Does the Act require the acceptance of electronic records (images) of checks?
  A. No. An institution is not required to accept electronic records (images) of checks, but is required to accept a paper substitute check.
A.3. Q. 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?
  A. The Act provides for the creation of a new paper legal instrument, a 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 records (images).
A.4. Q. Are some checks ineligible for replacement with substitute checks?
  A. No. All checks drawn on US banks payable in US dollars are eligible for replacement with substitute checks. Examples of this include, but are not limited to, consumer checks, commercial checks, money orders, traveler's checks, treasury checks, etc.
A.5. Q. Does an institution have to accept substitute checks presented to it for collection or that are returned to it unpaid?
  A. Yes. A substitute check is the legal equivalent of the original paper check for all purposes and all institutions must accept it as if it were the original check.
A.6. Q. Can institutions or their customers "opt out" of Check 21?
  A. No. Under the Act no institution or any of its customers may "opt out" of the Act; they all must accept substitute checks in lieu of original paper checks. This includes all depository financial institutions (DFIs) as defined by the Federal Reserve Act and includes every customer of every DFI. This includes, for example, but is not limited to consumer customers, corporate customers and governmental agencies.
A.7. Q. If a bank has to accept a substitute check, why is it said that the Act is voluntary?
  A. While a bank has to accept a substitute check, the Act does not require any party to create substitute checks. Banks will make their own decisions based on their business considerations as to whether to create substitute checks.

B Scope of the Act

B.1. Q. Does Check 21 provide legal rules or address check image exchanges between banks?
  A. No. Check 21 only provides legal recognition and equivalency of substitute checks. 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.
B.2. Q. What is a substitute check?
  A. 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 the definition of a substitute check from Regulation CC Subpart D. They must fulfill the requirements for legal equivalency and include the provisions required by the reconverting bank. Some of the attributes of a substitute check include:
  • An image of the front and back of the original check, conforming to industry standards that include, but are not limited to, the standard paper weight and size for paper checks,
  • A full MICR line containing all information to facilitate automated processing as if they were the original paper check,
  • The required legal legend,
  • An accurate representation of the original check,
  • Contain the identification of both the reconverting bank and truncating bank and bear all endorsements.

Substitute checks are designed to minimize the impact of check processing on institutions and their customers that wish to continue to receive paper checks for processing and for their customers' statements.

B.3. Q. What is the relationship between check images and Check 21?
  A. Check 21 authorizes the creation of the substitute check, a paper document, using images of the front and back of the original paper check. Check 21 uses image technology to enable banks to truncate all paper checks and to provide substitute checks to those banks and customers who have not agreed to accept the electronic records (images) of original paper checks.
B.4. Q. Does Check 21 require all checks to be truncated?
  A. No. 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.
B.5. Q. Since the Act only covers substitute checks, what is the point of the Act?
  A. The significance of Check 21 is not that it allows the replacement of one paper check with another paper check, but rather that it encourages the use of technology to improve the overall efficiency of the check payment system. Without Check 21, many agreements are required before any institution would be able to truncate 100% of its checks. Check 21 eliminates this requirement to obtain any agreement whenever an original check is replaced with a substitute check.

By promoting the use of image technology, the Act promotes the elimination of many costly processing steps. 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.

B.6. Q. How will Check 21 help the banking industry?
  A. There are a number of applications and uses that the banking industry has already envisioned. The most common ones are described here:
  • Reduced processing steps - Images can be transmitted between two banks or two banking locations, so that a physical substitute check can be created closer to the ultimate receiving bank: the paying bank in a forward collection process or the BOFD in a return process. This will eliminate processing steps and reduce transportation costs.
  • Remote Deposit Taking - An institution can image a check at its branch or ATM, transmit that image to its processing center where a substitute check is created and sent out for collection. This will reduce the expense of daily ATM and branch collections and expedite the check collection.
  • Return Processing - Paying banks today must sort all their received checks to locate and return the small number of return unpaid items (approximately 1% of all checks). Under Check 21 those banks can avoid the physical sorting of all the checks and just print substitute checks for the items that will be returned unpaid.
  • Image Exchange - Banks can agree to truncate and image all checks between themselves under agreement. Paying banks that need to provide their customer with a physical document would print substitute checks.
B.7. Q. Does the Act apply to all types of customer accounts or only to consumer accounts?
  A. Every check drawn on US banks payable in US dollars is eligible for replacement with a substitute check and the Act applies to every check that is replaced with 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. Some examples include:
  • Consumer checks
  • Business checks
  • Corporate checks
  • Government warrants
  • U.S. Treasury checks
  • Money orders
  • Controlled disbursement checks
  • Payable through drafts
  • Traveler's checks

There are provisions in the Act, such as the expedited recredit procedures and the customer education requirements, which 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.

B.8. Q. Can state warrants be replaced with substitute checks?
  A. Yes. 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 replaced with a substitute check under the Act. Since warrants vary from state to state, banks processing such warrants should consult with their legal counsel as necessary to determine coverage of warrants under the Act.
B.9. Q. 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?
  A. 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 not the original check.

C Provisions of Federal Reserve Board Regulation CC, Subpart D

C.1. Q. Will there be any official guidance on how the Check 21 Act will be implemented?
  A. Check 21 authorizes the Federal Reserve Board to adopt regulations to implement, prevent evasion of and facilitate compliance with the Act. The Federal Reserve Board published modifications to Regulation CC in a new Subpart D to implement Check 21. They also modified Regulation J to provide legal coverage for the Federal Reserve's Check 21-based products. As part of Regulation CC, the Federal Reserve Board published safe harbor model language that banks may use for their consumer awareness notice. Other model notices are also included that can be used for the various required consumer notifications.
C.2. Q. What is a substitute check under Regulation CC?
  A. A substitute check is a paper reproduction of an original check that:
  • Contains an image of the front and back of the original check
  • Bears a MICR line that, except as provided under ANSI X9.100-140 contains all the information appearing on the MICR line of the original check at the time that the original check was issued and any additional information that was encoded on the original check's MICR line before an image of the original check was captured.
  • 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.
C.3. Q. How does a substitute check become the legal equivalent of the original check?
  A. In addition to meeting the above criteria for substitute checks, the substitute 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".
C.4. Q. What is a reconverting bank?
  A. 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 (e.g. merchant, corporate customer), the first bank that transfers or presents that substitute check.
C.5. Q. Does the reconverting bank have additional responsibilities under Regulation CC Subpart D when creating a substitute check?
  A. 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 and the identity of the bank that truncated the original check must appear on the substitute check, both in conformance with X9.100-140.
C.6. Q. If a substitute check is redeposited, is the bank in which it is being redeposited the reconverting bank?
  A. No. The reconverting bank is the bank that originally created the substitute check that is being redeposited.
C.7. Q. What is a truncating bank?
  A. A truncating bank is the bank that truncated (removed) the original check from the payment stream. It may or may not be the reconverting bank. Under both Regulation CC Subpart D and ANSI X9.100-140 the identification of this bank is required on the substitute check.
C.8. Q. Does a bank or a bank's customer have to accept a substitute check?
  A. Yes. Under the Act, all persons, companies, government agencies and banks must accept substitute checks.
C.9. Q. Is there a requirement to destroy the original paper check, and if so when?
  A. No. The Act and Regulation CC are silent on this issue. Neither has a destruction requirement by the truncating bank. The truncating bank will determine if and for how long to retain the original check based on their own business considerations including but not limited to risk assessment, amount of the check, their ability to retrieve the check and the cost of retention. Retention of the original check may also be determined by agreement with the paying bank and by other federal or state law.
C.10. Q. Can a consumer make a claim for expedited recredit if they received an image statement with an image of a substitute check?
  A. No. The expedited recredit procedures and indemnity only apply when a consumer actually receives a substitute check. Image statements are provided to customers under agreement between the customer and the bank, and errors will be resolved under that agreement.
C.11. Q. If a consumer customer requests a copy of the original check, are they entitled to expedited recredit?
  A. If the consumer customer receives a substitute check based on this request they would be entitled to expedited recredit under Regulation CC Subpart D; but if they receive a copy of a substitute check they would not be.
C.12. Q. Are banks required to notify their customers about Check 21?
  A. The Act and Regulation CC Subpart D require that banks provide a consumer awareness notice. A bank must provide to each consumer a notice that describes that a substitute check is the legal equivalent of an original check and a description of the consumer recredit rights provided in the Act and Regulation CC.
C.13. Q. To whom must the bank provide the customer awareness?
  A. The customer education notice is only required to be sent to consumer customers.
C.14. Q. When does a bank have to provide the customer awareness disclosures?
  A. There are four situations when a bank must provide the disclosure C-5A in Regulation CC, Subpart D, Appendix C.
  • In the first regular communication after October 28, 2004, all banks should have sent to all consumer customers who receive paid original checks or paid substitute checks with their periodic statements.
  • For each consumer who becomes a customer after October 28, 2004 that will receive paid original checks or paid substitute checks with their periodic statements.
  • When a consumer customer receives a returned substitute check. This occurs when a deposited check that is returned unpaid in the form of a substitute check.
  • When a consumer customer requests a copy of a check and the bank provides a substitute check.
C.15. Q. Does a bank have to provide C-5A notices to business customers?
  A. No. This provision in the Regulation only applies to consumer customers.
C.16. Q. Under what circumstances must the bank provide the C-5A notice to a consumer each time it provides a substitute check to that consumer?
  A. The bank must provide the C-5A notice each time it provides a returned, unpaid check in the form of a substitute check or provides a substitute check in response to a consumer's request for a copy. The Federal Reserve Board commented: "A bank must provide the disclosure each time it provides a substitute check to a consumer on an occasional basis, regardless of whether the bank previously provided the disclosure to that consumer."
C.17. Q. Under what circumstances can the bank provide the C-5A notice one-time to a consumer that receives substitute checks?
  A. The notice is not required to be sent each time a consumer customer receives its periodic statement that may contain substitute checks in those situations a one-time notice is acceptable.
C.18. Q. Can the required notice be included with other notices that go with a returned check?
  A. Yes. The Federal Reserve Board commented "A bank also may include in its disclosure additional information relating to substitute checks that is not required by this section."
C.19. Q. Can foreign checks and other foreign items be replaced with substitute checks?
  A. No. Items that are not drawn on a U.S. depository institution or that are not payable in U.S. dollars are not "checks" under the Regulation CC definition of a check.
C.20. Q. Is there a specific location for the contact address and phone number information that is referenced in the Federal Reserve's Regulation CC model disclosure (consumer awareness notice)?
  A. The specific contact address and phone number may be included in the disclosure (such as with Regulation E). The address and phone number may also be included with or on the customer's bank statement.
C.21. Q. An email contact is referred to in the Regulation CC model disclosure. Do we have to give an e-mail reference?
  A. No. In the model disclosure it states "for example" so you do not have to give an email address.
C.22. Q. If a bank replaces an original check with a substitute check and speeds up the collection of that item by one day, does the bank have to pass this accelerated collection on to the consumer?
  A. Regulation CC Subpart A contains the check availability schedules, which have not been modified with the addition of Subpart D. Both the EFAA and Check 21 require that the Federal Reserve continue to survey banks about check availability and when warranted to modify the existing schedules. It is anticipated that once image exchanges become more prevalent and checks are collected and returned faster, the availability schedules may be updated.
C.23. Q. Is it 40 calendar days or 40 business days for the customer to notify the bank of an expedited recredit claim?
  A. 40 business days.
C.24. Q. If a consumer requests a copy of a check (e.g. court case, forgery) and the bank provides a substitute check, do the expedited recredit procedures apply?
  A. Yes. Any time the consumer is provided a substitute check, expedited re-credit procedures apply.
C.25. Q. What is the acceptable ink color for bank endorsements?
  A. As of January 1, 2006, only black ink on an original check or substitute check will be allowed.
C.26. Q. Can electronic endorsements be placed on substitute checks?
  A. It is possible for checks to be converted and reconverted several times in the process of collection, return and representment, etc. Regulation CC requires all endorsements to be on the substitute check including any electronic endorsements. This requirement and placement of these endorsements is included in ANSI X9.100-140.
C.27. Q. Since paying banks are not required to endorse checks, how can a paying bank that is a reconverting bank be identified on a substitute check?
  A. Under current law paying banks are not required to endorse checks. In order to be able to identify all reconverting banks, the Federal Reserve requires that a paying bank who is also the reconverting bank apply an identification similar to an endorsement to the substitute check; however this identification is not an endorsement.
C.28. Q. What is expedited recredit?
  A. Under the Act and Regulation CC, a new consumer protection is created for when a consumer experiences a loss as the result of having received a substitute check that they would not have experienced had their original check not been replaced with a substitute check. Banks are required, in some instances, to provide the consumer with a recredit in the amount of the substitute check within a ten day period after receipt of the consumer's claim.
C.29. Q. What kind of Check 21 disclosure notices need to be displayed in branches?
  A. Regulation CC Subpart D does not require any particular notices to be displayed in branches, though banks must provide Check 21 information to their consumer customer and banks may elect to provide Check 21 information to their non-consumer customers.
C.30. Q. If a consumer requests a copy of a check, and the copy is of an image of a substitute check, what notice/disclosure if any is required to be provided to the consumer?
  A. The notice requirements only apply if the consumer receives an actual substitute check that meets Regulation CC's definition of a substitute check, including, for example, the provisions related to paper stock and check dimensions. However, to avoid confusion and unnecessary inquires, the bank should consider indicating that it is a copy, e.g. by stamping "copy" on the item or otherwise indicating or explaining that this is a copy.

D Warranties, Indemnifications and Liabilities

D.1. Q. What are the warranties and indemnifications provided for in Regulation CC?
  A. In the regulation, 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:
  • 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
  • That no party 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 party that has received a substitute check and does not apply to electronic records of substitute checks.

D.2. Q. Under what circumstances would a bank incur a loss due to the receipt of a substitute check rather than the original check?
  A. Banks are still evaluating circumstances in which the original check would be required. If for example, the paying bank can not tell from a substitute check that the signature is forged and pays the item the customer can file an affidavit of forgery. The paying bank may initially take a loss, but can, under the Act, recover the loss from the reconverting bank.
D.3. Q. Is there the potential for consequential damages under Check 21 and who would be responsible for those damages?
  A. Yes. Any bank that creates a substitute check (e.g. is the reconverting bank) is potentially liable to an indemnified party for consequential damages when there is a breach of a Check 21 warranty.
D.4. Q. What other financial liability is incurred under the indemnity?
  A. 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.
D.5. Q. Do the warranties cover both paper and electronic representation of a substitute check?
  A. Yes. The Check 21 warranties cover both paper and electronic representation of a substitute check for which a bank receives consideration in either forward or return presentments.
D.6. Q. Can a non-bank create a substitute check and if so who would make the warranties under the Act?
  A. Under the Act, the first bank that transfers or presents a substitute check becomes the reconverting bank and as such takes on all the warranties and liabilities under the Act. It is possible that banks may allow their customers to create substitute checks, but would likely require agreements to allocate the Check 21 liabilities back to those customers. Bank's deposit agreements should state that a customer can create and deposit a substitute check only with prior agreement.
D.7. Q. What happens if a substitute check is incorrectly charged to a customer's account?
  A. The Act and Regulation requires that the bank that transfers, presents or returns a substitute check and receives consideration for it, provides two warranties (see above.) and an indemnification to other parties in the payment stream. A customer or bank can have a warranty or indemnification claim against the bank making the warranties and indemnification. There is also an expedited recredit procedure for consumer customers that receive substitute checks. Check 21 specifies the deadline to file a claim, the notification that the banks must make to consumer customers, when and how much funds must be provided to the consumer, and other procedural requirements.

The Act's warranty provisions would apply only if the incorrect charge to the customer's account resulted from a breach of either of the two substitute check warranties prescribed in the Act. The indemnification and expedited recredit provisions would apply only if the incorrect charge resulted from receipt by the customer of the substitute check and would not have occurred had the customer received the original check. Regardless of whether the warranty, indemnification or expedited recredit provisions are applicable, the customer would have the rights provided under the Uniform Commercial Code and other check laws in connection with the unauthorized charge to the customer's account.

E Image Agreements

E.1. Q. What kind of agreement is needed for image exchange?
  A. Banks need an image exchange agreement to specify under what provisions those exchanges will occur. These agreements can be clearing house rules (e.g. ECCHOTM 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 to the agreement. 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. Also, there are often one or more other non-bank intermediary endorsers.
E.2. Q. What provisions might be included in these agreements?
  A. 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;
  • Time frames for receipt of ECP (if banks will be exchanging electronic information about the checks separately from the exchange of the images);
  • The time frames for receipt of images and return items;
  • Assignment of liabilities among the parties;
  • Retrieval/request processes;
  • Retention requirements;
  • Image endorsement requirements and
  • Incorporation of other applicable law.
E.3. Q. Why would a bank create a substitute check if they are image capable?
  A. Since banks are not required to receive images, both the sending and receiving banks must first agree to exchange images and also be prepared to process images. The fact that a bank can create a substitute check does not mean that the bank is prepared to participate in an image exchange. There are numerous technical and operational issues associated with exchanging images beyond those required to process substitute checks. In addition exchanging banks would need an image exchange agreement.
E.4. Q. What responsibilities and liabilities are created when a bank customer images their checks and sends an electronic file to the bank?
  A. A company can only send electronic files to the bank with the agreement of the bank. Once the bank receives the electronic file, they can either create a substitute check, bearing the responsibilities required under Check 21, or they can image exchange the file, bearing the responsibilities under their image exchange agreement. The bank, to protect itself, should assign the liability to the bank's customer that was created by the customer's imaging process. The bank should also determine the financial strength of their customer to ensure that they have sufficient assets to cover any losses.
E.5. Q. A bank chooses to truncate and image a check. What are the responsibilities and risks associated with being a truncating bank?
  A. Most image exchange agreements between banks will put liability on the truncating bank, (the bank that converts the check to an image). This follows the logic of Check 21 that assigns the liability and losses associated with a substitute check to the bank that chooses to print a substitute check. Since the reconverting bank may not be the truncating bank, an image exchange agreement will generally move the liability created by Check 21 to the original imager of the check.

F Substitute Checks

F.1. Q. What is the difference between a substitute check and an IRD (Image Replacement Document)?
  A. A substitute check is defined in the Act and Regulation CC (see above). An Image Replacement Document (IRD) is the name that the ANSI X9.100-140 standard uses for the substitute check. An IRD by definition in the ANSI X9.100-140 standard will always be a substitute check.
F.2. Q. Who is required to pay for the creation and transportation of the substitute check and how much is it expected to cost?
  A. Neither the Act nor Regulation CC indicates who pays for the creation and transportation of the substitute check. Under current check operating procedures the sending bank is responsible for the cost of collecting an item. So, absent an agreement to the contrary, the bank creating the substitute check (the reconverting bank) will pay for the creation and sending of the substitute check.

There is not sufficient experience with substitute checks to reasonably estimate the cost of creating and transporting substitute checks. These costs likely will be dependent upon a variety of factors, including the number of substitute checks a bank creates, the time of presentment and the technology the bank uses to create the substitute checks. The Federal Reserve System has announced charges for printing and forward presenting substitute checks that can be accessed through the Federal Reserve Financial Services web site (www.frbservices.org)

F.3. Q. Is it true that the substitute check will look differently than the original check?
  A. A substitute check in many ways is exactly like an original paper check, but there are some differences and improvements over an original check. The substitute check contains an image of the front and back of the original check and contains all of the endorsements that would have appeared on an original cancelled check. Some of the endorsements will be printed in a specific area on the substitute check making them clearer to read versus regular endorsements that are in many cases difficult to decipher. The substitute check will be printed on regular check paper stock. The differences that customers may notice is that the substitute check is approximately the size of a corporate check; the image of the original check on the substitute check is reduced about 95% for personal size checks and 67% for business size checks. Additional information appears on the front of the substitute check that includes the bank who truncated the original item, the bank who converted this item into a substitute check, the legal legend as required and may contain optional information (e.g. security features, control information, etc.) . As required the substitute check can be processed as the original check and is the legal equivalent of the original check.
F.4. Q. Does a substitute check require a full MICR line?
  A. Under both Regulation CC and the ANSI X9.100-140 standard, a substitute check must contain the complete MICR line as it appeared on the original check at the time that the original check was issued and any additional information that was encoded on the original check's MICR line before an image of the original check was captured; all fields present on the original MICR line must be present on the substitute check. Under the ANSI X9.100-140 standard, a special code in what is known as the EPC (External Processing Code) field or Position 44 is required on all substitute checks. This identifies that the item is a substitute check and that the image of the original check already has been reduced once for printing on the substitute check, and should not be reduced again. The digit aids subsequent parties in processing and potentially creating another substitute check from an image of a prior substitute check.
F.5. Q. Can a bank create a substitute check from an image of another substitute check?
  A. Yes. The formatting of the second substitute check must conform to ANSI X9.100-140. Creating a substitute check from an image of a substitute check will require the bank to "clip" certain areas of the original substitute check to be placed on the subsequent substitute check.
F.6. Q. Can a substitute check be an electronic record?
  A. No. By definition a substitute check must be a piece of paper. An electronic file is not a substitute check.
F.7. Q. Can a bank create a substitute check for its customer, based on the receipt of an image file?
  A. Yes. Regulation CC clarified its definitions for Transfer and Consideration to allow a paying bank to produce a substitute check for the drawer and a depositing bank to produce a substitute check for the depositing customers.
F.8. Q. What are the special codes required in the EPC field (position 44 ) of the substitute check?
  A. A number placed in Position 44 is called the External Processing Code (EPC). Position 44 is just to the left of the RT/ABA routing number, on the MICR line. Both Regulation CC and the X9.100-140 standard require certain values in the EPC field for processing substitute checks.

Whenever a substitute check is created, a "4" is always printed in the EPC field in the MICR line of the substitute check. ANSI X100-140 requires that a "4" be placed in the EPC position identifying a substitute check. On an original check, Position 44 generally is left blank for forward collection, however if there is a value in that position it will be replaced with a "4". When a substitute check is created to return the check to a depositor, the substitute check will have a "4" in the EPC field in the MICR line of the substitute check. All substitute checks must have a "4" in the EPC field.

For a qualified return of an original item a "2" is placed on a qualified return strip. ANSI X9.100-140 requires that a "5" be placed in the EPC position for qualified returns of substitute checks. In the return process, a "5" is placed on the qualified return strip, or perforated strip attached to a substitute check.

F.9. Q. How will a bank know how to create a substitute check that conforms to the requirements of the Regulation?
  A. An ANSI standard has been developed for substitute checks, known as ANSI X9.100-140 - Specifications for an Image Replacement Document (IRD). ANSI X9.100-140 is recognized by the Federal Reserve as the exclusive substitute check standard. This standard describes exactly where on the substitute check all the required information must be placed. It can be obtained through X9 or ANSI.
F.10. Q. If the MICR line information on a substitute check must be repaired, are there any special considerations of which a bank should be aware?
  A. The Act does not expressly address the issue of MICR line repair. The Act does require the full MICR line from the original check when captured to be on the substitute check, except as variations are permitted under industry standards. If the reconverting bank fails to include the full and correct MICR line information, subsequent recipients of the substitute check may have warranty claims against that bank, if as a result of that failure the substitute check is determined not to accurately represent all of the information on the front and back of the original check as of the time it was truncated.
F.11. Q. Are there any special considerations of which a bank should be aware when returning a substitute check?
  A. Yes. Under the ANSI X9.100-140 standard, if a bank is returning a substitute check and is creating a qualified return item, which usually requires the identification of that item with a '2' in position 44 on the qualified return strip, it will now be required to use a '5' in that position.
F.12. Q. Are there any circumstances in which a qualified return of a substitute check does not contain a "5" in position 44?
  A. No. ANSI X9.100-140 requires that a "5" be placed in the EPC position for all qualified returns of a substitute check. In the return process, a "5" is placed on the qualified return strip, or perforated strip attached to a substitute check. Whether a returning bank creates the substitute check or the returning bank receives a substitute check through inclearings and returns that item, the "5" must be in position 44.
F.13. Q. If a bank receives a substitute check for forward presentment and needs to return it, but does not have the capability of creating a substitute check what do they do?
  A. A strip can be applied to a forward substitute check for returns, just like any other check. The qualified strip must contain the "5" rather than the "2" in position 44.
F.14. Q. If there is nothing on the back of the original check, must the substitute check contain an image of the back of the original check ?
  A. Yes. Regulation CC and the X9.100-140 standard are very specific that a substitute check must contain an image of the back of the check, regardless of what does or does not appears on it.

G Relationship to Other Laws, Regulations and Rules

G.1. Q. How does the Check 21 Act relate to Regulation E?
  A. There is no direct relationship of Check 21 Act to Regulation E. Check 21 Act is Federal law, but other than the special provisions for substitute checks under the Act a substitute check is governed under all applicable check law from beginning to end, and all rights and obligations of check law stays in place for substitute checks. This check law can include the Uniform Commercial Code, the Federal Reserve's Regulations CC and J and the Federal Reserve's Operating Circular. Electronic debits initiated by paper check are excluded from Regulation E coverage; and Reg. E coverage only applies when the payor's account is a consumer account.
G.2. Q. How does this Act relate to other law?
  A. This Act supersedes any provision of Federal or State law that is inconsistent with the Act. A substitute check that is the legal equivalent of the original check is subject to any provision of check law as if it were the original check to the extent such provision of law is not inconsistent with the Act.
G.3. Q. How does Check 21 relate to NACHA rules?
  A. There is no relationship between Check 21 and NACHA Rules. NACHA Rules cover ACH payments. Under the NACHA rules, checks can be converted into ACH transactions, these check conversions are not check truncation as envisioned under Check 21. All check conversion applications are covered by NACHA rules.

H ANSI X9.100-140

H.1. Q. What is the relationship between Regulation CC and ANSI X9.100-140?
  A. In Regulation CC, the Board stated that ANSI X9.100-140 is the exclusive standard for substitute checks. The Board also left the details regarding permissible MICR line variations up to ANSI X9.100-140.
H.2. Q. Where must the return reason appear on the substitute check?
  A. When a substitute check used for a returned check is created, the return reason must be included in text below the required legend to the left of the image. The return reason code must also be printed as an overlay or stamped on the front of the check.
H.3. Q. Does X9.100-140 require the legend that states "This is a LEGAL COPY of your check. You can use it the same way you would use the original check." be printed on all IRDs?
  A. Yes. The standard requires this legend be printed on all IRDs. The legend is one of two requirements for a substitute check to be the legal equivalent of the original check.
H.4. Q. What are the allowable MICR line variations from the original check when creating a substitute check?
  A. The Federal Reserve acknowledged the highly technical nature of the MICR line and its important role in check processing and left the details regarding permissible MICR line variations up to the X9.100-140 standard. The allowable variations include:
  • The reconverting bank can make corrections to a MICR line if they know there is an error in the MICR line information of the original check. Any corrections made by the reconverting bank are subject to the encoding warranties of UCC and Regulation CC.
  • A reconverting bank does not have to reproduce blank spaces within the MICR fields from the original check.
  • Position 44 from the original check if not blank will be changed on a substitute check.
  • Reproduction of inadvertent misreads from the original check, will not effect the status of the substitute check.
H.5. Q. Do the MICR symbols from the original check need to appear on the substitute check?
  A. Yes. All MICR symbols including the R/T, on-us and dollar symbols must appear on the substitute check as it appeared on the original check. Dashes from the original check must also appear on the substitute check.
H.6. Q. If a substitute check does not contain MICR ink, is it still a substitute check?
  A. Under certain conditions a substitute check without MICR ink would still be the legal equivalent of the original check. Banks are allowed to return paid substitute checks to their customers that do not contain MICR ink. However these substitute checks must conform to all other requirements of the standard including the proper size and paper for substitute checks.

I Customer Service/Education

I.1. Q. Will customers still be able to receive their cancelled checks?
  A. Yes. If their bank offers this service, however, some of these checks may be substitute checks. The Act provides that these substitute checks are the legal equivalent of the original checks for all purposes, including state laws and customer agreements that require the return of cancelled checks.
I.2. Q. If a customer needs to obtain an original check that has been converted to a substitute check, how can the customer go about locating it and gaining access to it?
  A. There is no requirement that an original check be retained or provided to the customer. Banks typically provide their customers with a copy of a paid check upon request. A bank is required to provide the original check or a copy of the original check in connection with expedited recredit claims by consumers. Other provisions of the Act and Regulation recognize that the bank can provide either the original check or a copy of the original check. A copy of the original check could be a substitute check or a copy of a substitute check.

J Proof of Payment

J.1. Q. What should be done if a business refuses to accept the substitute check from a customer as proof of payment?
  A. While there is no requirement for any notification or education to any party other then consumers, it may be helpful for banks to also educate their business customers as to the legal equivalency of the substitute check. Initially in situations like this, the bank may determine to help their customer explain to the business that the substitute check is the legal equivalent of the original check.
J.2. Q. Can businesses, courts, or governmental organizations refuse to accept substitute checks as proof of payment?
  A. No. A substitute check that meets all the requirements of the Act, Regulation and standard is the legal equivalent of the original check and must be accepted as proof of payment.
J.3. Q. What remedies are available to check writers should businesses, courts, or governmental organizations refuse to accept the substitute check as proof of payment?
  A. There are no specific remedies for this type of situation within Check 21. A customer's remedies are the same as they are today when some entity refuses to accept a proof of payment. However, based on the newness of this program, the customer's bank may elect to help in educating the entity that substitute checks are the legal equivalent to the original check.
J.4. Q. Does a bank have to provide a substitute check when a customer asks for a copy of his check?
  A. No. There is no requirement in Check 21 that a bank must provide a customer a Substitute Check when they ask for a copy of his check. A bank can provide the customer with an image copy, but should make sure that it states it is a copy particularly if it is a copy of a Substitute Check.

K Security Features

K.1. Q. Who is liable if an original check had a security feature that did not survive when the substitute check was created and a loss occurred because of the lack of that feature?
  A. Check 21 does not expressly address issues relating to security features on substitute checks. The aggrieved party may, depending on the facts and circumstances have a claim under the Act's indemnity provisions against any indemnifying bank, because the loss arguably would not have occurred if the aggrieved party had received the original check instead of the substitute check. The loss of the security feature also may involve a warranty breach if it is determined that because of that lost security feature the substitute check did not accurately represent all of the information on the front and back of the original check as of the time it was truncated. It is anticipated that image and substitute check survivable security features will be developed to replace existing security features that will not survive on the substitute check.
K.2. Q. Are there security features that will be used in place of the physical ones that will be lost due to imaging?
  A. The industry is working on a number of "image survivable" security features that will provide similar protections against loss to current paper check security features provide.
K.3. Q. How will Check 21 affect thumbprints on checks?
  A. Some reluctance has been expressed by District Attorneys that do not want to prosecute based on imaged thumbprints. Thumbprints don't image well enough to be usable. There is not enough detail that survives the image process.

L More Information

L.1. Q. How do I get more information on improving the efficiency of the check payment system including Check 21, its processing and business implications, image exchange, image rules, and reduction in bad check write-offs and membership in ECCHOTM?
  A. Visit the ECCHOTM website at www.eccho.org or contact ECCHOTM directly at (214) 273-3200.


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