Check 21: What Community Bankers Must Know Viveca Y. Ware VACB Check 21 An Update January 13, 2004.

Check 21: What Community Check 21: What Community Bankers Must KnowBankers Must Know

Viveca Y. WareVACB

Check 21 An Update

January 13, 2004

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Today’s AgendaToday’s Agenda

• Check 21– Background– Overview– Substitute Checks– Expedited Recredit– Consumer Awareness– Opportunities and Challenges– Resources

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Check 21: Check 21: BackgroundBackground

• In 2000, Federal Reserve PSDC suggested development of a new law intended to promote check truncation

• Fed collaborated with industry stakeholders to develop proposal

• Chairman Greenspan sent legislative proposal to Capitol Hill in December 2001

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Check 21: Check 21: OverviewOverview

• Check Clearing for the 21st Century Act, a/k/a Check 21, is the most significant federal check law in recent times

• Effective October 28, 2004

• Check 21 is a catalyst that can promote wide scale check truncation and a more efficient check-clearing system

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Check 21: Check 21: OverviewOverview

• United inter-industry support– Commercial banks of all sizes– Credit unions– Check processors– Clearinghouses– Equipment manufacturers– Federal Reserve Board of Governors

• Unanimous Congressional support

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Check 21: Check 21: What It DoesWhat It Does

• Authorizes a new negotiable instrument – a substitute check – and establishes its legal framework

• Allows the optional removal of the original paper check from the clearing & settlement process

• Allows optional electronic check processing by transmitting check images in lieu of original paper checks

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Check 21:Check 21:What It DoesWhat It Does

• Permits creation of substitute checks for those banks not equipped to receive and process check images

• Grants a substitute check the legal equivalence of the original paper check

• Eliminates need for customers to agree to check truncation

• Eliminates need for bank-to-bank truncation agreements

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CHECK 21:CHECK 21:What It Does Not DoWhat It Does Not Do

• Mandate the use of imaging for check clearing and settlement

• Mandate any other type of electronic check processing

• Customers receiving image or other descriptive statements would not be subject to provisions

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Check 21: Check 21: RegulationsRegulations

• Proposed implementing regulations released

• Proposed regulations amend Reg CC and its commentary by adding a new subpart D

• Comments are due by March 12, 2004

• www.federalreserve.gov

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Check 21: Check 21: Substitute ChecksSubstitute Checks

• Paper reproduction of the original paper check that:– Accurately represents all of the

information on the front & back of original check, including all MICR information (except position 44) and all prior endorsements

– Conforms to industry standards• X9.37, X9.90, X9.13

– Contains a legend: “This is a legal copy of your check. You can use it the same way you would use the original check.”

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• Must include:– Reconverting bank identification– Preserve all previous reconverting

bank identifications– Preserve all previous endorsements

• Parties must accept substitute checks as long as requirements are met

• Processed in same manner as the original paper check

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Check 21: Check 21: Substitute ChecksSubstitute ChecksSource: ECCHOSource: ECCHO

AN

SI X

9.90

DST

U

Front

Back

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• Checks eligible to become substitute checks– Consumer checks– Corporate checks– Government warrants– US Treasury checks– Money orders– Controlled disbursements– Payable through drafts– Traveler's checks

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• Bank could use electronics for processing & transmitting images to allow printing substitute checks closer to the receiving bank

• Banks could reduce physical sorting by sorting items electronically and printing substitute checks for return processing

• Branch and ATM deposits could be transmitted electronically to processing centers that print substitute checks and reduce or eliminate some transportation

Source: ECCHO

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• Legal Framework – Creates warranty structure to protect

against the risk of increased losses that may occur with the use of substitute checks• Meets legal equivalence requirements• No duplicate payments

– Reconverting bank and each subsequent bank handling the substitute check grant these warranties

– Similar to ACH origination framework

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• Legal Framework– Creates indemnity structure for

addressing losses resulting from use of substitute check in lieu of original check• Breach of Warranty

– Does not meet legal equivalence standards– Duplicate requests for payment– Indemnity Amount

» Amount of Loss» Reasonable Legal Fees, Interest, Other Costs

• Without Breach of Warranty– Indemnity Amount

» Amount of Substitute Check» Reasonable Legal Fees, Interest, Other Costs

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Check 21: Check 21: Substitute ChecksSubstitute Checks• Legal Framework

– Limits Indemnifying bank liability for losses if the original check or copy of the original check is produced that: • Accurately represents all the information on the

original check; or• Otherwise is sufficient to determine the

validity of the claim.– Liable for losses up to when the original

or copy is provided• Funds in excess of this amount must be returned

– Recoveries from other parties permitted– Indemnified party must comply with all

reasonable requests for assistance/information

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Check 21: Check 21: Expedited Recredit Expedited Recredit

• Consumers may obtain expedited recredit in cases where presentment of a substitute check created a loss and producing the original check or better copy is necessary to resolve the claim

• Consumer does not need to physically possess substitute check

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• Consumers can file claims within 40 days of the later of:– Date account statement is mailed or

delivered– Date substitute check is made

available to consumer

• Claim period may be extended due to extenuating circumstances, including consumer illness or extended travel

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• Consumer must provide:– an explanation of why a loss

occurred/claim description– estimated amount of loss– why production or the original check

or substitute check is necessary– Information to identify the check

• Account-holding bank may require claim to be made in writing

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• If account-holding bank determines claim is valid:– must produce the original check or

substitute check and show that the substitute check was properly payable; OR

– must recredit the consumer’s account for substitute check amount up to $2,500 plus interest no later than 10 business days

• Recredited funds must be available for consumer’s withdrawal on the next business day after the recredit date

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Check 21: Check 21: Expedited RecreditExpedited Recredit

• Amounts over $2,500 must be recredited as soon as the bank determines the claim is valid, but no later than 45 calendar days from the claim date

• Funds availability can be delayed for 45 business days if – claim is made within 30 days of

account opening– account has repeated overdrafts– claim is believed to be fraudulent

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• Recredited reversals permitted if claim was not valid:– Must notify consumer– Provide original check or sufficient

copy to consumer– Provide reversal amount and date of

reversal

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• Claimant bank can file an expedited recredit claim against an indemnifying bank if:– Received expedited recredit claim or

would have been subject to such a claim if the consumer’s account were charged;

– Loss suffered or must recredit consumer; and

– Producing the original check or better copy is necessary to resolve claim

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Check 21: Check 21: Expedited Recredit Expedited Recredit for Banksfor Banks• Claims must be submitted to an

indemnifying bank within 120 days of the transaction date that gave rise to the claim

• Recredit reversals should be promptly refunded to the indemnifying bank

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Check 21: Check 21: Expedited Expedited Recredit for BanksRecredit for Banks• Indemnifying bank must respond with 10

business days– Provide original check or sufficient

copy– Recredit claimant bank (including

interest)

• Procedures can be varied by agreement

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Check 21: Check 21: Consumer Consumer AwarenessAwareness• Banks must provide consumers with a

notice:– Substitute check is the legal equivalent of

the original check– Expedited recredit rights

• Notices Distribution– No later than first-regularly scheduled

mailing to existing customers after 10/28/04

– Account opening– Substitute check copy request– Returned substitute check

• FRS regs will include model notices

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Check 21: Check 21: PreparationPreparation

• Banks do NOT have to:– Change any current relationships– Capture images– Image-enable day two and/or back

office applications– Image enable ATMs and branches– Participate in image exchanges– Purchase image hardware or software– Purchase any hardware of software– Hire consultants to a Check 21 plan Source: ECCHO

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• Banks should:– Become familiar with the new law and

implementing regulations– Educate staff

• Plan for customer education• Develop internal expedited recredit

procedures

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Check 21:Check 21:PreparationPreparation

• Take an objective look at existing check processing with an eye for improvement and adaptation– Factor in:

• Paper check volume is declining and will continue to do so

• Unit cost for processing paper will increase

• Costs and risks of deploying new technologies

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• Research and understand correspondent bank and processor processing models

• Understand processing options

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• Collecting/depository banks– Continuing to send original paper

checks– Converting all paper checks to images– Converting some paper checks to

images– Creating substitute checks for paying

banks that have chosen not to accept image files

– Utilizing MICR line info (ECP) for clearing and settlement• Images to follow for informational purposes• Images held in central repository

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• Paying banks– Continuing to process paper checks –

originals and substitutes– Accepting image files– Creating image return files– Accepting ECP files

• Images to follow for informational purposes

• Images held in central repository

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Check 21: Check 21: ImplementationImplementation

• Minimum– Staff Training– Customer Awareness– Expedited Recredit Procedures– Substitute Check Qualified Returns• Place “5” in position 44 instead of

“2”

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Check 21: Check 21: OpportunitiesOpportunities

• Long term, Check 21 facilitates more efficient check processing– Infrastructure– Staffing– Transportation

• Benefits– Faster check clearing– More sophistication fraud detection

capability– New sources of non-interest income

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Check 21: Check 21: The ChallengeThe Challenge

Re-engineering the check clearing process to reap the opportunities and benefits

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Check 21: Check 21: AdviceAdvice

• Check 21 will affect all FIs over time whether changes are made to existing check operations

• Premature to make any technology, hardware, or processing decisions

• Understand the opportunities and challenges before taking action

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Check 21 Check 21 ResourcesResources

• www.icba.org– under construction

• www.eccho.org• www.x9.org• www.frbservices.org/Retail/Check

21.html

Contact InformationContact Information

Viveca Y. Ware800/422-8439, ext. [email protected]

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Check 21: What Community Bankers Must Know Viveca Y. Ware VACB Check 21 An Update January 13, 2004.

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