Page 1

Check 21 Presentations

1.

Check Clearing
for the
21st Century Act
Examiner and Industry
Check 21 Compliance
Training

2. Module 1: Overview of Act and Final Regulation

Overview of Act and

Final Regulation

3. Just as in other areas of business, technology is changing

Technological Changes how the financial industry conducts business. The emer-
gence of ATMs and Internet transactions are just two of
the many ways that institutions now use technology to
decrease operational expenses and stay competitive.

4. Industry wide, there are now about 40 billion check trans-

Check Imaging actions a year. Another technology used to cut costs and
reduce risk is check imaging, or electronic check ex-
change—replacing the labor-intensive process of sorting,
transporting, presenting, and reconciling paper checks
with a faster and potentially less error-prone process.
While some financial institutions have rapidly migrated
toward electronic check exchange, others are proceeding
more gradually.
 Page 2

5. In addition to the emergence of check imaging, over the

General Decline In Paper Checks past few years there has been a nation-wide decline in the
Shift from checks to total volume of checks being written. This is because
electronic payments consumers and businesses:
More electronic payment ▪ Have shifted from paper checks to electronic payments
options methods such as debit cards and
– Internet transactions
– ACH conversions ▪ Increasingly used electronic payment options, such as
Internet and ACH transactions for payment.
As a result of these conditions, a situation evolved in
which institutions that wanted to engage in electronic
check exchange on a widespread basis were hampered in
their ability to do so by institutions that were not yet ready
to move forward with the technology.

6. Specifically, barriers to electronic check exchange included:

Barriers
▪ The need to establish formal agreements to collect or
Need for formal agreements return checks electronically, which required an unmanage-
among institutions able number of agreements—among hundreds of institu-
Expense and complexity of tions, and
agreements
▪ Continued insistence by some banks on receiving paper
Resistance to accept check checks, which was slowing down the transition from paper-
imaging based to image-based check processing.

7. Because exchanging check images provides so many

Request For Assistance advantages over using paper checks, financial institutions
and consumer groups worked with the Federal Reserve,
and later with Congress, to develop a legal framework that
would help foster electronic check exchange without
penalizing institutions that were not yet ready to move into
the exchange of electronic images.

8. The result was the Check Clearing for the 21st Century
Check 21 Act Act, which passed on October 28, 2003 to take effect
Passed October 28, 2003 October 28, 2004.
Effective October 28, 2004
 Page 3

9. The law is designed to foster the transition from paper-

Check 21 Act based to image-based processing—a transition that is
expected to accelerate over the next few years, as banks
and consumers gain experience and confidence in the new
paperless process.

10. Generally referred to as the Check 21 Act or Check 21, the

Check 21 Act legislation:
Facilitates image processing ▪ Facilitates the use of imaging for check processing;
Fosters innovation in ▪ Fosters innovation in the check collection system; and
collection systems
▪ Improves the overall efficiency of the nation’s payments
Improves overall payment
system.
system efficiency
Does not require electronic The legislation does not require any individual institution
check process to change its current check-processing methods or to
process checks electronically, unless or until it determines
electronic processing is advantageous to its particular
business operation.

11. On July 26, 2004, the Board of Governors of the Federal

Final Rule Reserve System released its final rule amending
July 26, 2004 Regulation CC, Availability of Funds and Collection of
Checks, to implement the Check 21 Act. A new subpart D
Regulation CC
was added that details the requirements of the Check 21
Subpart D Act that apply to banks, provides a model consumer
– Requirements
– Model Awareness Disclosure
awareness disclosure and other model notices for
– Model Notices educating consumer customers about their rights under
– Indorsement and identification the Act, and specifies bank indorsement and identification
requirements for substitute requirements for substitute checks.
checks

12. The primary purpose of the legislation was to facilitate

Substitute Check electronic check exchange by authorizing a new negotia-
ble instrument called a "substitute check."
Front

Substitute checks facilitate electronic check exchange by

enabling a bank to create a substitute check for present-
ment to banks with which it has no pre-existing agreement
to exchange electronic images.
Back

Specifically, the regulation defines a "substitute check" as

a paper reproduction of the original check that contains an
image of the front and back of the original. Since substi-
tute checks are checks, they are subject to existing check
law.
 Page 4

13. In addition, the substitute check must:

SUBSTITUTE CHECK
▪ Bear a MICR line containing all the information from the
Bear standard MICR line, per original check’s MICR line, except as provided in ANS
ANS X9.100-140 X9.100-140 to facilitate the processing of substitute
Conform with ANS X9.100- checks;
140 standard for substitute ▪ Conform in paper stock, dimension, and otherwise with the
checks industry standard for substitute checks; and
Be suitable for automated
▪ Be suitable for automated processing, just like the original
processing check.

14. The regulation provides that a properly prepared substitute

Legal Equivalent check is the legal equivalent of the original check if it:
All front and back information ▪ Accurately represents all of the information on the front
on original check: and back of the original check, including payment, identifi-
– Payment cation, and indorsement information;
– Identification
– Indorsement information ▪ Bears the Check 21 Act’s required legal equivalence
Legal equivalence legend legend that reads, “This is a legal copy of your check. You
Bank warranties can use it the same way you would use the original
check.”; and
▪ Has been warranted by a bank, according to the Check 21
Act warranty requirements with respect to the substitute
check.
A legally equivalent substitute check can be used in place
of an original check, wherever the original check is re-
quired.

15. The interdependent nature of the payments system virtu-

Payments System ally guarantees that every financial institution will at least
receive substitute checks. Therefore, financial institutions
should understand and be prepared to comply with the
relevant aspects of the Check 21 requirements.
Let’s look at just which institutions are subject to Check 21
requirements.

16. The regulation creates a unique definition of bank to

"Bank" include insured banks, mutual savings banks, savings
Insured banks banks, insured credit unions, savings associations, an
agency or a branch of a foreign banks, and members of a
Mutual savings banks
Federal Home Loan Bank.
Savings banks
Insured credit unions
Savings associations
Agency/branches of foreign banks
Federal Home Loan Bank members
 Page 5

17. The definition also includes any person engaged in the

"Bank" business of banking, such as a Federal Reserve Bank or a
Person engaged in the Federal Home Loan Bank, and, to the extent that they act
as a paying bank, the U.S. Treasury and U.S. Postal
business of banking… Service. And, that's the way we'll use the term bank in the
Federal Reserve Bank remainder of the presentation.
Federal Home Loan Bank There are also a couple of other unique definitions that
US Treasury you'll need to know as you view the remainder of the
US Postal Service modules.

18. The regulation uses the term "truncate" to mean removing

Definitions an original check from the check collection process and
Banks replacing it with information from the original check, in-
Truncate cluding MICR line data, whether with or without the subse-
quent delivery of the original check.
Truncating bank
Reconverting Bank The bank that's responsible for truncation of the original
check is called the "truncating bank.”
A "reconverting bank” is defined as the bank that creates a
substitute check or, if a person other than a bank creates
a substitute check, the first bank to transfer, present, or
return a substitute check, or a paper or electronic repre-
sentation of a substitute check.

19. The Check 21 Act is designed so that losses associated

Reconverting Bank Responsibilities with a substitute check are borne by the reconverting
Losses associated with bank. Therefore, there are certain requirements estab-
lished for these banks.
substitute checks
Certain established
requirements

20. Each reconverting bank must:

Reconverting Bank Responsibilities
▪ Identify itself as a reconverting bank on the substitute
Identify itself as reconverting check;
bank on substitute check
Preserve all reconverting bank ▪ Preserve all previous reconverting bank identifications;
identifications
▪ Ensure that the substitute check bears all previously
Ensure substitute check bears applied indorsements; and
all previously applied
indorsements ▪ Identify the bank that truncated the original check.
Identify bank that truncated
original check
 Page 6

21. The law also stipulates that a bank that transfers, pre-
Warranties sents, or returns a substitute check makes two warranties
Legal equivalence warranty under the Act:
Duplicative payment warranty ▪ A legal equivalence warranty—the substitute check meets
the requirements for legal equivalence; and
▪ A duplicative payment warranty—no bank, drawee,
drawer, or indorser will be asked to make a payment on a
check it already has paid.

22. Both warranties apply to substitute checks and paper or

Warranties electronic representations of substitute checks. Whenever
a bank transfers, presents, or returns a substitute check
for which it receives consideration, the bank is automati-
cally making these two warranties. These warranties can
also flow back to the first reconverting bank.
Substitute Substitute
Check Check

Reconverting Paying Customer

Bank Bank
Warranties

23. Banks that transfer, present, or return a substitute check,

Indemnity or a paper or electronic representation of a substitute
For losses suffered from check, also indemnify subsequent parties against losses
receiving substitute check due to the receipt of a substitute check in place of the
instead of original original check. A valid indemnity claim can only be made
check by a recipient of a substitute check.
As with the warranties, the indemnities also flow back to
the first reconverting bank.

24. Now that you have a general background of the provisions,

Modules let's see how the check clearing might work under Check
Overview of the Act and 21.
Final Regulation
Check Clearing Under
Check 21
 Page 7

25. Module 2: Check Clearing Under Check 21

26. As with all checks, the Check 21 clearing process starts

Check 21 Clearing Process with a person writing an original check.
The payee then deposits the check with the Bank of First
Check
BOFD = Deposit or BOFD, which we will call Bank A. Bank A then
Bank A stamps its indorsement onto the back of the original
Check
Image check.
Let's assume that Bank A decides to “truncate” the original
check and send electronic information about the check to
Bank B Bank B; therefore, Bank A is the “truncating bank.”
Of course, in order for this scenario to occur, Bank B must
have previously agreed to accept checks electronically
from Bank A.

27. In order to truncate the original check, Bank A:

Truncating Process

28. ▪ Captures an image of the front and back of the original

Truncating Process check;
Captures front and back of ▪ Captures the magnetic ink character recognition (MICR)
the original check line data from the original check; and
Captures the MICR ▪ Sends the image and MICR line data in lieu of the original
Sends the image/MICR line check to Bank B, its correspondent bank.
data to Bank B
"Correspondent Bank"
 Page 8

29. Bank B applies its indorsement electronically and transfers

Check 21 Clearing Process the check image and MICR line data to Bank C. Again, in
order for this scenario to occur, Bank C must have previ-
ously agreed to accept checks electronically from Bank B.
Check
BOFD =
Bank A

Check
Image

Bank B Bank C

30. Bank C wants to present the check for payment to Bank D,

Check 21 Clearing Process the paying bank. However, Bank D has not agreed to
accept checks electronically.
Check
BOFD = Accordingly, Bank C uses the information received from
Bank B to create a substitute check, and therefore be-
Bank A
comes the reconverting bank.
Check Substitute
Image Check Finally, Bank C presents the substitute check to Bank D
for payment.
Bank B Bank C Bank D

Bank D, the Paying Bank, uses the MICR line data on the
substitute check to process it just like an original check.

31. Bank D may provide the substitute check to its customer,

Substitute Check who wrote the original check, in the customer’s monthly
periodic statement.

Bank D

32. This is only one example of how check processing might

Check 21 Clearing Process work under Check 21. However, the example shows the
variety of options that can occur under the new regulation.
Check
BOFD =
Bank A

Check Substitute
Image Check

Bank B Bank C Bank D

 Page 9

33. In the next module we'll look at the role that compliance
Modules plays in the Check 21 process.
Overview of the Act and
Final Regulation
Check Clearing Under
Check 21

34. Module 3: Consumer Compliance Issues

Consumer Compliance
Issues

35. Banks that provide their consumer customers with can-

Consumer Awareness celled checks in periodic statements need to comply with a
requirement to provide a disclosure of consumer rights
under the new law.

36. Check 21 requires banks to provide this disclosure in a

Consumer Disclosures number of circumstances.
Provide existing consumer
customers disclosure by first ▪ All existing consumer customers who routinely receive
statement after October 28, 2004 cancelled checks in their periodic statement must be pro-
Provide new consumer vided a disclosure no later than the first statement after
customers a disclosure when October 28, 2004.
relationship is established
Provide disclosure to ▪ All new consumer customers who will receive cancelled
consumers who occasionally checks or substitute checks must be provided a disclosure
receive substitute checks when the customer relationship is established.
▪ Consumers who receive substitute checks on an occa-
sional basis must also be provided the disclosure.
 Page 10

37. If a bank provides a substitute check in response to a

Consumer Request For Copy consumer’s request for a copy of a check, the bank must
provide the disclosure at the time of the request, if feasi-
ble, and, otherwise, no later than when the bank provides
the substitute check.

38. If a bank provides a consumer a returned substitute check,

Timing Of Disclosures the consumer disclosure must be provided at the time the
bank provides the substitute check. A bank must provide
the disclosure on these occasional bases even if the
consumer previously received the disclosure.

39. Model language for the disclosure is found in Appendix C

Model Language of the regulation. A bank’s use of this model language
provides a safe harbor for content requirements. Of
XXXVIII.
XXXVIII. Appendix
Appendix C-Model
C-Model
Availability
course the bank’s policies and practices must be consis-
Availability
Policy
Policy Disclosures,
Disclosures, Clauses,
Clauses, and
and Notices;
Notices; tent with the disclosure.
and
and Model
Model Substitute
Substitute Check
Check Policy
Policy
Disclosure
Disclosure and
and Notices
Notices

A.
A. Introduction
Introduction
1.
1. Appendix
Appendix C C contains
contains model
model disclosure,
disclosure,
clauses,
clauses, and
and notices
notices that
that may
may be
be used
used by
by

40. Consumer Awareness is only one of the compliance re-

Legal Requirements quirements set out in the law and regulation. A bank that
Consumer Awareness provides a substitute check to a consumer also must be
Check 21's Consumer prepared to comply with Check 21's Consumer Expedited
Expedited Recredit Rights Recredit Rights for addressing errors relating to substitute
checks.
 Page 11

41. Expedited recredit rights may apply when a bank provides

Expedited Recredit Rights a substitute check to a consumer.
Applies only to “consumers” The provision applies only to “consumers,” not business
not business customers customers, who have received a substitute check and
Applies only to substitute have had a transaction involving a substitute check
checks charged to charged to their account.
consumer deposit Because the Check 21 Act defines “account” as a deposit
accounts account, the expedited recredit procedures only apply to
substitute checks charged to a consumer deposit account.

42. Generally, credit card checks, checks a consumer draws

Not A Trigger on a home equity line of credit, or checks a consumer
Credit card checks draws on a brokerage clearing account would not trigger
Checks drawn on home the expedited recredit rights.
equity line of credit
Checks drawn on a brokerage
clearing account

43. To use the expedited recredit process, the consumer must

Use Of Expedited Recredit be able to assert in good faith that:
Account charged for substitute ▪ The consumer’s account was charged for a substitute
check check that the consumer received;
Account improperly charged
or warranty claim ▪ The consumer’s account was improperly charged or the
consumer has a warranty claim related to the substitute
Consumer suffered loss
check;
Original check or copy needed
to determine claim validity ▪ The consumer suffered a loss; and
▪ The consumer needs the original check or a “sufficient
copy” to determine the validity of the claim.

44. In addition, the consumer must provide:

Consumer Must Provide
▪ A description of why he or she believes the account was
Description of situation improperly charged or the nature of the warranty claim;
Statement of loss and
estimate
▪ A statement that a loss occurred, including an estimate of
the amount;
Necessity of original check or
sufficient copy ▪ The reason why producing the original check or a sufficient
Sufficient identification copy is necessary to determine the validity of the charge;
information and
▪ Sufficient information to identify the substitute check and
to investigate the claim.
 Page 12

45. In determining the amount of loss and related recredits a

Loss And Recredits bank must consider:
Breach of substitute check
warranty or indemnity ▪ If the loss only involved a breach of the substitute check
– Damages up to the amount of warranty, or only involved the indemnity, the claimant is
substitute check
– Interest and expenses
entitled to damages up to the amount of the substitute
Both breach of warranty and check, plus interest and expenses, such as reasonable at-
indemnity torney’s fees and other expenses of representation.
– Damages up to amount of the
substitute check ▪ If the loss involves both a breach of warranty claim and an
– Interest and expenses
– Other proximately caused damages
indemnity claim, the claimant is entitled to damages up to
the amount of the substitute check, plus interest and ex-
penses, as well as other proximately caused damages.

46. A consumer must file an expedited recredit claim so that

Time Limitations the bank receives it within 40 calendar days from the date
Bank receipt within 40 calendar that the bank mailed, or delivered by a means agreed to
days of bank mailing the: by the consumer, the:
– Account statement
– Substitute check
▪ Account statement showing the transaction that gave rise
Required Extensions to the claim or
▪ Substitute check that gave rise to the claim,
whichever date is later.
Banks are required to extend the time limits in extenuating
circumstances, and have latitude under the final rules to
extend the 40-day time period for any reason. A bank may
choose to extend the 40-day time period, so that it paral-
lels the 60-day claim period under Regulation E, which
involves claims for disputed electronic fund transfers.

47. A complaint is not a “claim,” for purposes of the expedited

Claim Versus Complaint recredit procedure, until the claim is complete; and the
bank’s “clock” for responding does not begin to tick until
the consumer submits a complete claim. However, the
bank has a duty to tell the consumer that the complaint is
incomplete and must identify what information is missing.
 Page 13

48. Other bank requirements concerning Consumer Expedited

If bank requires written claim… Recredit Rights include requirements for claims:
Bank must:
– Inform consumer of requirement
▪ If a bank requires a written claim and the consumer at-
– Include requirement in consumer tempts to submit a claim orally, the bank must inform the
awareness disclosure
consumer of the requirement for a written claim at the time
Consumer must submit for the consumer attempts an oral claim. The consumer
receipt within:
– Within 10 business days of awareness disclosure that the bank distributes also should
notification of requirement or inform the consumer of the written claim requirement.
– Within standard 40-calendar-day
requirement ▪ If the bank requires the claim to be in writing, the con-
sumer must submit the written claim so that the bank re-
ceives it either
‫ ־‬Within 10 business days of the date of notification of the
written claim requirement or
‫ ־‬Within the basic 40-calendar-day time period, previously
discussed, for filing a claim
whichever is later.
If an oral claim is made within the 40-day period and the
consumer meets the 10-day written notification require-
ment, the consumer’s claim is timely even if the written
claim is received after the basic 40-day period.

49. Banks have certain options for responding to consumer

Response Options claims. If an expedited recredit claim is received, the bank
must take one of three options.

50. It must:
Response Options
▪ Send a notice of recredit no later than the business day
Notice of recredit – business day after the banking day on which the bank recredits the con-
after banking day of recredit to
consumer account; or
sumer’s account; or
Deny claim - business day after ▪ Deny the claim and demonstrate to the consumer why the
banking day on which determination claim is not valid—no later than the business day after the
is made; or banking day on which it makes this determination; or
Provisionally recredit consumer
account - 10th business day after ▪ If the bank has not determined the validity of the claim by
banking day of receipt of claim the 10th business day after the banking day on which the
bank received the claim, the bank must provisionally
recredit a consumer’s account pending further investiga-
tion.
The bank must provide a notice of the provisional
recredit no later than the business day after the bank-
ing day on which the bank recredits the consumer’s
account.
 Page 14

51. If the bank provisionally recredits a consumer’s account

Provisional Recredits pending further investigation, the bank is required to
Recredit amount of loss - up recredit the amount of the consumer’s loss, up to the
to amount of the substitute amount of the substitute check or $2,500, whichever is
check or $2,500 less. The bank would recredit any remaining amount (plus
Recredit remaining amount - applicable interest) on the 45 th calendar day after receiv-
by 45th calendar day after ing the claim, unless before that time the bank had already
receiving claim made a determination concerning either the validity or
May reverse recredit invalidity of the consumer’s claim.
If the bank later determines that the claim was not valid,
the bank may reverse the recredit. The bank must provide
a notice of reversal of recredit no later than the business
day after the banking day on which the bank makes the
reversal.

52. The Federal Reserve Board has provided model notices in

Expedited Recredit Notices appendix C that banks may use in responding to consumer
expedited recredit claims. Unlike the model consumer
e awareness disclosure, however, use of these model no-
l Notic
Mode tices does not provide banks with a safe harbor.

53. The law also gives banks certain Interbank Expedited

Interbank Expedited Recredit Recredit Rights that allow a bank to recover losses asso-
Recover losses associated ciated with a consumer expedited recredit claim from the
with consumer expedited indemnifying bank that sent the item in question.
recredit claim The claimant bank can submit a claim to cover losses
Claimant bank associated with providing an expedited recredit to a con-
– Within 120 calendar days sumer or another bank involved in the collection process.
Indemnifying bank
– Within 10 days after receipt of
This claim must be submitted by close-of-business on the
the claim 120th calendar day after the claimant bank processed the
problematic substitute check. And the indemnifying bank
has 10 days after receipt of the claim to provide a recredit,
the original check, or a sufficient copy. These provisions
can be varied by agreement.

54. In Module 4, Examination Issues, we'll take a look at how

Modules all of the information we've covered in the previous mod-
Overview of the Act and ules relate to compliance examinations.
Final Regulation
Check Clearing Under
Check 21
Consumer Compliance
Issues
Examination Issues
 Page 15

55. Module 4: Examination Issues

Examination Issues

56. Working within the guidelines of each agency's risk-

Examinations focused examination processes, examiners will generally
focus their Check 21 evaluations on meeting two objec-
tives when evaluating a financial institution’s compliance
with the provisions of Regulation CC:

57. ▪ Determining the financial institution’s compliance with

Compliance Examiners subpart D disclosure notice content and timing require-
Compliance with disclosure
ments, and
notice content and timing ▪ Ascertaining whether the financial institution complies with
requirements timing requirements for acting on a substitute check expe-
Compliance with timing dited recredit claim.
requirements for substitute
check expedited recredit
claim

58. Documents relating to preliminary review of the financial

Review Documents institution’s compliance with the disclosure requirements
Consumer awareness can include, but are not limited to:
disclosures
Samples of substitute checks ▪ The actual consumer awareness disclosure or disclosures
Direct mail ▪ Samples or tests of substitute checks, if available
Expedited recredit claim notices
– Notice of valid claim and refund ▪ Direct mail correspondence and statement stuffers that
– Notice of provisional refund describe Check 21 and/or substitute check implementation
– Denial of claim to customers
– Reversal of refund
▪ Notices relating to expedited recredit claims, such as:
‫ ־‬Notice of valid claim and refund
‫ ־‬Notice of provisional refund
‫ ־‬Denial of claim
‫ ־‬Reversal of refund
 Page 16

59. Review of the financial institution’s training manual, inter-

Review Documents nal audit reports, and board meeting minutes can also
Training manual reveal the extent to which the financial institution’s com-
Internal audit reports pliance risk management program has responded to the
Check 21 provisions.
Board meeting minutes

60. Additionally, interviews with key staff members, including

Review Documents new accounts personnel and deposit operations, can
Training manual identify how effectively the institution’s management has
Internal audit reports communicated its response to this new regulation to the
individuals responsible for ensuring compliance.
Board meeting minutes
Additionally:
Interviews
– New accounts personnel
– Deposit operations

61. The FFIEC has approved examination procedures that

FFIEC Examination Procedures discuss specific steps for examiners to follow when evalu-
ating a financial institution’s compliance with consumer
protection provisions of the regulation. Those examination
procedures are available through the Examination Proce-
dures Link at the top of this training site.

62. The previous modules have presented an overview on:

▪ The Act and final regulation,
▪ The Check 21 clearing process,
▪ Consumer compliance, and
▪ The compliance examination.
The summary module reiterates the main points we've
covered under each of these topics.
 Page 17

63. Module 5: Summary

Summary

64. One way to review the material we've covered is to sum-

Modules marize just what Check 21 does and what it does not do.
Overview of the Act and
Final Regulation
Check Clearing Under
Check 21
Consumer Compliance
Issues
Examination Issues

65. Check 21 does:

Check 21 Does …
▪ Create a new negotiable instrument (called a substitute
Create a new negotiable check)
instrument
Establish a substitute check as ▪ Establish that a properly prepared substitute check is the
legal equivalent of original check legal equivalent of the original check
Make any check eligible to
▪ Make any check eligible to become a substitute check
become a substitute check
Require banks to accept legally ▪ Require banks to accept legally equivalent substitute
equivalent substitute checks checks as they would an original check

66. Check 21 does not:

Check 21 Does Not…
▪ Require banks to accept check images, which must still
Require banks to accept check
images take place under agreements
Give legal equivalence to check ▪ Give legal equivalence to check images
images
Mandate check truncation ▪ Mandate check truncation
Mandate destruction of original ▪ Mandate destruction of original checks
checks
Pertain to checks that are ▪ Pertain to checks that are converted to ACH transactions
converted to ACH transactions
 Page 18

67. We can also say that, while the regulation authorizes and
Substitute Checks defines substitute checks, no person or entity is required
Authorized not required to to create a substitute check.
create On the other hand, a properly prepared substitute check
Must be accepted as that a bank has transferred, presented, or returned, is the
negotiable instrument legal equivalent of the original check, and, as such, a
paying bank must accept a legally equivalent substitute
check just as it would the original check.

68. The Act and regulation protect recipients of substitute

Recipient Protections checks in three ways.
Two warranties First, Check 21 provides a legal equivalence warranty and
– Legal equivalence warranty a no double debit warranty.
– No double debit warranty
Indemnity against losses due Second, it includes an indemnity against losses due to the
to substitute check receipt of a substitute check in lieu of the original check.
Expedited recredit processes And, third, the regulation provides expedited recredit
processes.

69. The regulation also requires banks to provide consumer

Consumer Disclosures disclosures.
Provide existing consumer
customers disclosure by first
▪ All existing consumer customers who routinely receive
statement after October 28, 2004 cancelled checks in their periodic statement must be pro-
Provide new consumer vided a disclosure no later than the first statement after
customers a disclosure when October 28, 2004.
relationship is established
Provide disclosure to ▪ All new consumer customers who will receive cancelled
consumers who occasionally checks or substitute checks must be provided a disclosure
receive substitute checks when the customer relationship is established.
▪ Consumers who receive substitute checks on an occa-
sional basis must also be provided the disclosure.

70. This concludes our Check 21 compliance training presen-

Conclusion tation. Please visit the Resource Page, FAQ, Examination
Procedures, and the Foundation Document for additional
information.