Spring 2004-11 Check Clearing for the 21st Century Act

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Number 55
Spring 2004
FDIC proposed rule

Check Clearing for the 21st Century Act

The Federal Deposit Insurance Corporation has proposed a rule to implement the recently-enacted Check Clearing for the 21st Century Act, 12 U.S.C. §§ 5001-5018. This law supersedes any provision of federal or state law, including the Uniform Commercial Code, that is inconsistent with its terms, but only to the extent of the inconsistency.

Substitute checks

Under the current law, a collecting bank must present for payment an original paper check, absent an electronic presentment agreement with the paying bank. Some institutions frown on electronic presentment. The "Check 21 Act" and the proposed FDIC rule accommodate both positions by authorizing the use of a new negotiable instrument called a "substitute check." The bank that creates the substitute check, or the first bank that receives and transfers a substitute check created by a person that is not a bank, is called the "reconverting bank."

A reconverting bank must identify itself as such on the substitute check and must preserve the endorsements of parties that previously handled the check in any form.

A substitute check is a paper reproduction of an original check (both front and back) that carries the warranty of the bank that uses it to the effect that:

the image is accurate and

no person will be asked to pay a check that already has been paid.

A substitute check for which a bank has made these warranties is the legal equivalent of the original check for all purposes and all persons.

Substitute checks 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."

Losses associated with a substitute check are borne by the party that caused the problem with the substitute check. The reconverting bank will be the first bank to provide the warranties stated above, and the first bank in the chain of indemnifying banks, and, thus, ultimately should bear the loss traceable to a problem that existed as of the time the substitute check was created. However, banks may contractually further allocate liability amongst themselves; therefore, by agreement, a reconverting bank may pass some or all of its loss.

This system allows a bank in California, for example, to transfer check information electronically to a bank in New York with whom its has an electronic presentment agreement, which would then create a substitute check for presentment to a paying New York bank with whom the California bank does not.

Customer awareness

Banks must provide a disclosure to its consumer customers that describes (a) that substitute checks are the legal equivalent of an original check, and (b) the recredit rights described below. Disclosures must accompany periodic account statements not later than the in first mailing after October 28, 2004, for consumers who are customers on that date. Disclosures must be delivered to new consumer customers when they establish accounts after October 28, 2004.

Expedited recredit procedures

The proposed rule sets forth expedited procedures for the recredit of accounts debited for substitute checks object of a claim.

A depositor may file a claim with the bank until the end of the 40th calendar day after mailing of his periodic account statement or the substitute check. The period may be extended by a reasonable amount of time because of extenuating circumstances. If the bank determines the claim to be valid, then it must recredit the account for the amount of the substitute check plus interest (if the account bears interest). The recredit must take place not later than at the end of the business day after the banking day on which the bank makes the determination of validity. The bank must notify the recredit to the customer.

If the bank determines that the claim is not valid, then it must so inform the customer, together with an explanation for the basis for said determination and the documents on which it based the conclusion.

In the event that it needs more time to make a determination, the bank must recredit the account for up to $2,500 pending investigation, and either recredit the balance or notify invalidity of the claim within 45 calendar days from the original receipt of the claim.

The rule also presents a procedure for expedited recredit among banks.

Legal action

Any person may bring an action to enforce a claim in any United States district court or in any other court of competent jurisdiction. The suit must be brought within one year of the date on which the cause of action accrued, i.e., when the plaintiff first learned (or reasonably should have learned) of the facts giving rise to the cause of action, including the identity of the defendant.


© 2004 Goldman Antonetti