1 preparing for check 21 icba national convention march 15, 2004 david walker [email protected]
TRANSCRIPT
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Topical Agenda Overview of the Check 21 Act
Proposed Regulation
Overview of Standards
Thinking Differently About Checks
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Passed by U.S. House and Senate– No opposition in House– Unanimous consent in Senate
President Signed– October 28, 2003
Effective Date– October 28, 2004– There are some actions that you
must complete before October 28th
Status of Check 21
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Can banks opt-out of Check 21? No! Can bank customers opt-out? No! Can governmental organizations opt-
out?– No! All checks eligible for replacement by
substitute check Do banks have to accept substitute
checks presented to them?– Yes, they are the legal equivalents of the
original checks Preserving the status quo is not an
option– All checks are in and all banks have impact
Preserving Status Quo?
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Encourage check truncation by allowing unilateral decisions to truncate paper checks– Unlike current environment with
requirement to obtain agreements from all the parties (tens of millions)
But without mandating the receipt of electronic transactions
Challenge
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Create a new legal instrument to replace the original paper check 1)For those customers that have not
agreed to check truncation and want to receive their paid checks
2)For those banks that have not agreed to receive electronic check files
“Substitute Check” becomes the legal equivalent of the original check
Check 21 Solution
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Original Check
VOID – IRD TEST SAMPLE
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Substitute Check / IRD
Do not endorse or write below this line.
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[053000183] 01/03/2002
1800539446
*123456789* 01/04/2002
123456789012345
Back
Front
This is a legal copy of yourcheck. You can use it the same way you would usethe original check.
*123456789*01/04/2002
123456789012345
[053000183] 01/03/20021800539446
VOID – IRD TEST SAMPLE
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9
Example - Collections
Intermediary
Paying Bank
BOFD
Traditional Paper Collection
Check Check Check
Intermediary
Paying Bank
BOFD
Sub Ck
Substitute Check Collection
Check Check
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Substitute Check / IRD Designed to be processed as if it were
the original paper check Substitute check is the legal equivalent
of original check for all purposes if:– It contains images of front & back of check– Conforms to industry standards
MICR Physical characteristics of checks
– Suitable for automated processing– Must accurately represent all information on original check– Bears legend– Includes all indorsements– Includes identification of party creating it
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ALL CHECKS are eligible for replacement with substitute checks, for example: – Retail checks– Non retail checks– Government warrants– Treasury checks– Money orders– Controlled disbursement– Payable through drafts– Etc.
Eligible Checks?
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Only checks replaced with substitute checks are covered by the Act
Not all truncated or safekept checks are covered by the Act– For example, original checks truncated or
safekept under agreement are not covered by the Act
Act is designed to encourage truncation and it is not needed if customer already agreed to not receive their checks back
Checks Covered?
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Myth – Check 21 validates the exchange of check images
Reality – Check 21 does not address exchanges
under agreement such as ECP or image exchanges
Confusion– Check 21 is dependent on the use of
image technology for substitute checks but– Does not cover image exchanges between
banks or their customers
Myth & Reality
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Major Provisions of Act Bank that creates the
substitute check warrants1) Substitute check meets all
requirements for legal equivalency2) No double debit
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Major Provisions of Act Indemnification
– Bank that creates substitute check and each subsequent bank indemnifies all parties for loss, if loss is due to receipt of substitute check instead of original
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Major Provisions of Act Indemnification Creates Risks
– Warranty Breach - Consequential damages rests with bank that creates substitute check
– No Warranty Breach - Bank that creates substitute check can limit liability, if it produces original check or copy of original check on request
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Expedited Recredit – New Protection For Consumers– May make claim under Act for
Substitute Check that was not properly charged to their account or for a warranty claim, and
– The consumer suffered loss, and– The original check or copy of original
check is necessary to determine validity
Major Provisions of Act
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Expedited Recredit
PAYING BANK
RECONVERTING BANK
CLAIM CLAIM
40 DAYS
$$$10 DAYS
10 DAYS
ConsumerStatemen
t
1) Paying bank must provide consumer with original check, copy of original check or recredit within 10 days of claim up to $2,500 per check
2) Amounts > $2,500 must be recredited to consumer within 45 days
3) Paying bank must make claim to reconverting bank within 120 days of of transaction that gave rise to claim
4) Reconverting bank must provide recredit, original check or copy within 10 days of paying bank claim
120 DAYS
Check, Copy
or $$$ SUBSTITUTE CHECK
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Expedited Recredit– Bank may withhold availability in
Reg CC like exception situations New accounts, excessive ODs, or cause to
believe fraud Bank may withhold availability for 45 days
– Bank must notify Consumer of delay in availability Bank cannot charge OD fees for five days
Major Provisions of Act
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Consumer Awareness Requires that Notice be Provided to
– Existing customers who receive original checks or substitute checks with statement
– New account holders– Consumers who request copy and receives
substitute check Notice May be Provided by U.S. Mail
or other Means as Agreed by Consumer
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Consumer Awareness Model Language
– Fed Board of Governors shall publish model forms and clauses that a bank can use
– Safe harbor Bank shall be in compliance with Act if the
notice uses the model form or clause published by the Fed– As long as it accurately describes bank’s
policies and practices
– Bank is not required to use Fed’s model language
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New Regulation Federal Reserve may prescribe
regulations to implement, prevent circumvention or evasion of, or facilitate compliance with the provisions of this Act
Fed proposing new subpart D in Regulation CC
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Fed Issued Request for Comment on December 22, 2003– Comments were due March 12,
2004– Proposal consists of
Mostly Check 21 related issues Also included some additional changes to
Reg CC Requested comment of whether Reg CC
should add provisions for unsigned demand drafts
Proposed Regulation
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Potential Risk to Bank Non-banks create risk under Check 21
CUSTOMERPAYING BANK
BOFD RECONVERTI
NG BANK
NON-BANK CUSTOMER
CHECK
IRD IRDAt Risk
- not carried back to original imager of the item - Need Customer Agreement
Reconverting bank makes warranties & indemnifications
Warranties & Indemnifications
IRD
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Potential Risk to Bank Image Risk & Check 21 - collections
CUSTOMERPAYING BANK
RECONVERTING BANK
COLLECTING BANK (BOFD)
CHECKand/or
X9.37
IRD IRDImage
1) Check 21 covers these relationships2) Reconverting bank makes warranties & indemnifications to other parties
Warranties & Indemnifications
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Potential Risk to Bank Image Risk & Check 21 - collections
CUSTOMERPAYING BANK
RECONVERTING BANK
COLLECTING BANK (BOFD)
CHECKand/or
X9.37
IRD IRDImage
At Risk
- not carried back to original imager of the item
Reconverting bank makes warranties & indemnifications
Warranties & Indemnifications
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Risk avoidance – ECCHO Rules
Potential Risk to Bank
1) ECCHO rules covers these relationships
PAYING BANK
RECONVERTING BANK
COLLECTING BANK (BOFD)
CHECKand/or
X9.37
IRD
CUSTOMER
IRDImage
2) Reconverting bank’s warranties & indemnifications ARE carried back to original imager of the item
Warranties & Indemnifications
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Potential risk to bank Need both Check 21 & ECCHO Rules
PAYING BANK
RECONVERTING BANK
COLLECTING BANK (BOFD)
CHECKand/or
X9.37
IRD
CUSTOMER
IRDImage
2) Check 21 covers these relationships
1) ECCHO rules covers these relationships
Need a common, national set of image exchange rules
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Industry Recognitions Recognize and support ECCHO as national
provider of ECP and image exchange rules
AlogentAmerica Banker AssociationAmerica’s Community BankersAQUBANC, LLCAurum Technology Inc.BancTecBAIBearingPoint, Inc.BITSCarreker CorporationCheck Payments Systems AssociationComputer Services, Inc.Data Support ServicesEDS Information ServicesElectronic Clearing ServicesEmpire Corporate FCUFiservFSTCIBM
ICBA - Independent Community Bankers of AmericaIPSOMobius Management Systems, Inc.National Clearing House AssociationNetDeposit, Inc.NCRPayments Resource OnePuerto Rico Clearing House AssociationSmall Value Payments CompanySymcor, Inc.TAWPI Great Lakes ChapterTronitechThe Clearing HouseThillensUnisysVECTORsgiViewpointe Archive ServicesWespay
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DSTU X9.90
Purpose– A specification for an IRD that provides
for a machine-readable substitute document created from the image that is made from the front and back of the original check or a previous IRD
Specifications for an Image Replacement Document – IRD
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DSTU X9.90
Highlights– Front and back check image size, on
original IRD, is maintained on subsequent IRDs
– Maintains physical and electronic endorsements chain
– Identifies original check truncator and IRD creator
– Supports return information– Supports optional data– Uses EPC digit for identification as an IRD -
(4 forward, 5 return)
Specifications for an Image Replacement Document – IRD
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DSTU X9.90
Do not endorse or write below this line.
>031000011< 01/02/2002
7815830233
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DO
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/ WR
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/ ST
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FO
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CC
OU
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234
56
789
01
23
NO
RTH
PO
LE, IN
C.
[053000183] 01/03/2002
1800539446
*123456789* 01/04/2002
123456789012345
Back
Front
This is a legal copy of yourcheck. You can use it the same way you would usethe original check.
*123456789*01/04/2002
123456789012345
[053000183] 01/03/20021800539446
VOID – IRD TEST SAMPLE
AN
SI X
9.90
DST
U
33
Payments Perspectives Developments in check payments
have been limited by the law– Check law primarily UCC based and the
UCC evolves very slowly– Without changes in the law, evolution is
limited by agreements (tens of millions) Developments in non-check
payments have not been limited artificially– Most notable advancements have been in
expansion of ACH at point of purchase and lockbox
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Payments Perspectives Check law now changing rapidly
– 1999 Reg CC now allows electronic check returns (with agreement)
– 2001 Uniform Electronic Check Transaction Act (UETA) - State law that validates electronic records (including checks) with same weight as paper documents
– 2002 E-Sign Act – Federal law that validates electronic records (including checks) with same weight as paper documents
– 2003/2004 – Check 21 creates new legal instrument that is image based
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Payments Perspectives Recent changes the law unshackle
check payments so they can now evolve and use new technology– To create new bank revenue through new
products and services for customers– To improve bank expenses, improve
internal processes and accelerate collections and returns
Two key characteristics of checks– Fast – no limits on collection speed– Information rich
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Need More Information Accurate and updated Check
21 Information on ECCHO Website– www.eccho.org– Implementation Aids
FAQ – Available Description and Overview -Available Minimum Compliance Requirements -
Available Processing and Quality Standards -
Available Endorsement Chain - Available
