check 21 presentation

Check 21Version 3June, 2004

www.eccho.org

Topical Agenda Myths and Reality Applications Warranties and Indemnification Compliance Issues

– Consumer Awareness– Expedited Recredit

Other Provisions Standards Rules Versus Act Operational Considerations

– Minimum Requirements Regulation CC to Implement Check 21 Historical Perceptive

Quiz Question You think you know the Act???

– There is mis-information regarding the Act Multiple choice, which one(s), if

any apply Check 21

a) Mandates Check Truncationb) Mandates the destruction of the

original checkc) Grants electronic check images the

same legal status as the original checkd) Grants Substitute Checks (IRDs) the

same legal status as the original check

Another Quiz Question Check 21

a) Allows banks to exchange checks electronically (images)

b) Allows banks to truncate an item and convert it to ACH

c) Makes substitute checks the legal equivalent of original checks

d) Excludes all government checks including Treasury checks and state warrants

Check 21 – The Myths “It is my understanding that

this proposal would require the destruction of the physical check at the bank the check is deposited.”

“…the passage of legislation that will give electronic check images the same validity as paper checks for clearance and settlement.”

Check 21 – The Myths “Check Clearing for the 21st Century in

the House would grant check images the same legal status as paper checks for purposes of clearing and settlement.”

“This proposed legislation will allow a collecting bank … to clear their check-based transactions through … check image exchange presentment.”

And many more examples

Legislation Overview Origin

– Proposed by the Federal Reserve as new federal law

Fed’s Objectives– To facilitate truncation– To foster innovation in check

collection systems without mandating receipt of checks in electronic format

– To improve the overall efficiency of the nation’s payments systems

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

Check 21 – The Reality Relationship between image

and Check 21– Check 21 is dependent on image

technology, but does not provide any legal provisions to check images or image exchange

Check 21 – The Reality Only Applies to “Substitute

Checks”– Image reprints of original paper

checks– Use of substitute checks does not

require agreement between the parties

Check 21 – The Reality Designed to encourage check

truncation by removing key barrier to truncation– Allows unilateral decisions to truncate checks

Unlike current environment with requirement to obtain agreements from all the parties

– Provides for the replacement of a paper check with a substitute paper check For those customers that have not agreed to

check truncation or electronic check files But without mandating the receipt

of electronic transactions

Check 21 – The Reality Included in Legislation

– Check 21 only addresses situations in which banks do not agree to truncation Creates new legal instrument - Substitute

Checks– Designed to be processed exactly as if it

were the original paper check Excluded from Legislation

– Products and services under other agreements Check safekeeping products Other truncation products ECP & image exchanges

ALL CHECKS are eligible for replacement with substitute checks, for example: – Consumer/Retail checks– Business/Non retail checks– Government warrants– Treasury checks– Payroll checks– Money orders– Controlled disbursement– Payable through drafts– Traveler’s checks– Etc.

Eligible Checks?

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?

Why Substitute Checks? Key Benefits

– Primary benefit associated with Act is faster collection and return of checks

– Bank could use electronics for processing and transmitting images for printing of 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 to processing centers to print substitute check and reduce or eliminate some transportation

Collections

Intermediary

Paying Bank

Traditional Paper Collection

Check Check Check

Intermediary

Paying Bank

Sub Ck

Substitute Check Collection

ImageCheck

Return Processing

CUSTOMER PAYING BANK

BOFD RETREIVE CHECKS

Traditional Paper Return

Return Check Return Check

PRINT Sub Ck

PAYING BANK

CUSTOMER Return Sub Ck

Substitute Check Returns

Return Sub Ck

Branch

Remote Depositing

Transit Items

Traditional Paper Collection

Check Check

Branch

Sub Ck

Transit Items

Substitute Check Collection with Branch Capture

Image Exchange

PAYING BANK

BOFD IMAGE

OR Check

Current Image

PAYING BANK

BOFDImage

PRINT Sub Ck

Sub Ck

Image with Substitute Checks

Biller’s Processor

Consumer receives

bill, writes and mails

checkConsumerBill

Non-consumer receives

bill, writes and mails

Check InformationCaptured, Some

Converted to ARC and Checks Stored

CHECKS STORED

ARC &CONSUMER CHECKS

ChecksBiller’s (Collecting) Bank (ODFI)Enters ARC Into ACH Network

& Clears Paper Checks

Paying Bank (RDFI)Post Dr Entry to Customer’s

Account

ACH Operator

ARCARC

Intermediary

And/or

Statement

Lockbox – ARC

CustomerStatements

Statement

Paying Bank Posts Substitute Checks to Customer’s

Account

Sub Ck

Biller’s Depository BankCollects Substitute Checks

All check payments

Captures Check Images,Stores Checks,

Reconverts Images to Substitute Check & Sends Substitute Checks to Bank

STORE CHECKSALL CHECKS

Sub Ck

Lockbox – Check 21 Process

STORE CHECKSALL CHECKS

IMAGES

All check payments

Captures Check Images,Stores Checks & Sends

Images to Bank

Lockbox – Check 21 Process

Paying Bank Posts Substitute Check

to Customer’s Account

IntermediaryPrint (Reconverts)Substitute Check

IMAGES

Sub Ck

Biller’s Depository BankClears the Images

CustomerStatements

Statement

Covered by Check 21

Local Office Corporate Headquart

Corporate Bank

Paying Bank

Deposit Check

ACHACHDeposit Bank

Deposit Reporting

Cash ConcentrationCurrent Concentration

Local Office

IMAGECorporate

Headquarters

Corporate Bank

Paying Bank

Intermediary

Sub Ck

Substitute Cash Concentration

Retail Store

BOFDCorporate Bank

Paying Bank

ACHCheck

Current Point of Purchase

Retail Store

Image Corporate

Headquarters

Corporate Bank

Paying Bank

Intermediary

Sub Ck

Substitute Check Point of Purchase

Point of Purchase

Substitute Checks Designed to be processed exactly as if it were the

original paper check Substitute Check is legal equivalent of original

check for all purposes– Contains image of front and back of check– Conforms to industry standards

MICR Physical characteristics of check

– Suitable for automated processing– Must accurately represent all information on original check– Bears legend– Includes all indorsements– Includes identification of party creating it

Substitute Check/IRD

ANSI X

Check 21 Warranties Bank that creates substitute

checks warrants– Substitute check meets all

requirements for legal equivalency– No double debit

Check 21 Indemnification Bank that creates substitute

check and each subsequent bank indemnifies all parties in the collection or return process for loss– If loss is due to receipt of substitute

check instead of original check

Check 21 Indemnification Indemnity amount

– Breach of warranty – Amount of any loss proximately caused by the breach This includes consequential damages

– Absent breach of warranty – Amount of loss up to amount of substitute check plus interest and expense

Check 21 Indemnification Minimizing amount of risk

– If indemnifying bank produces original check or copy sufficient to determine validity of claim It shall be liable only for losses incurred

up to time item was produced Have right to return of funds paid under

indemnity in excess of losses

Check 21 Indemnification Other Indemnification Considerations

– Production of original check, etc. shall not absolve the bank from any liability on a warranty established under this Act or other law

– Each indemnified party shall have duty to comply with all reasonable requests in connection with claim

Comparative negligence– If loss results from negligence or failure to act

in good faith, then indemnification shall be reduced in proportion to amount of negligence or bad faith

Compliance Issues Consumer Awareness Expedited Recredit

Consumer Awareness Each bank shall provide to each

consumer of bank brief description– Consumer recredit rights – How substitute check is legal equivalent of

original check Notice provided to consumers who

receive original checks or substitute checks with periodic statement– Notice also provided to consumer who

requests copy and receives substitute check

Consumer Awareness Notice must be provided to

– Existing customers– New account holders

Notice may be provided by U.S. mail or other means as agreed by consumer

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

Check 21 Expedited Recredit Expedited recredit for

consumers– Consumer may make claim under Act

for substitute check that was not properly charged or for warranty claim

– Consumer suffered loss– Original check or copy of original check

necessary to determine validity

Check 21 Expedited Recredit Procedures for claim

– Consumer must provide to bank Description of claim Statement that consumer suffered loss Reason why production of item is

necessary Sufficient information to identify

substitute check– Bank may in its discretion require

claim in writing

Check 21 Expedited Recredit Expedited recredit for consumers

– 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 If bank delays availability it cannot charge OD fees

for five days after notice of delay to consumer Bank may reverse recredit if

– Determines substitute check which was recredited was properly charged

– Notifies consumer

Check 21 Expedited Recredit Notice to consumer is required

– If consumer claim not valid– Notice of recredit under Act– Notice of reversal of recredit

Notice shall be delivered by U.S. mail or other means agreed by consumer

Providing recredit does not absolve bank from liability for claim made under any other law

Expedited recredit procedure between banks

Check 21 Expedited Recredit

PAYING BANK

RECONVERTING BANK

Sub Ck

CLAIM CLAIM

40 DAYS

$$$10 DAYS

10 DAYS

ConsumerStatemen

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 days3) Paying bank must make claim to reconverting bank within 120 days

of of transaction that gave rise to claim4) Reconverting bank must provide recredit, original check or copy

within 10 days of paying bank claim

120 DAYS

Check, Copyor $$$

Federal Reserve Regulation

Act states that the Federal Reserve may prescribe regulations to implement, prevent circumvention or evasion of, or facilitate compliance with the provisions of this Act

Fed developed modification to Regulation CC as Subpart D to implement act and provide safe harbor consumer awareness language

Other Provisions Effective Date

– 12 months after enactment October 28, 2004

Treasury Checks– Congress excluded any special

provisions for Treasury Checks

Check 21 Status Fed sent CTA to congress 12/2001 House bill Check Clearing for the 21th Century or

Check 21 passed 405 to 0 on June 5 Senate bill Check Truncation Act of 2003 passed

Senate by unanimous consent on June 27 Compromise report as of October 1

– Differences in bills resolved Passed in House without opposition on October 8 Passed in Senate by unanimous consent on October 15 Signed by President on October 28, 2003 RFC for enabling regulation issued December 22 with

comments due March 12 Safe harbor language must be available July 28, 2004

Standards OrganizationsAccredited Standards Committee

(ASC) X9, Inc. - www.X9.org

Mission: Develop, establish, publish, maintain, and promote standards for the Financial Services Industry in order to facilitate delivery of financial products and services.– X9B: Check related transactions

DSTU X9.37 - Specifications for Electronic Exchange of Check and Image Data (2003)

DSTU X9.90 - Specifications for an image Replacement Document – IRD (new)

DSTU X9.81 - Specifications for Media-Based Bulk Image and Data Delivery (new)

ANS TG-15 - Technical Guidelines: To Aid in Understanding and Implementation of Check Electronification (new)

StandardsCheck Electronification

DSTU X9.37Work Group Chair:

Phyllis MeyersonECCHOpmeyerson@eccho.org214-273-3202

Purpose:Standard Supports Electronic Check Exchange (ECE) with or without images in a cash letter structure for forward check presentment, return item notification, and return processing.

Specifications for Electronic Exchange of Check and Image Data

DSTU X9.37Status: • Standard for Electronic Exchange Originally Issue

1994.• Gained active use in 1999 with SVPCo mandate for

use by members.• Recent five-year review completed and re-issued

2001.• Workgroup actively updating standard to support

Check 21, image exchange, and electronic image returns.

• Approved and released March 2003 as DSTU.

DSTU X9.37

Highlights:– Minimize changes to records currently in use.– Supports multiple processing models (image cash letter;

image and/or paper to follow, and electronic transaction only).

– Accommodates endorsement chains and substitute checks in support of the Check 21.

– Accommodates special use for Federal Reserve (account totals, Fed documentation and work type).

– Improved returns processing (supports return reasons).

File Header

File Control

Cash Letter Header (10)

Cash Letter Control

M MForward

PresentmentBundle

ReturnBundle

Cash Letter

Routing Number

Summary (85)

One record for each payor bank routing number

in the Cash Letter

Forward presentment bundles and/or return bundles

See Figure 1a for Forward Presentment Bundle detail

See Figure 1b for Return Bundle detail Mandatory

Record

Conditional Record

Multiple Logical Entities

Multiple Conditional Records

LEGEND

Mandatory Record

Conditional Record

LEGEND

X9.37 Forward and ReturnCash Letter Hierarchy

Diagram

*NOTE: The above hierarchy diagram is from DSTU X9.37-2003 Specifications for Electronic Exchange of Check and Image Data

DSTU X9.37Specifications for Electronic Exchange of Check and Image Data

Mandatory Record

Conditional Record

LEGEND Logical Entity

Mandatory Record

Conditional Record

X9.37 Forward Presentment

Bundle Hierarchy Diagram

Check Detail (25)

One record for each box of

bundles

Image View Detail (50)

ImageView

Record Types 50 and 52 shall occur together for each Image View.

One recordfor each

subsequent endorsing bank

Image View

Data (52)Image View

Analysis(54)

Check Detail

Add A (26)

Check Detail

Add B (27)

Check Detail

Add C (28)

Bundle Header

Bundle Control

Box Summary

Forward Presentment

Bundle

Mandatory Record

Conditional Record

Mandatory Record

Conditional Record

X9.37 Return Bundle

Hierarchy DiagramBundle Header

Bundle Control

ReturnItem

ImageView

BOFDCReturnAdd. D

One record foreach subsequent endorsing bank.

Return Bundle

Detail(50)

Analysis(54)

Data(52)

Record Types 50 and 52 shall occur together for each Image View

ImageViewDetail(50)

Record Types 50 and 52 shall occur together for each Image View.

ImageViewData(52)

ImageView

Analysis(54)

ReturnAdd. C

ReturnAdd. B

(33)ReturnAdd. A

ReturnRecord

Implementation Considerations:• Ability to store and access incoming ECE data.

• Processing information (truncator, IRD creator, etc.).• Endorsement chain.• Return processing information.• Location of original image/physical item.

• Creation of unique item/image keys.• Ability to provide full MICR line.• Accommodation of variable length records (type 27, 34, 52).

• Changed from fixed length record to variable length• Ability to execute multiple sends to the same institution.

DSTU X9.37X9.37Specifications for Electronic Exchange of Check and Image Data

Issues & Concerns:• Major effort to prepare standard for ballot

process.• Approved and released March 2003 as

DSTU (Draft Standard for Trial Use)• To become final in 18 months.• Allows time for additional feedback.

DSTU X9.90

Work Group Chairman:Andy GarnerWachovia Bankandy.garner@wachovia.com336-748-5618

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

Status: •New standard development.•Approved and released March 2003 as DSTU.

DSTU X9.90Specifications for an Image Replacement Document – IRD

DSTU X9.90Specifications for an Image Replacement Document – IRDHighlights:• 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 photocopy, notice and future Check 21 substitute

check.• Supports return information.• Supports optional data.• Uses EPC digit for identification as an IRD - (4 forward, 5

return).

DSTU X9.90ANSI

IRD Image and Document Flow Overview

Bank 1

Bank 2

Customer

Bank 3

Bank 4

[1] An original check is presented to Bank 1, the Bank of First Deposit (BOFD) and then processed.

[2] Bank 1 (Truncating Bank) creates an image from the original check and sends electronic data and the image of the check to Bank 2.[3] Bank 2 prints an original IRD from the X9.37 Data and Image received from Bank 1.

[4] Bank 3 processes the original IRD and creates an image of the IRD.

[5] Bank 3 sends electronic data and the image of the IRD to Bank 4.

[6] Bank 4 prints a 2nd (subsequent) IRD from the image of the original IRD.

33 This is a LEGAL COPY of your

check. Y ou can use it the same way you would use the original check.

*011500120* 01/ 03/ 2002 8587408979

Original IRD

Check Image

Subsequent IRD

IRD Image

DSTU X9.90

Implementation Considerations:• Ability to retain and recreate electronic

endorsements.• Ability to detect an IRD (EPC 4 or 5).• Ability to access return reason codes.• Control of templates for different uses.• Clipping accuracy and variations.• Physical stock (preprinting, bursting,

control, security).

Issues & Concerns:• Potential to overlay endorsements and usage

text.• Location of BOFD overlay is below 3.0 inches.• Image quality and resulting usability and

legibility concerns due to rescanning.• Use of IRD’s in carrier documents.• Survivable security features.• EPC usage of digit 4 and 5, and impact to

edits.

Workgroup Chairman:Lori HoodHelena Federal Reservelori.hood@mpls.frb.org406-447-3917

Purpose:Establishes the data elements and data structures necessary for the bulk delivery of check transaction objects and data using a variety of media in a common digital format for any business purpose. Also supports user-defined transaction objects.

DSTU X9.81Specifications for Media-Based Bulk Image and Data Delivery

Status: • New standard currently under development.• Has evolved from the Common Output Format (COF)

specifications used by the Federal Reserve that was first released in 1997.

• XML chosen for flexibility and ease of implementation.• Currently defining a hierarchy and overall structure that

can evolve to meet multiple business purposes• bulk delivery, lockbox, IRD data

DSTU X9.81Specifications for Media-Based Bulk Image and Data Delivery

Purpose:Establishes the placement and location for printing MICR ink on checks, drafts and other documents intended for automated processing.

ANS X9.13Specifications for the Placement and Location of MICR Ink Printing

Use: • Document that is to be read by magnetic ink character

recognition • Band along bottom edge reserved for magnetic encoding• Band divided into character spaces, organized into

several areas or fields• Common fields with fixed format for all users are Amount

Field, Routing Field and optional EPC field• Variable field known as On-Us Field, with format

determined by needs of issuing financial institution• On document of sufficient length another variable field

Auxiliary On-Us Field may appear at extreme left side

EPC (External Processing Code): • One MICR digit which conveys special information for the

correct handling or routing of a check or check data to financial institutions or other processors

• Primarily used with value of “2” for qualified returns • This digit will be used to identify IRD and return IRD

Status: • Current standard• In process of modifying Annex on EPC codes• New Work Item to investigate standardized MICR line has

just begun

Workgroup Co-Chairs:Wayne DoranNCR CorporationWD135627@exchange.Canada.NCR.com519-883-3704Phyllis MeyersonECCHOpmeyerson@eccho.org214-273-3202

Purpose:Provide information to aid in understanding the standards related to Check Electronification and to provide guidance for the implementation of these standards.

ANS TG-15Technical Guideline: To Aid in Understanding and Implementation of Check Electronification

Status: •New guideline currently under

development.•Current focus is on organization of the

guide, scope, and content definition.

ANS TG-15Technical Guideline: To Aid in Understanding and Implementation of Check Electronification

Check 21 and Rules Need for image rules beyond

Check 21– Check 21 is image based & will

encourage image exchanges, but– Electronic exchanges are not covered

by the Check 21 & require agreements – Warranties and indemnification of Act

made by reconverting bank not carried back to original imager of item

Check 21 & Rules Risk Under Check 21 -

Collections

CUSTOMERPAYING BANK

RECONVERTING BANK

COLLECTING BANK (BOFD)

CHECKand/or

Sub Ck Sub CkImage

1) Check 21 covers these relationships2) Warranties and indemnification are made by reconverting bank to other parties

Warranties & Indemnifications

Check 21 & Rules Risk Under Check 21 -

Collections

CUSTOMERPAYING BANK

RECONVERTING BANK

CHECKand/or

Sub Ck Sub CkImage At Risk

- not to original imager of the item

Reconverting bank makes warranties & indemnification

Risk Avoidance

1) Rules covers these relationships

Check 21 & Rules

PAYING BANK

RECONVERTING BANK

CHECKand/or

Sub Ck

CUSTOMER

Sub CkImage

2) Reconverting bank’s warranties & indemnifications ARE carried back to original imager of the item

1) Rules covers these relationships

Check 21 & Rules Need Check 21 and Rules

PAYING BANK

RECONVERTING BANK

CHECKand/or

Sub Ck

CUSTOMER

Sub CkImage

2) Check 21 covers these relationships•Proposed Reg acknowledges need for agreements

•Need a common, national set of image exchange rules

ECCHO Rules ECCHO has adopted rules

– Image exchange rules– Image return rules– IRD rules

Pre-Check 21 - Provides necessary IRD exchange agreements

– ECP with image replacement document (IRD)– Warranties to parallel the Check 21 substitute check

warranties Post-Check 21 - Supplements Check 21 with other

necessary agreements– Image exchanges prior to reconverting bank– Moves warranties and indemnifications to imaging

bank– Expedited recredit for banks

Industry Recognitions Recognize and support ECCHO as national

provider of ECP and image exchange rulesAlogentAmerica Banker AssociationAmerica’s Community BankersAutomated Financial SystemsAQUBANC, LLCAurum Technology Inc.BancTecBAIBearingPoint, Inc.BITSCarreker CorporationCheck Payments Systems AssociationComputer Services, Inc.Data Support ServicesEDS Information ServicesElectronic Clearing ServicesEmpire Corporate FCUEPSONFiservFSTCIBM

ICBA - Independent Community Bankers of AmericaIPSOMobius Management Systems, Inc.NetDeposit, Inc.NCRPayments Resource OnePuerto Rico Clearing House AssociationSouthern Financial ExchangeSmall Value Payments CompanySymcor, Inc.TAWPI Great Lakes ChapterTronitechTriSyn GroupThe Clearing HouseThillensUnisysVECTORsgiViewpointe Archive ServicesWespay

Some of Federal Reserve’s guiding principles in drafting law included– To foster innovation in check collection system

without mandating receipt of checks in electronic format

– Bank and its customer would be in substantially equivalent legal and practical position regardless of whether or not they received the original check

– Ensure that burdens associated with law did not outweigh associated benefits for banks or customers

Fed and Congress strived to minimize impact to institutions that choose not to participate

Operational Requirements

Banks do not have to– Change any current relationships– Capture images– Have their day two and/or back office applications

image enabled– Image enable their ATMs and branches – Participate in image exchange with any organization– Purchase expensive image hardware– Purchase expensive image software– Purchase any hardware or software– Hire consultants to develop a Check 21 plan

Banks may choose to do any or all of these things, but they are NOT Required for implementing Check 21

Not Required

Check Capture– Ensure that capture system will not

reject checks with character in EPC Customer

Service/Training/Education– Training of bank personnel

Minimize customer concern Consumer Awareness

– As required by the Act and Fed regulation

Check 21 Ops Minimum

Expedited Recredit Procedures for Consumers– As required by the Act and Fed

regulation Expedited Recredit Procedures

for Banks– Bank handling substitute check makes

warranties even if not reconverting bank – Claim can be made to any bank that

makes warranties

Returns– Outgoing qualified returns of substitute

checks must have “5” in EPC to avoid additional shrinkage

– Incoming returns sorting to identify either “2” or “5” in EPC

Corporate Customers– Protect bank from unknown customer

deposit of substitute check through deposit agreements Under Act only banks can make warranties Without customer agreement, bank assumes

Check 21 and Agreements Non-banks create risk under Check 21

Sub Ck

CUSTOMERPAYING BANK

BOFD RECONVERTI

NG BANK

NON-BANK CUSTOMER

Sub Ck Sub Ck

Reconverting bank makes warranties & indemnifications

- not carried back to original imager of the item - Need Customer Agreement

At Risk

Identifying Duplicate Checks– Receipt of substitute check

Customer service and expedited recredit Statement Rendering

– Will different size checks cause problems in statement rendering

Repair– Bank performing full field repair on a

substitute check must include EPC– Other repair implications

Corporate Customers– Impact on disbursement products

Code line matching requirements Font size and location requirements

Fraud risk– Expedited recredit– Alterations & counterfeit substitute

checks– Signature verification & physical

examination of substitute checks Security features

– Original check security features may not survive imaging

– New technology needed to develop image-survivable security features

– “Void” pantographs

Check 21 Ops Considerations

Retention and retrieval of original item– Retention term of the original item– Ability to retrieve original as needed

Transit bulk file Identifying duplicate checks

– Creation of substitute check Delayed processing of ATM checks Breach of warranty – consequential

damages

Substitute check shrinkage– Substitute check must be properly

stripped with 4 or 5 in EPC field to avoid additional shrinkage

Quality– Images– Substitute checks– Images of items in carrier envelops

Indorsements– Must carry indorsements that are both

physical and electronic– Electronic indorsements enhance

legibility– Readability of indorsements

Substitute check issues– Authentication of substitute check– Potential piggybacks/misreads/MICR

bleed through causing read exceptions– Cost of printing

Representments– Bank personnel recognition and

acceptance of substitute checks for redeposits / representments

Full MICR line required on substitute checks– Breach of warranty without MICR

line– Risk of consequential damages

Check 21 Ops Considerations Cash letter control ATM processing Others?????

Fed Issued Request for Comment on December 22, 2003– Comments due March 12, 2004– Board modified Regulation CC to address

all Check 21 provisions Reorganized and restated Check 21 Act

– Proposal consist of Section-by-section analysis Regulation Disclosures Commentary to Regulation

Fed Board’s Request

Fed Issued Request for Comment on December 22, 2003– Fed will accept comment on

everything in its proposal Specific questions

– Other non Check 21 modifications included

Issues Identified– Definition of paying bank

Inclusion of Treasury checks and Postal money orders

– Definition of transfer and consideration Paying bank to create substitute check

Issues Identified– Purported substitute checks

Treatment for repair How a substitute check MICR line may

vary from the original check MICR line – A paper reproduction of an image of

something that is not a check cannot be converted into a substitute check Cannot convert source document to

substitute check (ARC and POP)

Issues Identified– Reconverting bank duties

No need to obtain unapplied indorsements– Agreement between bank and customer

Bank becomes reconverting bank when customer creates and deposits substitute check

– Substitute check legal equivalence Requires“all of the information” on the front

and back of the original check A bank must make the Check 21 warranties

Issues Identified– Duplicate payment warranty

Provided even if reconverting bank had no knowledge of fraud or fraudster

Seeks comment on whether duplicate debit resulting from ACH results in violation of double debit

– Breach of other warranties In addition to Check 21 also including

Issues Identified– Burden of proof for indemnity

Proposal did not expressly address who has burden of proof and standard of proof for indemnity claim, but it implies that the burden of proof is on the indemnifying bank and it has a high standard to meet

– Scope of indemnify Indemnity runs to recipients of substitute

check only, this should be clearly stated– Determination of invalidity of claim

Examples only include when claim is valid

Issues Identified– Definition of sufficient copy and its

application to electronic image Electronic image is not sufficient copy

until printed, but bank will never know if and when customer prints it

– Treatment of generally applicable industry standards References applicable industry

standards in regulation and then refers to specific standard in commentary

Issues Identified– Model consumer educational document

Long, detailed and complex Have restated provisions in Act, not typical

treatment in regulation– Timing of provision of consumer

education document for one-off notices At time of request or when provided to

customer– Other model documents

No safe harbor from Act– Inform consumer that Expedited Recredit

required in writing

Issues Identified– Indorsements

Reconverting bank responsible for loss due to indorsement location “shift” caused by substitute check creation

Requiring truncating bank on substitute check as required in X9.90

– But definition of truncate differs between Fed and standard

Indorsement location of reconverting bank and truncating bank on substitute checks

Left current physical indorsements the same Eliminated requirement for bank name Eliminated purple ink

ANSI X

Indorsement Requirements

Issues Identified– Inclusion of provisions on remotely

created demand drafts UCC modified to include warranty for

consumer drafts Clearing Houses have adopted rule

with procedure to make claim

All comments available on Fed website–Easiest way to find it is through

www.eccho.org Summary of commenters

–145 comments received About 64 from financial institutions About 32 from individuals &

Consumer’s Union About 23 from trade associations,

clearinghouses, including: About 17 from venders About 6 from attorneys, legal

professors associated with universities and UCC

3 from the Federal Reserve Banks

Comments Published

General positions–Supportive of Check 21

Financial institutions Trade associations Venders Professors

–Opposed to Check 21 Individuals Consumer Union

Comments Published

Coordinated an industry group that developed a joint comment letter–Approximately 60 organizations

Approximately 135 individuals Major trade associations Banks Technology providers

–Co-signers included 41 organizations

Comments Published

America’s Community Bankers American Bankers AssociationBank of America Bank OneBB&T BITSCitigroup ComericaCredit Union National Association Deutsche BankEDS Information Services ECCHOElectronic Clearing Services Electronic Payments NetworkFiserv Fleet BankFrost Bank HSBCHuntington Bancshares ICBAJPMorgan Chase Bank KeyBankMid-America Payment Exchange NACHANational Association of Federal Credit Unions

National Clearing House Association

NCR Corporation PNC BankSouthern Financial Exchange Association of Corporate Credit UnionsThe Clearing House The Financial Services RoundtableThe National Check Exchange Puerto Rico Clearing House AssociationThe Small Value Payments Company Union Bank of Calif.USBank Wachovia CorporationWells Fargo & Company WesCorpWisconsin ACH Association

41 Co-Signers

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 Ways to Use Check 21 - Available Processing and Quality Standards - Available Other Implementation Considerations - Shortly Endorsement Chain - Available

– Check 21 Training Video now available– Regulation CC comments

Historical Perspective Impact on Banking Industry

– Historically Banks could choose to ignore

check electronification without significant impact

Banks controlled their own products, processes, revenues and expenses

Banks could isolate themselves and their customers from check electronification

Perspective Recent Impacts on Industry

– Accelerating transition to electronics Reg E interpretation – check conversion

– Notice = authorization– Bank has no input into decision– Impacts banks’ costs, revenue,

product quality, etc. In 2001, the Fed sent a proposal to the

U.S. Congress in the form of CTA– Truncation without agreements– Expected implementation in 2004

Can banks opt-out? No! Can bank customers opt-out? No! Can governmental organizations opt-out?

– No!– All checks are eligible for substitute check

replacements 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

Bank Decisions Accelerating Bank Impacts

– Decisions are being made by other banks and non-banks for which the bank has no control and little-to-no recourse

No decision does not mean no impact!

Avoiding Impact is Not An Option

Be prepared! Take advantage of New Opportunities!

Check 21June, 2004

www.eccho.org

check 21 presentation

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