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What is Check 21?
What is Check 21? : Insite Banking System


Check Truncation Act (CTA) - known as Check 21 or Check Clearing for the 21st Century - is possibly most important change that affects the financial industry as a whole in the last forty years. The Check 21 law creates a standard called Image Replacement Document or IRD. IRDs are documents created with the original check's front and rear image. IRDs also contain all of the check's encoded MICR data. To take full advantage of Check 21, financial institutions will need the ability to generate, accept and archive check images and data. This will produce substantial savings in the handling and movement of check related transactions that will no longer need to rely on couriers, planes, trains and/or armored transport for the clearing of physical drafts.


In 2000 the Federal Reserve Board staff began investigating a concept to promote check truncation and electronic check presentment. That concept evolved into the Check Clearing for the 21st Century Act or Check 21.

What are Substitute Checks?

The idea was to enable a bank to substitute a machine-readable copy of a check (a "substitute check") for the original check for forward collection or return. Substitute checks that meet the requirements of the Act would be the legal and practical equivalent of the original check.


Federal Reserve Board staff worked with industry and other stakeholders through numerous versions of the Act. On December 21, 2001, Chairman Greenspan sent the Federal Reserve Boardís legislative proposal to the Chairs and Ranking Members of the Senate and House Banking Committees. Both the House and Senate introduced bills in the 107th Congress (2002). In the 108th Congress (2003), the following bills were introduced.
  • House: H.R. 1474
  • Senate: S. 1334
Many banking organizations monitored the legislative process and provided input. All sectors of the banking industry (small banks, large banks, credit unions, processors, technology companies, Federal Reserve Board, etc.) strongly supported the Act and worked together to achieve passage. The Accredited Standards Committee X9B (www.x9.org) focused on the development of industry standards for the financial services industry and developed the technical specification for substitute checks (DSTU X9.90-2003) in support of Check 21. (DSTU is an acronym for Draft Standard for Trial Use.)

Highlights of the Check 21 Act

The purposes of the Check 21 Act are:
  • To facilitate check truncation
  • To foster innovation in the check payment system without mandating receipt of checks in electronic format; and to improve the payment system overall. The Act creates a new negotiable instrument, called a "substitute check".
  • If the substitute check meets the Actís requirements, then it is the legal equivalent of the original paper check.
  • A substitute check can be processed in the same manner as the original paper check.
  • Parties cannot refuse to accept a substitute check that meets the Actís requirements. "Parties" includes everyone: other banks, paying customers, depositing customers, consumers, corporations, Federal Reserve, processors, etc.
  • The Act provides legal equivalence only for substitute checks.
  • The Act facilitates check truncation and electronic/image exchanges but does not provide legal equivalence for electronic check or image presentment.
  • Systems and clearing arrangements involving electronic check or image presentment still require agreement of the parties who accept the electronic form of the instrument for value.
  • The Act encourages the use of electronics by empowering banks to truncate original checks, process them electronically and, where necessary, provide paper substitute checks.
  • All checks, except foreign checks, are eligible to become substitute checks, including, but not limited to, the following:
    • Consumer checks
    • Business checks
    • Corporate checks
    • Government warrants
    • U.S. Treasury checks
    • Money orders
    • Controlled disbursement checks
    • Payable through drafts
    • Travelerís checks
A bank creating the substitute check and all subsequent banks that process the substitute check provide warranties and an indemnity to subsequent parties in the collection and return processes. The warranties are that:
  • The substitute check meets the Actís legal equivalence requirements; and
  • No party will be asked to make payment based on a check that it has already paid (no double debit).
The indemnity relates to losses incurred due to the receipt of a substitute check instead of the original check.
  • In the instance of a warranty breach, the indemnity includes damages proximately caused.
  • In the absence of a warranty breach, the indemnity is for the amount of the substitute check plus interest. The indemnifying bank may limit its liability if it is able to produce the original check or a copy.
  • The Act includes a new expedited recredit feature for consumers who receive substitute checks. A consumer receiving a substitute check may make an expedited recredit claim if a substitute check was improperly charged to the consumerís account or the consumer has a warranty claim and the consumer suffered a loss. Bank generally has 10 business days after consumer claim to complete its investigation of the consumerís claim and to recredit the consumerís account for amounts up to $2,500 per check, pending completion of the investigation. Exceptions are made for new accounts, accounts repeatedly overdrawn, and suspicion of fraud. All funds must be recredited within 45 calendar days if the claim still cannot be validated.
Customer Awareness

Banks are required to provide customer awareness notices explaining substitute checks for consumers who are provided substitute checks including existing and new customers. The Federal Reserve is to write model language for this requirement. The consumer awareness document must explain how a substitute check is the legal equivalent of an original check for all purposes and the consumerís recredit rights under the Act.

 Sample Checks
 What is Check21

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