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This legislation was drafted to help speed up the notoriously slow check-clearing process and to reduce related costs. But what really gave the bill the momentum it needed for enactment was the terrorist attacks on September 11, 2001. The suspension of air traffic after 9/11 resulted in huge problems with the physical clearing of paper checks, and helped overcome reluctance to change the system.

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The “Check 21” law was enacted on October 28, 2003 in a bill signed by President George W. Bush. The effective date is October 28, 2004.

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The act creates a new negotiable instrument, “Substitute Checks”, to make the U.S. Payments System more efficient. Paper checks can be truncated (converted to an electronic image) at any point in the check-clearing process and the resulting electronic image can be reconverted into a substitute check that, if it conforms to the law’s standards, is the legal equivalent of a paper check and must be accepted as such.

The law provides consumer protections similar to the Electronic Funds Transfer Act, including prompt re-crediting of amounts in dispute. The law also requires providing a notice to consumer account holders explaining the process of substitute checks, how the process may be different than the check-clearing process the consumer is familiar with, and a description of the consumer’s re-credit rights when the consumer believes in good faith that a substitute check was improperly charged to the consumer’s account.

Financial institutions creating and handling substitute checks will warrant that the substitute meets legal requirements and is not a duplicate of another check that has been paid. These institutions will be liable for any losses that result from the receipt of a substitute check rather than an original check.

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In the current clearing process the check you wrote physically travels from the recipient’s financial institution through the payment system and is returned to your financial institution to be debited to your account. Some banks still send the cancelled check to you, while others send you optical images of the front and back of the cancelled checks in with your monthly bank statement.

With the passage of “Check 21”, financial institutions will be able to present images of the checks you have written from recipient’s institution to your institution electronically. This will reduce the amount of time your check is floating through the payment system, but will allow the detection of fraud, identity theft and other criminal activities that may adversely affect you and your money more effectively, efficiently and timely. Should the need arise financial institutions will be able to produce a “substitute check” that will have the legal equivalent of a paper check.

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To make check processing faster, a federal law permits banks to replace original checks with “substitute checks.” These checks are similar in size to original checks with a slightly reduced image of the front and back of the original check. The front of the substitute check states: “This is a legal copy of your check. You can use it the same way you would use the original check.” You may use a substitute check as proof of payment just like the original check.

Some or all of the checks that you receive with your account statement or by request may be substitute checks. This notice describes rights you have when you receive substitute checks from us. The rights in this notice do not apply to original check or to electronic debits to your account. However, you have rights under other law with respect to those transactions.

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In certain cases, federal law provides a special procedure that allows you to request a refund for losses you suffer if a substitute check is posted to your account (for example, if you think that we withdrew the wrong amount from your account or that we withdrew money from your account more than once for the same check).

The losses you may attempt to recover under this procedure may include the amount that was withdrawn from your account and fees that were charged as a result of the withdrawal (for example, bounced check fees).

The amount of your refund under this procedure is limited to the amount of your loss; or the amount of the substitute check, whichever is less. You also are entitled to interest on the amount of your refund if your account is an interest-bearing account. If your loss exceeds the amount of the substitute check, you may be able to recover additional amounts under other law.

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If you believe that you have suffered a loss relating to a substitute check that you received and that was posted to your account, please contact us by mail, e-mail, or telephone.

You must contact us within 40 calendar days of the date that we mailed (or otherwise delivered by a means to which you agreed) the substitute check in question or the account statement showing that the substitute check was posted to your account, whichever is later. We will extend this time period if you were not able to make a timely claim because of extraordinary circumstances.

Your claim must include–

  • A description of why you have suffered a loss (for example, you think the amount withdrawn was incorrect);
  • An estimate of the amount of your loss;
  • An explanation of why the substitute check you received is insufficient to confirm that you suffered a loss; and
  • A copy of the substitute check or the following information to help us identify the substitute check and investigate your claim:
    • The check number;
    • The name of the person to whom you wrote the check: and
    • The amount of the check.

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We will investigate your claim promptly. If we conclude that we incorrectly charged your account, we will refund to your account the amount of your claim (up to the amount of the substitute check, plus interest if your account earns interest) within one business day of making that decision. If we conclude that we correctly charged your account, we will send you a notice that explains the reason for our decision and includes either the original check or a better copy of the original check than the one you already received.

If you use this procedure, you may receive up to $2,500 of your refund (plus interest if your account earns interest) within 10 business days after we received your claim and the remainder of your refund (plus interest if your account earns interest) not later than 45 calendar days after we received your claim.

If we refund your account, on the next business day we will send you a notice that tells you the amount of your refund and the date on which you may withdraw that amount. Normally, you may withdraw your refund on the business day after we make it. In limited cases, we may delay your ability to withdraw up to the first $2,500 of the refund until the earlier of these two dates: (1) The day after we determine that your claim is valid; or (2) the 45th calendar day after the day that you submitted your claim.

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We may reverse the refund (including any interest on the refund) if we later are able to demonstrate that the substitute check was correctly posted to your account. Within one business day after we reverse a refund, we will send you the original check or a better copy of the original check than the one you previously received, explain to you why the substitute check was correctly charged to your account, and tell you the amount and date of the reversal.

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