Check 21 Act

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The Check Clearing for the 21st Century Act (or Check 21 Act) is a United States federal law, Pub.L. 108-100, enacted into law October 28, 2003 by the 108th Congress. It took effect one year later, on October 28, 2004. The law allows the recipient of a paper check to create a digital version, thereby eliminating the need for further handling of the physical document.

Consumers are most likely to see the effects of this act when they notice that certain checks are no longer being returned to them with their monthly statement even though other checks are still being returned. Another side effect of the law is that it is now legal for anyone to use a computer scanner to capture images of checks and deposit them electronically, a process known as remote deposit.

1 Truncation
2 Implications
3 Patents
4 References
5 External links

[edit] Truncation

The process of removing the paper check from its processing flow is called truncation. In truncation, both sides of the paper check are scanned to produce digital images. If a paper document is still needed, these images are inserted into specially formatted documents containing a photo-reduced copy of the original checks called a "substitute check".

Once a check is truncated, businesses and banks can work with either the digital image or a print reproduction of it. Images can be exchanged between member banks, savings and loans, credit unions, servicers, clearinghouses, and the Federal Reserve Bank.

Not all banks have the ability to receive image files, so there are companies who offer the service. At the item processing center, the checks are sorted by machine according to the routing/transit (RT) number as presented by the magnetic ink character recognition (MICR) line, and scanned to produce a digital image. A batch file is generated and sent to the Federal Reserve Bank or presentment point for settlement or image replacement. If a substitute check is needed, the transmitting bank is responsible for the cost of generating and transporting it from the presentment point to the Federal Reserve Bank or other corresponding bank.

Check 21 has also spawned a new bank treasury management product known as remote deposit. This process allows depositing customers the ability to capture front and rear images of checks along with their respective MICR data for those being deposited. This data is then uploaded to their depositing institution, and the customer's account is then credited. Remote deposit therefore precludes the need for merchants and other large depositers to travel to the bank (or branch) to physically make a deposit.

In addition to remote deposit, other such electronic depositing options are available to qualifying bank customers through NACHA-The Electronic Payments Association. These options include "Point of Purchase" (POP) for retailers and "Accounts Receivable Conversion" (ARC) for high volume remittance receivers. These transactions are not covered under the Check 21 legislation, but rather are electronic conversions of the checks' MICR data into an ACH (Automated Clearing House) debit. This can help the depositor save on the costs of transporting checks and in bank fees. However, the liability changes from Regulation CC of the Federal Reserve to Regulation E, which provides much more protection for the account being debited and therefore more risk to the merchant and originating bank.

Check writers may no longer be able to obtain original autographs from cancelled checks endorsed by celebrity recipients. This practice may have been used by some charities to encourage donations ^[1] and may have also been used in other contexts as well.

[edit] Implications

Although the act greatly reduces check processing cost for banks (in part, by eliminating the need for the costly transportation of physical checks), and speeds up the fund transfers, these benefits are not necessarily passed on to the consumers.

While the bank of deposit clears and receives the funds associated with a deposited transaction sooner than before, it may still legally hold them for a period of days specified by Expedited Funds Availability Act. During that period, the funds are essentially in the bank possession; accumulated across all the bank customers at any given day, such funds earn the bank a sufficiently large amount of interest.

Additionally, the fact that the funds are debited from the check issuer's account much faster than before may catch him/her by surprise, resulting in non-sufficient funds, overdraft and a penalty in the form of NSF fee.

[edit] Patents

There are thought to be a number of patents relating to "check collection systems",^[2] including some owned by DataTreasury.^[3] Section 14 of the Patent Reform Act of 2007 includes provisions elminating the right of patent holders to prevent financial institutions from using their inventions.^[2] There are fractious lobbying efforts on both sides of the debate^[4] and it is feared that enacting Section 14 would result in litigation against the federal government seeking compensation for a taking of private property.^[2]