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Check Clearing for the 21st Century Act - Check 21

Check 21 is a new federal law that became effective on October 28, 2004 and is designed to allow banks to process more checks electronically. The name comes from the idea that check processing technology is entering the 21st century. This should speed up transactions and lead to more efficient handling of checks. Instead of having to move the actual paper check from the bank that accepts the deposit to the bank that pays it, the bank can simply process the transaction based on the image of the check. 

Having to transport physical checks can be costly and takes time. Check 21 allows the banks to capture an image of the front and back of a check and transmit it electronically along with payment information. If a customer later requests a paper check, the bank is allowed to use the electronic image to print a paper "substitute check". 

Though the Check 21 law is new, electronic banking is not. The financial industry has found electronic processing to be a safe, reliable, and efficient way of processing payments and has been doing so on a limited basis for some time. The technology used to generate the electronic information has been tested and deemed secure.

The biggest change that consumer should be aware of is the speed at which transactions are processed. Because there will be virtually no float time, the time between when a check is deposited and the time it is actually paid, will be reduced to hours instead of days. Before you write a check it is essential to be sure your account has sufficient money to cover the check. In some states it is a criminal act to write a check knowing there are insufficient funds in the account to cover it. Furthermore, as banks improve their means of processing payments the speed will only increase.

Improvements in check processing will benefit consumers by reducing the hold time put on checks deposited. The Expedited Funds Availability Act already specifies the maximum time a bank can hold a check before making the fund available to you and most banks do so in less time than required. As processing time decreases, so will the hold times on checks.

Check 21 and Electronic Payments.

When you write a check, specific check laws and regulations govern your rights. When your check is used as a source of information to create an electronic fund transfer, however, the transaction is covered by different laws, which give you different consumer rights than when your check is processed as a paper check. For example, with electronic check conversion, you have the right to an investigation by your financial institution when an error occurs or if you believe there has been an unauthorized debit from your account.

As with other purchases, you have the right to receive a receipt that includes the date, amount, location, and name of the merchant where the transaction occurred. This same information should appear on the regular account statement from your financial institution. 

Substitute Checks and Electronic Check Conversion - Your Rights

Electronic check conversion is a process in which your check is used as a source of information such as the check number, your account number, and the identifying information for your bank or financial institution. This information is then used to make an electronic deduction from your account. This is an Electronic Funds Transfer. The check itself is not the payment instrument. Sometimes you will be aware of the fact that an electronic transfer is taking place, by law notice is required, but the way that notice is given varies from a notice in the store's window to a notice that you are asked to sign. 

The substitute check is a document that functions in much the same way as a check and actually contains an image of your paper check. It is a little larger than a paper check, and should contain a clear image of your check. If it is not a legible image you should contact your bank. If the substitute check varies from the original, Check 21 makes special provision for getting your money back called expedited re-credit.

Under this provision you can receive an expedited re-credit if you believe the substitute check was incorrectly charged to your account, if you lost money as a result of the substitute check being charged to your account, and you need the original check, or a copy of it, to show that the substitute check was incorrectly charged to your account. To make this claim you must notify the bank no more than 40 days from the when your bank mailed or delivered your account statement. The bank will promptly investigate your claim. If the bank agrees that there was an error it has to credit your account with the correct amount of money, together with any interest if your account earns interest, within one business day. 

If your bank is unable to determine the validity of your claim within 10 business days after receiving it, your bank on that day must refund the amount of your loss up to the lesser of amount of the substitute check or $2,500, plus interest (if your account earns interest). Unless your bank determines that your claim is not valid, it must refund to your account any remaining amount of your loss, up to the amount of the substitute check, plus interest, no later than the 45th calendar day after the bank received your claim. If your bank later determines that your claim was not valid, it may reverse the refund and interest it has paid to you. 

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