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Published Articles by David Balovich

Title: Check Clearing For The 21st Century Act
Published in: Creditworthy News
Date: 9/22/04
Beginning October 28, 2004 digital images will become the legal equivalents of paper checks. Check 21 (Check Clearing for the 21st Century Act) legislation signed by the President in October 2003 legalizes the use of digital images of checks as official image replacement documents (IRDs). This enables both banks and corporations to convert a paper check to digital format and consider the electronic image file to be the legal version of the check.

Currently, unless otherwise agreed to, when a check is deposited it must be physically received at the issuers’ bank for the check to “clear”. Effective October 28, 2004 banks and corporations will have the option of creating, processing and sending digital pictures of checks to the issuing bank rather than sending the original check.

Congress and the Federal Reserve believe there are three major benefits to the Check Clearing for the 21st Century Act.

First: To improve the overall efficiency of the nation’s payment systems. The Federal Reserve and the other check clearing-houses process 42 billion checks each year and often they process those checks more than once in the case of insufficient or other problem checks.

The shutdown of air transportation in the days following the September 11, terrorist attacks forced the banking industry to transport checks by ground, which resulted in businesses creating good-faith grace periods for late payments. Processing delays can still be attributed to the aftermath of September 11.

Second: To facilitate check truncation by authorizing the use of substitute checks instead of the original checks. Truncation is the process of removing an original paper check from the collection or return process and creating a substitute or electronic check to clear the item for payment or return. Many checks, today, are truncated but permission has to be obtained from the account holder before that can occur. Under Check 21 permission to truncate is no longer required and the check writer cannot demand the original check back. The entity that stops the check is free to destroy it.

Check 21 creates a new legal document, the “substitute check”, that can be used for processing payment or for any other reason that might require an original cancelled check. A substitute check is a legally sanctioned document with all the rights and obligations given to the original written check. Substitute checks are paper copies created from electronic or digital copies of the original checks (front and back, with all endorsements). Each substitute check includes a statement identifying it as a legal copy of the original check.

Third: To foster innovation in the check collection system without mandating receipt of checks in electronic form. Banks, for several years, have been encouraged but are not required to accept electronic transfers. Check 21 does not mandate that banks covert to or accept electronic transfers. However, banks are required to accept substitute checks.

Unlike check conversion through the ACH (Automated Clearing House) system, substitute checks will be cleared the same way as original checks have been under Federal Reserve board regulations regarding check collection and availability of funds, (Regulation CC), and state law (Uniform Commercial Codes and state regulatory laws).

Under Check 21, businesses will be able to optimize their check processing operations through various methods. Let’s use the example of the company who has several lockboxes around the country and utilizes local banks to clear checks received at those locations. When Check 21 becomes effective, that same company could consolidate all its check deposits with one bank, which may not necessarily be located close to its offices or its customers, and yet take advantage of electronic imaging to clear checks faster and cheaper. Companies will no longer be dependent on local banks nor will they have to manage multiple banking relationships. Check 21 should provide reduction in bank costs and at the same time increase both productivity and cash flow.

Firms who receive checks through the mail at their offices can eliminate transporting checks to their bank by creating digital images and electronically transferring the information, saving time and increasing security.

The credit department should begin to educate the customer about the impact Check 21 will have on their payments after October 28. The customer who frequently makes payment assuming they will have a week of “float” due to postal delays before their check finds its way back to their bank for payment will be understandably upset if not forewarned, that after October 28, 2004, “payment float” will, for the most part, cease to exist.

I wish you well.   .   

This information is provided as information only and not legal advice. Legal advice should be obtained from a competent, licensed attorney, in good standing with the state bar association.

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