• The Check 21 Act facilitates check truncation and electronic check exchange by authorizing a new negotiable instrument called a "substitute check," which is the legal equivalent of an original check for all purposes.
• The Check 21 Act does not require any bank to create substitute checks or to accept checks electronically. However, it does require banks to accept a legally equivalent substitute check in place of an original check after the Check 21 Act's effective date of October 28, 2004.
• The FRB has issued final amendments to Regulation CC to implement the Check 21 Act. The amendments:
  (1) Set forth the requirements of the Check 21 Act that apply to financial institutions;
  (2) Provide a model disclosure and model notices relating to substitute checks; and
  (3) Set forth financial institution endorsement and identification requirements for substitute checks.
• Answers to frequently asked questions posed by financial institutions can be found at http://www.fdic.gov/regulations/resources/21actfaq/index.html.
• Answers to consumer questions can be found at www.federalreserve.gov/paymentsystems/truncation/faqs.htm.

Distribution:
FDIC-Supervised Banks (Commercial and Savings)

Suggested Routing:
Chief Executive Officer
Compliance Officer

Related Topics:
FRB Regulation CC

Attachment:
FRB Model "Substitute Check Policy Disclosure," published as Appendix C5-A to Regulation CC

Contacts:
Examination Specialist William H. Henley at (202) 898-6513, or WiHenley@fdic.gov, or Examination Specialist Donald Saxinger at (202) 898-6521, or DSaxinger@fdic.gov. Consumer compliance issues, please contact Acting Senior Policy Analyst Rita Ross at (202) 898-3842, or RRoss@fdic.gov or Compliance Section Chief April Breslaw at (202) 898-6609, or apbreslaw@fdic.gov.

Printable Format:
FIL-116-2004 – PDF (PDF Help)

Note:
FDIC Financial Institution Letters (FILs) may be accessed from the FDIC's Web site at www.fdic.gov/news/news/financial/2004/index.html.

To receive FILs electronically, please visit http://www.fdic.gov/about/subscriptions/fil.html.

Paper copies of FDIC FILs may be obtained through the FDIC's Public Information Center, 801 17th Street, NW, Room 100, Washington, DC 20434 (1-877-275-3342 or (703) 562-2200).

The Federal Reserve Board (FRB) has finalized amendments to Regulation CC that are necessary to implement the Check Clearing for the 21st Century Act (Check 21 Act). The Act becomes effective on October 28, 2004.

On May 21, 2004, the Federal Deposit Insurance Corporation (FDIC) notified institutions under its supervision to prepare for Check 21 Act operational changes (see FIL-54-2004). On July 26, 2004, the Federal Reserve Board issued a final rule and commentary to implement the Check 21 Act.

The purpose of the Check 21 Act, enacted on October 28, 2003, is to facilitate check truncation and electronic check exchange, and to authorize a new negotiable instrument called a "substitute check." A substitute check is a paper reproduction of the original check containing an image of the front and back of the original check that can be processed in the same manner as the original check.

Although the Check 21 Act provides that a properly prepared substitute check is for all purposes the legal equivalent of the original check, financial institutions are not required to create substitute checks or to accept checks electronically. The Check 21 Act, however, includes new warranties, an indemnity and expedited recredit procedures that protect substitute check recipients.

Specifically, the final rules:

• Set forth the requirements of the Check 21 Act that apply to financial institutions;
• Provide a model disclosure and model notices relating to substitute checks; and
• Set forth financial institution endorsement and identification requirements for substitute checks.