Your Financial Edge!

What is Check 21, and How Will if Affect Me?

Mike Segaloff, TCCU Marketing Director

Here’s the “bottom line up front.” Check 21 means that your checks, which used to take days to clear, may now clear in just hours. If you have been counting on a check “float” to help you make it from payday to payday, you must change the way you write checks. You’ll no longer be able to write a check today, hoping to cover it with a deposit tomorrow! Many of our members have discovered that our new discretionary Overdraft Privilege policy is one solution to this problem.

“Check 21” is the short name for the “Check Clearing for the 21^st Century Act,” which was signed into federal law on October 28, 2003, and takes effect on October 28, 2004. The act authorizes a new negotiable instrument called a "substitute check." It provides that a properly prepared substitute check is the legal equivalent of the original check for all purposes. The new federal law supercedes contradictory state laws, including state laws that allow consumers to demand the return of their original checks.

A lot of financial institutions have been lobbying for something like this for a long time, but it took the 9/11 disaster at the World Trade Center to bring this legislation to the forefront. When all air traffic was grounded after that attack, all of the Fed’s planes which normally carry the checks for the twelve regional Federal Reserve Banks were grounded as well. For a significant (and for some people, excruciatingly long) time, no one’s checks cleared. A lot of people didn’t get paid, and considering the fact that most people were already in a pretty foul mood because terrorists were flying planes into our buildings, Congress decided something needed to be done.

Check 21 was designed to eliminate the need to truck and fly these billions of little slips of paper all over the country.

So, what is a substitute check?

A “substitute check” is a copy of the original paper check that is considered the same as the original check for all purposes, as long as it has an accurate image of the front and back of your check and contains the words: “This is a legal copy of your check. You can use it the same way you would use the original check.” It must also contain a Magnetic Ink Character Recognition (MICR) line at the bottom of the check with all the same information that appears on the original. A substitute check is subject to all the same state and federal laws that apply to the original check.

Why the change?

The new law allows merchants and financial institutions to reduce the cost of sending the paperwork all over the country for collection, and reduces the time that it takes people to get paid by check. Some estimates claim that $2 billion a year can be saved with Check 21.

How will it work?

Even though all financial institutions (credit unions, banks, etc.) are subject to Check 21 compliance, for the most part the whole process will be transparent to you, the consumer and credit union member. Let’s say you write a check for groceries tonight. The grocery store deposits the check in their bank. The bank then scans the front and back of your check and electronically sends it to the Federal Reserve Bank. The Federal Reserve then transmits that electronic copy to your bank or credit union for collection. If your financial institution is not yet accepting electronic checks, then the Federal Reserve can create a paper “substitute check” and submit that for collection. The whole process can take just a few hours, meaning the check you wrote for groceries this afternoon could clear your bank or credit union tonight.

What if something goes wrong with this process?

We all know that no system is perfect. Theoretically, the Check 21 system has the potential to be much more efficient than sending millions of little slips of paper all over the country for collection. Even so, something could go wrong, and certain procedures have been put in place to address these issues.

Federal law gives you the right to file a claim for an expedited refund if you receive a substitute check that is erroneously charged to your account, results in a loss to you, and if you believe the original check will demonstrate the error. To file a claim for an expedited refund, contact the credit union by phone, in writing, or by email within 40 calendar days of (a) your last statement (showing the particular charge) or (b) the date the substitute check was made available to you.

When you request an expedited refund, you should (a) describe why you think the charge was incorrect, (b) estimate your loss, (c) explain why the substitute check is not sufficient to show if the charge is correct, and (d) provide the credit union with a copy of the substitute check or other information that will help us to investigate your claim.

Once the investigation is completed, you will be informed of the results, and if a refund to your account is warranted, one will be made immediately.

Final Thoughts

Check 21 isn’t going to change things much for the typical consumer and credit union member. The biggest changes will be seen in the back office operations of financial institutions and merchants, who will increasingly be encouraged to embrace the new technology of check-imaging and electronic transfers.

For the rest of us, the most important issue to come out of the transition to Check 21 this fall will be this: Either make sure the money’s in your account before you write that check, or verify that your account has Overdraft Privilege!

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