CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2004 No.7
May 20, 2004

Vol 2004 No. 7 May 20, 2004

Check 21 Communications Challenges and Opportunities

Whether or not a bank intends to take advantage of the opportunities presented by the Check Clearing for the 21st Century Act ("Check 21"), all banks must prepare themselves and their customers for the changes that Check 21 will bring. This Bulletin discusses some of the challenges and opportunities for banks as they help customers make the transition away from original paper checks.

Required disclosures. Within the next few months the Federal Reserve will publish final rules implementing Check 21, which will include a model form customer awareness disclosure required to be provided to consumer customers. A bank that uses the model form will be treated as being in compliance if the form also accurately describes the bank's policies and practices.

The disclosure must include the following:

A notice that a substitute check may be used as the original check for all purposes under state or federal law and for all persons if it meets the legal equivalence requirements.

A description of the consumer recredit rights.

The disclosure is to be delivered to consumers who are customers as of October 28, 2004, no later than the first statement period following that date. As to new customers after the effective date, it must be provided at the time "the customer relationship is initiated."

Check 21 requires only that disclosures are given to consumers who receive returned original checks or substitute checks. The reason is that customers who are accustomed to receiving images of returned checks (that are not substitute checks) are not likely to observe any changes due to Check 21, other than that some of the images will be of substitute checks rather than of originals. Also, their rights with regard to checks are not affected by Check 21 (because, for example, the expedited re-credit rights apply only if the consumer receives a substitute check).

However, banks will be required to provide the customer awareness disclosure (if not already provided) when a consumer requests an original or a copy of a check and is furnished a substitute check, or receives a returned item in the form of a substitute check. According to the proposed rules, the disclosure in such instances would be required either at the time the request is made or when the substitute check is furnished, as applicable.

Because banks will not know when or whether a particular customer will come into possession of a returned substitute check, and because of the difficulties of implementing policies and procedures to ensure delivery of the disclosure in each instance where a substitute check is provided, banks may consider instead providing some form of the notice as a matter of course to all customers.

There is no provision in Check 21 for the disclosures to be furnished annually. Nor does Check 21 address account disclosure agreements, an issue that is beyond the scope of this Bulletin. Banks should consult with their counsel regarding any amendments that may be necessary.

Discretionary disclosures. While Check 21 does not require customer awareness notices to be delivered to business customers, they nevertheless are also likely to encounter substitute checks. For example, if a business check payable to a consumer is returned as a substitute check, the consumer may take that substitute check back to the maker. Also, checks made to a business may be returned as substitute checks. And, of course, businesses that receive original cancelled checks may receive substitute checks along with originals. Therefore, it may be worthwhile for banks to provide general information to their business customers about Check 21, but taking care not to imply that business customers have consumer Check 21 rights.

Banks that intend to create substitute checks should also consider informing customers of the advantages of Check 21 processing. Check deposits will post faster, allowing funds to be made available earlier. The greater use of digital images would make online access to check images and imaged statements more widely available.

Keep in mind, though, that groups like the Consumers Union (CU) have already disseminated information about Check 21 that may predispose some consumers against Check 21 and banks. Some of the organization's assertions are fair and accurate. For example, CU notes that faster clearing of checks increases the risk that a check will bounce, and that customers will not necessary get access to the funds from checks any sooner because Check 21 does not shorten check hold times.

Some of the CU's assertions are accurate but biased. Consider the following statements:

"Banks will save money on processing checks, but the new law does not require the banks to share these savings with consumers."

"Check 21 does not cap the fee that a bank can charge for [a substitute check]."

CU also asserts that Check 21 is ambiguous about whether the expedited recredit rights apply when a substitute check is created but not returned to the consumer. It opines that the legislative history supports consumers on this point. (Neither the text of Check 21 or the proposed rules support this view). CU adds, correctly, that if a check is processed electronically by all the banks it is routed through, the consumer has no recredit rights even if the electronic image is paid twice, paid for the wrong amount, or if both the electronic image and the original paper check are paid. As a remedy, CU suggests that consumers should ask for return of substitute checks with account statements. (CU does not clarify that the error resolution rules under the UCC continue to apply).

Some of the organization's statements are simply inflammatory. For example:

Q. "Will a bank be able to use information from the electronic images of checks to invade the privacy of a consumer or a business?"

A. "Yes. Check 21 places no limits on a bank's use of information contained in its customer's check images. A bank might build a database using check images to determine which of its consumers shop at certain kinds of retailers, or what kinds of suppliers a business customer uses."

If you have any questions, you may contact Leland Chan at lchan@calbankers.com.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

Section 3(7) of Check 21 defines a consumer as an individual who draws the check on a "consumer account" or, as to a return, who deposits the check into a "consumer account," as the term is defined in the Expedited Funds Availability Act ("any account used primarily for personal, family, or household purposes"). See 12 CFR 229.2(n).

See the entire set of questions and answers about Check 21 prepared by Consumers Union, available at the organization's website at http://www.consumersunion.org/finance/ckclear1002.htm