Check 21

1. Check 21 Version 3 June, 2004

2. Topical Agenda • Myths and Reality • Applications • Warranties and Indemnification • Compliance Issues • Consumer Awareness • Expedited Recredit • Other Provisions • Standards • Rules Versus Act • Operational Considerations • Minimum Requirements • Regulation CC to Implement Check 21 • Historical Perceptive

3. Quiz Question • You think you know the Act??? • There is mis-information regarding the Act • Multiple choice, which one(s), if any apply • Check 21 • Mandates Check Truncation • Mandates the destruction of the original check • Grants electronic check images the same legal status as the original check • Grants Substitute Checks (IRDs) the same legal status as the original check

4. Another Quiz Question • Check 21 • Allows banks to exchange checks electronically (images) • Allows banks to truncate an item and convert it to ACH • Makes substitute checks the legal equivalent of original checks • Excludes all government checks including Treasury checks and state warrants

5. Check 21 – The Myths • “It is my understanding that this proposal would require the destruction of the physical check at the bank the check is deposited.” • “…the passage of legislation that will give electronic check images the same validity as paper checks for clearance and settlement.”

6. Check 21 – The Myths • “Check Clearing for the 21st Century in the House would grant check images the same legal status as paper checks for purposes of clearing and settlement.” • “This proposed legislation will allow a collecting bank … to clear their check-based transactions through … check image exchange presentment.” • And many more examples

7. Legislation Overview • Origin • Proposed by the Federal Reserve as new federal law • Fed’s Objectives • To facilitate truncation • To foster innovation in check collection systems without mandating receipt of checks in electronic format • To improve the overall efficiency of the nation’s payments systems

8. Myth & Reality • Myth – Check 21 validates the exchange of check images • Reality • Check 21 does not address exchanges under agreement such as ECP or image exchanges • Confusion • Check 21 is dependent on the use of image technology for substitute checks but • Does not cover image exchanges between banks or their customers

9. Check 21 – The Reality • Relationship between image and Check 21 • Check 21 is dependent on image technology, but does not provide any legal provisions to check images or image exchange

10. Check 21 – The Reality • Only Applies to “Substitute Checks” • Image reprints of original paper checks • Use of substitute checks does not require agreement between the parties

11. Check 21 – The Reality • Designed to encourage check truncation by removing key barrier to truncation • Allows unilateral decisions to truncate checks • Unlike current environment with requirement to obtain agreements from all the parties • Provides for the replacement of a paper check with a substitute paper check • For those customers that have not agreed to check truncation or electronic check files • But without mandating the receipt of electronic transactions

12. Check 21 – The Reality • Included in Legislation • Check 21 only addresses situations in which banks do not agree to truncation • Creates new legal instrument - Substitute Checks • Designed to be processed exactly as if it were the original paper check • Excluded from Legislation • Products and services under other agreements • Check safekeeping products • Other truncation products • ECP & image exchanges

13. Eligible Checks? • ALL CHECKS are eligible for replacement with substitute checks, for example: • Consumer/Retail checks • Business/Non retail checks • Government warrants • Treasury checks • Payroll checks • Money orders • Controlled disbursement • Payable through drafts • Traveler’s checks • Etc.

14. Checks Covered? • Only checks replaced with substitute checks are covered by the Act • Not all truncated or safekept checks are covered by the Act • For example, original checks truncated or safekept under agreement are not covered by the Act • Act is designed to encourage truncation and it is not needed if customer already agreed to not receive their checks back

15. Why Substitute Checks? • Key Benefits • Primary benefit associated with Act is faster collection and return of checks • Bank could use electronics for processing and transmitting images for printing of substitute checks closer to the receiving bank • Banks could reduce physical sorting by sorting items electronically and printing substitute checks for return processing • Branch and ATM deposits could be transmitted to processing centers to print substitute check and reduce or eliminate some transportation

16. Collections Traditional Paper Collection Check Check Check Intermediary BOFD Paying Bank Substitute Check Collection Sub Ck Check Intermediary Image BOFD Paying Bank

17. Return Processing Traditional Paper Return Return Check Return Check PAYING BANK BOFD RETREIVE CHECKS Substitute Check Returns IMAGE CUSTOMER Return Sub Ck Return Sub Ck PAYING BANK BOFD PRINT Sub Ck CUSTOMER

18. Remote Depositing Traditional Paper Collection ATM Check Check Transit Items BOFD Substitute Check Collection with Branch Capture ATM Sub Ck Check Image BOFD Transit Items Branch Branch

19. Image Exchange Current Image Check OR Check PAYING BANK BOFD IMAGE Image with Substitute Checks IMAGE Check PRINT Sub Ck Image BOFD PAYING BANK Sub Ck

20. Consumer receives bill, writes and mails check Biller’s Processor CONSUMER CHECKS Consumer CHECKS STORED Bill ARC & Checks Check Information Captured, Some Converted to ARC and Checks Stored Biller’s (Collecting) Bank (ODFI) Enters ARC Into ACH Network & Clears Paper Checks Non-consumer receives bill, writes and mails check Statement And/or ARC ARC ACH Operator Paying Bank (RDFI) Post Dr Entry to Customer’s Account Intermediary Statement Lockbox – ARC

21. Biller’s Processor ALL CHECKS STORE CHECKS Sub Ck All check payments Captures Check Images, Stores Checks, Reconverts Images to Substitute Check & Sends Substitute Checks to Bank Biller’s Depository Bank Collects Substitute Checks Statement Sub Ck Customer Statements Paying Bank Posts Substitute Checks to Customer’s Account Lockbox – Check 21 Process

22. Biller’s Processor ALL CHECKS STORE CHECKS All check payments Captures Check Images, Stores Checks & Sends Images to Bank IMAGES Biller’s Depository Bank Clears the Images Covered by Check 21 Statement IMAGES Sub Ck Intermediary Print (Reconverts) Substitute Check Paying Bank Posts Substitute Check to Customer’s Account Customer Statements Lockbox – Check 21 Process

23. Substitute Cash Concentration Sub Ck Paying Bank IMAGE IMAGE Corporate Headquarters Check Corporate Bank Local Office Intermediary IMAGE Cash Concentration Current Concentration ACH Deposit Bank BOFD Deposit Check ACH Deposit Reporting Corporate Bank Check Paying Bank Corporate Headquarters Local Office

24. Substitute Check Point of Purchase Sub Ck Intermediary Image Image Check Corporate Headquarters Corporate Bank Image Retail Store Paying Bank Point of Purchase Current Point of Purchase ACH CHECK ACH Corporate Bank Check Paying Bank BOFD Retail Store

25. Substitute Checks • Designed to be processed exactly as if it were the original paper check • Substitute Check is legal equivalent of original check for all purposes • Contains image of front and back of check • Conforms to industry standards • MICR • Physical characteristics of check • Suitable for automated processing • Must accurately represent all information on original check • Bears legend • Includes all indorsements • Includes identification of party creating it

26. Substitute Check/IRD Front ANSI X9.90 DSTU Back

27. Check 21 Warranties • Bank that creates substitute checks warrants • Substitute check meets all requirements for legal equivalency • No double debit

28. Check 21 Indemnification • Bank that creates substitute check and each subsequent bank indemnifies all parties in the collection or return process for loss • If loss is due to receipt of substitute check instead of original check

29. Check 21 Indemnification • Indemnity amount • Breach of warranty – Amount of anyloss proximately caused by the breach • This includes consequential damages • Absent breach of warranty – Amount of loss up to amount of substitute check plus interest and expense

30. Check 21 Indemnification • Minimizing amount of risk • If indemnifying bank produces original check or copy sufficient to determine validity of claim • It shall be liable only for losses incurred up to time item was produced • Have right to return of funds paid under indemnity in excess of losses

31. Check 21 Indemnification • Other Indemnification Considerations • Production of original check, etc. shall not absolve the bank from any liability on a warranty established under this Act or other law • Each indemnified party shall have duty to comply with all reasonable requests in connection with claim • Comparative negligence • If loss results from negligence or failure to act in good faith, then indemnification shall be reduced in proportion to amount of negligence or bad faith

32. Compliance Issues • Consumer Awareness • Expedited Recredit

33. Consumer Awareness • Each bank shall provide to each consumer of bank brief description • Consumer recredit rights • How substitute check is legal equivalent of original check • Notice provided to consumers who receive original checks or substitute checks with periodic statement • Notice also provided to consumer who requests copy and receives substitute check

34. Consumer Awareness • Notice must be provided to • Existing customers • New account holders • Notice may be provided by U.S. mail or other means as agreed by consumer

35. Consumer Awareness • Model language • Fed Board of Governors shall publish model forms and clauses that a bank can use • Safe harbor • Bank shall be in compliance with Act if the notice uses the model form or clause published by the Fed • As long as it accurately describes bank’s policies and practices • Bank is not required to use Fed’s model language

36. Check 21 Expedited Recredit • Expedited recredit for consumers • Consumer may make claim under Act for substitute check that was not properly charged or for warranty claim • Consumer suffered loss • Original check or copy of original check necessary to determine validity

37. Check 21 Expedited Recredit • Procedures for claim • Consumer must provide to bank • Description of claim • Statement that consumer suffered loss • Reason why production of item is necessary • Sufficient information to identify substitute check • Bank may in its discretion require claim in writing

38. Check 21 Expedited Recredit • Expedited recredit for consumers • Bank may withhold availability in Reg CC like exception situations • New accounts, excessive ODs or cause to believe fraud • Bank may withhold availability for 45 days • If bank delays availability it cannot charge OD fees for five days after notice of delay to consumer • Bank may reverse recredit if • Determines substitute check which was recredited was properly charged • Notifies consumer

39. Check 21 Expedited Recredit • Notice to consumer is required • If consumer claim not valid • Notice of recredit under Act • Notice of reversal of recredit • Notice shall be delivered by U.S. mail or other means agreed by consumer • Providing recredit does not absolve bank from liability for claim made under any other law • Expedited recredit procedure between banks

40. Check 21 Expedited Recredit Consumer Statement 40 DAYS 120 DAYS CLAIM CLAIM $$$ 10 DAYS 10 DAYS Check, Copy or $$$ Sub Ck RECONVERTING BANK PAYING BANK • Paying bank must provide consumer with original check, copy of original check or recredit within 10 days of claim up to $2,500 per check • Amounts > $2,500 must be recredited to consumer within 45 days • Paying bank must make claim to reconverting bank within 120 days of of transaction that gave rise to claim • Reconverting bank must provide recredit, original check or copy within 10 days of paying bank claim

41. Federal Reserve Regulation • Act states that the Federal Reserve may prescribe regulations to implement, prevent circumvention or evasion of, or facilitate compliance with the provisions of this Act • Fed developed modification to Regulation CC as Subpart D to implement act and provide safe harbor consumer awareness language

42. Other Provisions • Effective Date • 12 months after enactment • October 28, 2004 • Treasury Checks • Congress excluded any special provisions for Treasury Checks

43. Check 21 Status • Fed sent CTA to congress 12/2001 • House bill Check Clearing for the 21th Century or Check 21 passed 405 to 0 on June 5 • Senate bill Check Truncation Act of 2003 passed Senate by unanimous consent on June 27 • Compromise report as of October 1 • Differences in bills resolved • Passed in House without opposition on October 8 • Passed in Senate by unanimous consent on October 15 • Signed by President on October 28, 2003 • RFC for enabling regulation issued December 22 with comments due March 12 • Safe harbor language must be available July 28, 2004

44. Standards Organizations Accredited Standards Committee (ASC) X9, Inc. - www.X9.org Mission: Develop, establish, publish, maintain, and promote standards for the Financial Services Industry in order to facilitate delivery of financial products and services. • X9B: Check related transactions

45. Standards Check Electronification • DSTU X9.37 - Specifications for Electronic Exchange of Check and Image Data (2003) • DSTU X9.90 - Specifications for an image Replacement Document – IRD (new) • DSTU X9.81 - Specifications for Media-Based Bulk Image and Data Delivery (new) • ANS TG-15 - Technical Guidelines: To Aid in Understanding and Implementation of Check Electronification (new)

46. DSTU X9.37 Specifications for Electronic Exchange of Check and Image Data Purpose:Standard Supports Electronic Check Exchange (ECE) with or without images in a cash letter structure for forward check presentment, return item notification, and return processing. Work Group Chair:Phyllis MeyersonECCHOpmeyerson@eccho.org214-273-3202

47. DSTU X9.37 Specifications for Electronic Exchange of Check and Image Data • Status: • Standard for Electronic Exchange Originally Issue 1994. • Gained active use in 1999 with SVPCo mandate for use by members. • Recent five-year review completed and re-issued 2001. • Workgroup actively updating standard to support Check 21, image exchange, and electronic image returns. • Approved and released March 2003 as DSTU.

48. DSTU X9.37 • Highlights: • Minimize changes to records currently in use. • Supports multiple processing models (image cash letter; image and/or paper to follow, and electronic transaction only). • Accommodates endorsement chains and substitute checks in support of the Check 21. • Accommodates special use for Federal Reserve (account totals, Fed documentation and work type). • Improved returns processing (supports return reasons). Specifications for Electronic Exchange of Check and Image Data

49. DSTU X9.37 LEGEND LEGEND Multiple Multiple Logical Logical M M Mandatory Mandatory Entities Entities Record Record C C C C Multiple Multiple Conditional Conditional Conditional Conditional Record Record Records Records Specifications for Electronic Exchange of Check and Image Data X9.37 Forward and ReturnCash Letter Hierarchy Diagram M M File File Cash Letter Header Control (01) (99) M M C Routing Number Summary (85) Cash Letter ForwardPresentmentBundle Cash Letter Header (10) ReturnBundle Forward presentment bundles Control and/or return bundles (90) See Figure 1b for Return Bundle detail See Figure 1a for Forward Presentment Bundle detail One record for each payor bank routing number in the Cash Letter *NOTE: The above hierarchy diagram is from DSTU X9.37-2003 Specifications for Electronic Exchange of Check and Image Data

50. DSTU X9.37 One record for each box of bundles Logical Logical LEGEND LEGEND Entity Entity Multiple Multiple Logical Logical M M Mandatory Mandatory Entities Entities Record Record C C C C Multiple Multiple Conditional Conditional Conditional Conditional Record Record Records Records Specifications for Electronic Exchange of Check and Image Data X9.37 Forward PresentmentBundle Hierarchy Diagram Forward Presentment Bundle M M C Bundle Control (70) Bundle Header (20) Box Summary (75) Item BOFD M C C C Check DetailAdd A (26) Check DetailAdd B (27) Check DetailAdd C (28) Check Detail (25) ImageView C C C One recordfor each subsequent endorsing bank Image View Detail (50) Image View Data (52) Image View Analysis(54) Record Types 50 and 52 shall occur together for each Image View. *NOTE: The above hierarchy diagram is from DSTU X9.37-2003 Specifications for Electronic Exchange of Check and Image Data