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Preparing for Check 21

Preparing for Check 21 . ICBA National Convention March 15, 2004. Topical Agenda. Overview of the Check 21 Act Proposed Regulation Overview of Standards Thinking Differently About Checks. Status of Check 21. Passed by U.S. House and Senate No opposition in House

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Preparing for Check 21

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  1. Preparing forCheck 21 ICBA National Convention March 15, 2004

  2. Topical Agenda • Overview of the Check 21 Act • Proposed Regulation • Overview of Standards • Thinking Differently About Checks

  3. Status of Check 21 • Passed by U.S. House and Senate • No opposition in House • Unanimous consent in Senate • President Signed • October 28, 2003 • Effective Date • October 28, 2004 • There are some actions that you must complete before October 28th

  4. Preserving Status Quo? • Can banks opt-out of Check 21? No! • Can bank customers opt-out? No! • Can governmental organizations opt-out? • No! All checks eligible for replacement by substitute check • Do banks have to accept substitute checks presented to them? • Yes, they are the legal equivalents of the original checks • Preserving the status quo is not an option • All checks are in and all banks have impact

  5. Challenge • Encourage check truncation by allowing unilateral decisions to truncate paper checks • Unlike current environment with requirement to obtain agreements from all the parties (tens of millions) • But without mandating the receipt of electronic transactions

  6. Check 21 Solution • Create a new legal instrument to replace the original paper check • For those customers that have not agreed to check truncation and want to receive their paid checks • For those banks that have not agreed to receive electronic check files • “Substitute Check” becomes the legal equivalent of the original check

  7. Original Check VOID – IRD TEST SAMPLE

  8. Substitute Check / IRD *123456789*01/04/2002123456789012345 This is a legal copy of yourcheck. You can use it the same way you would usethe original check. Front [053000183] 01/03/20021800539446 VOID – IRD TEST SAMPLE 0145 B0000029545B ENDORSE HERE: ANSI X9.90 DSTU 4A000067894A 12345678C 0145 B0000029545B FOR DEPOSIT ONLYFIRST UNION NATIONAL BANKACCOUNT 1234567890123NORTH POLE, INC. >031000011< 01/02/20027815830233 *123456789* 01/04/2002123456789012345 [053000183] 01/03/20021800539446 DO NOT SIGN / WRITE / STAMP BELOW THIS LINEFOR FINANCIAL INSTITUTION USAGE ONLY Back  Do not endorse or write below this line. 

  9. Example - Collections Traditional Paper Collection Check Check Check Intermediary BOFD Paying Bank Substitute Check Collection Check Check Sub Ck Intermediary BOFD Paying Bank

  10. Substitute Check / IRD • Designed to be processed as if it were the original paper check • Substitute check is the legal equivalent of original check for all purposes if: • It contains images of front & back of check • Conforms to industry standards • MICR • Physical characteristics of checks • Suitable for automated processing • Must accurately represent all information on original check • Bears legend • Includes all indorsements • Includes identification of party creating it

  11. Eligible Checks? • ALL CHECKS are eligible for replacement with substitute checks, for example: • Retail checks • Non retail checks • Government warrants • Treasury checks • Money orders • Controlled disbursement • Payable through drafts • Etc.

  12. 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

  13. 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

  14. Major Provisions of Act • Bank that creates the substitute check warrants • Substitute check meets all requirements for legal equivalency • No double debit

  15. Major Provisions of Act • Indemnification • Bank that creates substitute check and each subsequent bank indemnifies all parties for loss, if loss is due to receipt of substitute check instead of original

  16. Major Provisions of Act • Indemnification Creates Risks • Warranty Breach - Consequential damages rests with bank that creates substitute check • No Warranty Breach - Bank that creates substitute check can limit liability, if it produces original check or copy of original check on request

  17. Major Provisions of Act • Expedited Recredit – New Protection For Consumers • May make claim under Act for Substitute Check that was not properly charged to their account or for a warranty claim, and • The consumer suffered loss, and • The original check or copy of original check is necessary to determine validity

  18. Expedited Recredit Consumer Statement 40 DAYS 120 DAYS CLAIM CLAIM $$$ 10 DAYS 10 DAYS Check, Copy or $$$ RECONVERTING BANK SUBSTITUTE CHECK 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

  19. Major Provisions of Act • Expedited Recredit • 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 • Bank must notify Consumer of delay in availability • Bank cannot charge OD fees for five days

  20. Consumer Awareness • Requires that Notice be Provided to • Existing customers who receive original checks or substitute checks with statement • New account holders • Consumers who request copy and receives substitute check • Notice May be Provided by U.S. Mail or other Means as Agreed by Consumer

  21. 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

  22. New Regulation • Federal Reserve may prescribe regulations to implement, prevent circumvention or evasion of, or facilitate compliance with the provisions of this Act • Fed proposing new subpart D in Regulation CC

  23. Proposed Regulation • Fed Issued Request for Comment on December 22, 2003 • Comments were due March 12, 2004 • Proposal consists of • Mostly Check 21 related issues • Also included some additional changes to Reg CC • Requested comment of whether Reg CC should add provisions for unsigned demand drafts

  24. Potential Risk to Bank CHECK IRD IRD IRD • Non-banks create risk under Check 21 At Risk NON-BANK CUSTOMER BOFD RECONVERTING BANK PAYING BANK CUSTOMER Warranties & Indemnifications Reconverting bank makes warranties & indemnifications - not carried back to original imager of the item - Need Customer Agreement

  25. Potential Risk to Bank X9.37 CHECK and/or IRD IRD Image COLLECTING BANK (BOFD) PAYING BANK RECONVERTING BANK CUSTOMER • Check 21 covers these relationships • Image Risk & Check 21 - collections Warranties & Indemnifications • Reconverting bank makes warranties & indemnifications to other parties

  26. Potential Risk to Bank IRD IRD • Image Risk & Check 21 - collections X9.37 CHECK At Risk and/or Image COLLECTING BANK (BOFD) PAYING BANK RECONVERTING BANK CUSTOMER Warranties & Indemnifications Reconverting bank makes warranties & indemnifications - not carried back to original imager of the item

  27. Potential Risk to Bank X9.37 CHECK and/or IRD IRD Image COLLECTING BANK (BOFD) PAYING BANK RECONVERTING BANK CUSTOMER • ECCHO rules covers these relationships • Risk avoidance – ECCHO Rules Warranties & Indemnifications • Reconverting bank’s warranties & indemnifications ARE carried back to original imager of the item

  28. Potential risk to bank X9.37 CHECK and/or IRD IRD Image COLLECTING BANK (BOFD) PAYING BANK RECONVERTING BANK CUSTOMER • ECCHO rules covers these relationships • Check 21 covers these relationships • Need a common, national set of image exchange rules • Need both Check 21 & ECCHO Rules

  29. Industry Recognitions • Recognize and support ECCHO as national provider of ECP and image exchange rules

  30. DSTU X9.90 Specifications for an Image Replacement Document – IRD • Purpose • A specification for an IRD that provides for a machine-readable substitute document created from the image that is made from the front and back of the original check or a previous IRD

  31. DSTU X9.90 Specifications for an Image Replacement Document – IRD • Highlights • Front and back check image size, on original IRD, is maintained on subsequent IRDs • Maintains physical and electronic endorsements chain • Identifies original check truncator and IRD creator • Supports return information • Supports optional data • Uses EPC digit for identification as an IRD - (4 forward, 5 return)

  32. DSTU X9.90 *123456789*01/04/2002123456789012345 This is a legal copy of yourcheck. You can use it the same way you would usethe original check. Front [053000183] 01/03/20021800539446 VOID – IRD TEST SAMPLE 0145 B0000029545B ENDORSE HERE: ANSI X9.90 DSTU 4A000067894A 12345678C 0145 B0000029545B FOR DEPOSIT ONLYFIRST UNION NATIONAL BANKACCOUNT 1234567890123NORTH POLE, INC. >031000011< 01/02/20027815830233 *123456789* 01/04/2002123456789012345 [053000183] 01/03/20021800539446 DO NOT SIGN / WRITE / STAMP BELOW THIS LINEFOR FINANCIAL INSTITUTION USAGE ONLY Back  Do not endorse or write below this line. 

  33. Payments Perspectives • Developments in check payments have been limited by the law • Check law primarily UCC based and the UCC evolves very slowly • Without changes in the law, evolution is limited by agreements (tens of millions) • Developments in non-check payments have not been limited artificially • Most notable advancements have been in expansion of ACH at point of purchase and lockbox

  34. Payments Perspectives • Check law now changing rapidly • 1999 Reg CC now allows electronic check returns (with agreement) • 2001 Uniform Electronic Check Transaction Act (UETA) - State law that validates electronic records (including checks) with same weight as paper documents • 2002 E-Sign Act – Federal law that validates electronic records (including checks) with same weight as paper documents • 2003/2004 – Check 21 creates new legal instrument that is image based

  35. Payments Perspectives • Recent changes the law unshackle check payments so they can now evolve and use new technology • To create new bank revenue through new products and services for customers • To improve bank expenses, improve internal processes and accelerate collections and returns • Two key characteristics of checks • Fast – no limits on collection speed • Information rich

  36. Need More Information • Accurate and updated Check 21 Information on ECCHO Website • www.eccho.org • Implementation Aids • FAQ – Available • Description and Overview -Available • Minimum Compliance Requirements - Available • Processing and Quality Standards - Available • Endorsement Chain - Available

  37. Preparing forCheck 21 ICBA National Convention March 15, 2004

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