New Consumer Guides Regarding Check 21 and Check-Processing Technology
November 1, 2004
Circular No. 11656

To All Depository Institutions and Others Concerned in the Second Federal Reserve District:

The Federal Reserve Board announced the publication of two new consumer guides that provide practical information on the changes resulting from technological advances in check processing.

Technological innovation is allowing for checks to be collected and processed more efficiently, reducing the time and resources dedicated to handling, sorting, and transporting checks. A federal law known as the Check Clearing for the 21st Century Act (Check 21), which took effect on October 28, 2004, makes it easier for banks to electronically transfer check images instead of physically transferring paper checks. Check 21 does not require banks to accept checks electronically, but it facilitates electronic transmission between banks by providing a way for banks that clear electronically to exchange information with those that do not.

Under Check 21, banks would be able to stop the flow of paper checks, process them electronically, and create machine-readable "substitute checks"—paper copies of the front and back of original checks—when a paper check is needed. Check 21 requires banks and consumers to accept substitute checks in place of original checks in the check collection or return process. It does not require that bank customers stop receiving paid checks in their account statements, although these checks may be either the original or in the form of substitute checks.

The Consumer Guide to Check 21 and Substitute Checks describes how consumers may be affected by the new law and provides information on how to resolve problems associated with the receipt of substitute checks.

A second guide, What You Should Know about Your Checks discusses more broadly how check payments have changed, including the increased use of electronic check conversion, a process separate from Check 21. In the check conversion process, a consumer authorizes the use of information from their paper check to make an electronic payment at the point of sale or when paying a bill by mail.

Both brochures stress that because payments might be processed faster, when a check is written, the money may be deducted from a consumer's checking account sooner. As a result, consumers should be sure they have enough money in their account to cover the amount of their check.

The guides are available on the Board's web site (see links below) and also from the Federal Reserve Board's Publication Fulfillment, Mail Stop 127, Washington DC 20551, 202-452-3244.

Press release OFFSITE
Consumer Guide to Check 21 and Substitute Checks OFFSITE
What You Should Know About Your Checks OFFSITE

Maryann Campbell
Supervising Examiner
Legal and Compliance Risk Department