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Check 21

Questions & Answers about Check 21 and Substitute Checks

What is Check 21?
The official name of Check 21 is “Check Clearing for the 21st Century Act.” The new Act was passed by Congress in the summer of 2003 and signed into law by President Bush on October 23, 2004. This law went into effect October 28, 2004. Check 21 provides for the creation of a new negotiable instrument know as a “Substitute Check.”

What are the benefits of the new Act?
There are several benefits that will be realized for both credit unions and credit union members including:

  • Providing for faster collection, return of check
  • Eliminates the risk of transporting documents (transportation risks, weather, etc.)
  • Removes the legal barriers to truncation, encouraging financial institutions to use image technology/electronification
  • Improves the efficiency of the U.S. payment system

What is a Substitute Check?
A Substitute Check is a paper reproduction of the original check. The Substitute Check is created from an image of the original check and also must:

  • Contain an image of the front and back of the original check;
  • Bear a MICR line containing all the information appearing on the MICR line of the original check;
  • Conform in paper stock, and otherwise with generally applicable industry standards for Substitute Checks;
  • Be suitable for automated processing in the same manner as the original check.

Substitute Checks have been referred to as IRDs or Image Replacement Documents. The terms are interchangeable but the Act specifically refers to these new items as Substitute Checks.

Is a Substitute Check a real check?
If a Substitute Check meets all the legal requirements of the original check, then the Substitute Check is indeed a real check and possesses the same legal equivalence of the original check. No financial institution can refuse to pay a Substitute Check. If your credit union receives a Substitute Check in place of the original share draft from your processor, Mid-States Corporation, SCIP or others, you must accept the Substitute Check.

When could a Substitute Check be received?
If your credit union does not return the original share drafts in their account statements, then you could possibly see a copy of a substitute check when a copy is requested or a member could also view images of share drafts via a home banking system. A member may also come into contact with a Substitute Check when a deposited check is returned to them. The returned deposited check may have been converted to a Substitute Check. This document is a legal document and must be accepted.

What happened to the original check?
At some point in the processing of the check, the original item will probably be destroyed. The destruction will occur once an electronic image of the original has been obtained. Each financial institution will determine their retention policy for the original check.

What does truncation mean?
Truncation occurs when an original paper check is removed from the collection process. The check’s information is stored electronically and the original check is destroyed. Members who do not receive original checks back with their account statement have what is known as truncated accounts.

What type of checks can become Substitute Checks?
Every type of U.S. Check can become a Substitute Check including:

  • Consumer Checks
  • Business Checks
  • Government Warrants
  • Treasury Checks
  • Money Orders
  • Controlled Disbursement Checks
  • Payable Through Drafts
  • Traveler’s Checks

Do we have to accept Substitute Checks?
YES! Everyone, including banks, credit unions, paying customers, depositing customers, consumers, corporations, the Fed, must accept a legitimate Substitute Check for payment.

What do I do if I have a problem/error with a Substitute Check?
If a member currently does not receive their original checks back in their account statement, then the problem/error can be handled by the credit union just like any other error including encoding errors, etc. If the member does receive their original checks back in their account statement and suffers a loss due to the receipt of a Substitute Check and the loss is because the original check was not provided, the member should contact the credit union for further assistance. The member may be able to file an Expedited Recredit Claim for the loss incurred.

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