Learn About Check 21 Tips

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What are the terms of Check 21?

Check 21 Overview

Under the terms of the Check 21 Act, banks can create a substitute check from an image of the original check. The legal equivalent of the original paper check, Check 21 substitute checks allow banks to eliminate the paper shuffle that was the hallmark of the traditional check processing system.

Substitute checks are paper copies created from electronic images of original paper checks (front and back, with all endorsements). Each substitute check also includes a statement identifying it as a legal copy of the original check. The original check may then be destroyed once it is digitized. Because substitute checks pass through fewer hands, they post to your account much more quickly than under the traditional processing method.

Where can I find more information on Check 21?

More Information on Check 21

If you have questions or want to learn about Check 21 Act, there are a few places to turn. You can get basic information about Check 21 by visiting the Federal Reserve Board Web site's consumer information page.

Another excellent resource is the Consumer's Union Web site where you'll find an entire list of pros and cons relating to the Check 21 Act under the finance heading.

Do I need to do anything different to avoid bouncing check?

Preventing Bounced Checks

Under the provisions of the Check 21 law, any check you write is going to clear your account much more quickly than it would have in the past. In fact, some checks will clear almost instantaneously, much like a debt card transaction does. If you've been practicing good checking account habits all along, you should be all set. However, if you're one of those who subscribe to the philosophy that you can't be out of money because there are still checks left in your checkbook, you could be in trouble. If you haven't already done so, balance your most recent checking statement. Make sure you record all ATM and debit card transactions. Once you've done that, keep a current running balance in your check register so you know your balance at all times. Finally, don't write any checks unless the money is already in the account to cover the full amount. Otherwise, you are going to bounce checks. At the very least, you'll get slapped with high fees. At the worst, your check bouncing history will be reported by merchants to check verification systems such as ChexSystems, and stores will no longer accept your checks.

What are my responsibilities under Check 21?

Consumer Responsibilities

As a consumer, you are obligated to recognize substitute checks drawn on your account as just as legally binding as the original written paper check. Strictly speaking, other than that there are no specific obligations on the part of the consumer. There are, however, a few things you're probably going to want to do to make sure you don't bounce checks or lose money to bank errors.

Since checks drawn on your account are going to clear much more quickly, you need to make sure you have the money in the account before you write a check. Second, you're going to want to review your bank statements as soon as you get them. No more stuffing in the file cabinet unopened. Why? Because even though financial institutions claim that Check 21 processing efficiencies will reduce the number of errors (you should learn about Check 21 if you're not already familiar with it), mistakes still happen. If a substitute check is withdrawn from your account twice, or if the amount of the check is more than it should have been, you only have 40 days to request a recredit of the amount in error. After that, you're out of luck.

How did check processing used to work?

Voluntary Check Truncation

Of course, customers can only take advantage of the rights afforded them by the Check 21 Act if they have received a copy of the substitute check they are disputing. For this as well as other reasons, many financial institutions are trying to entice customers to switch to voluntary check truncation.

Voluntary check truncation means you agree that the bank is not obligated to include copies of substitute checks in your monthly statement. Don't, whatever you do, agree to voluntary check truncation.

How does check processing work under Check 21?

When an Error Occurs

If you suspect an error has been made under the new Check 21 law substitute check processing system, you have 40 days in which to request that your bank reaccredit the disputed amount to your account. The 40-day clock starts running the day you receive either a copy of an individual substitute check or your bank statement that includes copies of your substitute checks. Within ten days of receiving your request to reaccredit, the bank must reaccredit your account up to $2,500 of the disputed amount. Within thirty days, the bank must reaccredit the full amount of the dispute if it is more than $2,500.

Never place a request to reaccredit verbally. Instead, place the request in writing and include the date of the request, a description of the dispute, an estimate of your loss, and a copy of the substitute check or the check number, the name of the payee, and the amount of the check. Keep copies of all correspondence you send to or receive from the bank. If you do speak with the bank, keep notes of the date, the topics discussed, and the name of the person to whom you spoke.

Why was Check 21 necessary?

Check 21 History

Even with the growing popularity of debit cards, U.S. consumers write approximately 71 billion checks a year. Under the traditional paper exchange system for check processing, each of those 71 billion checks used to pass through as many as a dozen sets of hands from the time a check was written and it enters the banking system until it is returned to the consumer paid.

Under the old system, a check would arrive at a branch, be sent to a central site for initial processing and then sent to a local clearing agent or the Federal Reserve office for final processing. After that, it would be sent to the bank's agent, who would return the paper check to the paying institution. Needless to say, this paper shuffle was fairly antiquated in the Internet age. Financial institutions were clamoring for a more streamlined, more efficient processing method.

Thankfully, banks began to learn about the Check 21 Act, which went into effect on October 28, 2004. This act gives these financial institutions the ability to use electronic images of paper checks for more to more efficient processing.

Can I get bank fees back that were charged in error?

Bounced Check Fees

If your bank or credit union made an error under the Check 21 substitute check processing system that results in another check bouncing, you should be able to receive a full reaccredit of those fees. When you submit your written request for a reaccredit of a substitute check disputed amount, be sure to itemize any and all bounced check charges, as well as other charges and fees assessed by merchants or creditors.

Let's say you mailed out a bunch of checks to pay your mortgage, utility, and Visa bills. Your mortgage company's bank issued a substitute check during processing of the payment. Somehow, the mortgage payment was withdrawn from your account twice so that by the time your Visa payment hit your account, there were insufficient funds, and the check bounced. As a result, Visa charged you a late fee of $35. While you may not be able to collect the $35 fee under the rights afforded you by the Check 21 Act, you could collect it and other damages in small claims or civil court, depending on the size of your claim.

What are my rights under Check 21?

Consumer Rights

Under the Check 21 Act, you have the right to request a reaccredit of disputed funds. A regular copy of a check does not carry these same protections. If you ask for a copy of a check, your bank may send you an ordinary copy instead of a substitute check copy. Make sure you specifically request the substitute check copy as it entitles you to certain legal rights and protections, including the right to receive a refund of up to $2,500 in disputed amounts within ten days.

You should make sure you request your bank send you all copies of any substitute checks with your bank statement to ensure that you do not lose any of your rights to dispute transactions in the future. If your bank invites you to sign up for voluntary check truncation, don't do it. Voluntary check truncation means you are agreeing that the bank does not have to send you copies of substitute checks. This, in essence, means you are throwing out the window your rights to dispute errors to your account.

What are my bank's responsibilities under Check 21?

Bank Responsibilities

Banks are really the ones that stand to gain the most from the Check 21 Act. The ability to use substitute checks means greater processing efficiency and lower costs—which, by the way, the banks aren't required to pass on to customers. It only stands to reason, then, that Banks should be held to a higher standard of accountability.

You should have already received a notice from your bank or credit union explaining the legal status of substitute checks. A bank or credit union that uses substitute checks is also obliged to reaccredit any disputed amounts to a customer's account—up to a $2,500 maximum—within ten days of receiving written notice of the dispute from the customer. If the disputed amount exceeds $2,500, the bank has to make good on the full amount within 30 calendar days of first receiving written notice of the disputed amount.

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