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Ask About Check 21

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By | October 28, 2011

Dear Toolkit,

I just got a bizarre letter from my bank informing me that I may not get all my original cancelled checks back with my monthly statement from now on. They may include "substitute check" copies in place of some or even all of my originals. Can they do this? Aren't my original checks legal documents that belong to me? What's going on?


Mad Hatter

Dear Mad Hatter,

Calm down and pour yourself another cup of tea. Don't get your blood pressure up over this new wrinkle in our venerable banking laws. It's not a crazy as it sounds. This one's called the "Check Clearing for the 21st Century Act" (dubbed Check 21 for short) and it's effective date is October 28, 2004. It's just another example of technology forcing us to change another of our old fashioned habits. We're rigid critters and naturally resist this intrusion into our routine but bottom line, it won't have too much of an adverse affect on our lives and it'll ultimately make things a lot more efficient for our banks and, hopefully, for us as well.

The purpose of Check 21 is to enable banks to handle more checks electronically rather than waiting for them to be physically schlepped from bank to bank all over the country, during which time they could fall victim to fire, flood, air crashes, train wrecks, theft and who knows what else. Check 21 makes "substitute checks" the legal equivalent of originals. Even the IRS has agreed to accept them as proof of payment. A "substitute check" is defined as "a paper reproduction of an electronic image of an original paper check."

The most detrimental aspect of this new law to you might be the shortening of the "float" time some folks have relied on in the past. You used to be able to write a check to your kid's trombone teacher on Wednesday without worrying about whether you had enough in your bank account to cover it as you were expecting your paycheck to go into your account on Friday. Under Check 21 the trombone teacher can deposit your check to his bank on his way home and his bank (known as the bank of first deposit) will process it electronically. The money will be charged against your account almost immediately via this electronic transfer of information.

Up until Check 21 became law, they physically bundled up your trombone lesson payment with all the other checks from that day and sent them off in a Brink's truck to the nearest clearing bank, which would then rebundle them and send them to the maker's (that's you) bank to be charged against your account. That process took a couple of days or more. . .days that you still had use of the money you'd already disbursed to the trombonist. Goodbye float! Those days are gone forever.

Now if your bank is one of those that insists on having a legal copy of each check, the BOFD (bank of first deposit) will have to create a "substitute check" as a legal stand-in for your original, which will ultimately be destroyed. The substitute will be sent electronically to your bank, which may then print it out. Initially some banks will agree to go all-electronic, some will insist on having paper copies or originals of every transaction, and the rest will fall in between. As time goes by, this law will cause all banks to evolve with technology and adopt the electronic way of life. In the meantime, it'll be a gradual process so you'll have time to get used to it.

Check 21 doesn't require that banks send or receive checks electronically, it simply makes substitute checks the legal equivalent of original paper checks and requires that banks accept and process them. This law also supersedes certain contradictory state laws that have heretofore allowed consumers to demand the return of original checks. Ultimately, the efficiencies gained should save the banks a lot of money. It remains to be seen how much of the savings will be shared with customers.

Banks will have to spend a fortune on new equipment and training, and their brother and sister banks will no doubt be hassling your bank and each other until this system smooths out. So be kind to your bank while it goes through this painful, expensive transition.

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