Check 21 Final Rules: A BOL Team Summary

Check 21 Final Rules:
A BOL Team Summary
On Monday, July 26, 2004, the Federal Reserve released the final check 21 rules. These rules create a new Subpart D of Regulation CC and make certain other amendments to existing sections of the regulation and its Official Staff Commentary. The effective date is October 28, 2004. A model form for use in consumer disclosures is effective for use immediately, and a revision to Appendix D requiring all indorsements and other bank-identifying data to be in black ink is effective January 1, 2006, to allow the industry to adapt.

The Fed reports it received comments from 168 parties, including 107 depository institutions and organizations representing depository institutions, 35 consumers and consumer groups, 14 nonbank service providers and 12 other organizations and persons (including a U.S. senator).

The document runs 112 pages. We'll have a detailed analysis at a later date, but we've picked out some highlights to summarize for you now.

Consumer Awareness Disclosure
Responding to several comments, the Fed has shortened somewhat Model Form C-5A, the Consumer Awareness Disclosure required in section 229.57 of the revised regulation. (The model form is still one and one-half typewritten pages in the Board document.) The Board also has clarified that these disclosures need only be sent to consumer customers who will continue to receive checks in their statements, and to consumers who occasionally receive a substitute check. The former group will receive a notice no later than "the first regularly-scheduled communication (read: next statement date) after October 28, 2004," or at the time the customer relationship is established, for each relationship started after October 28, 2004.

Only one disclosure need be given per account in the case of joint accounts, and only one per customer (rather than account) relationship. Thus, if a customer receives disclosures in November 2004 because of an existing checking account from which checks are enclosed in statements, and the same customer opens another such checking account in March 2005, no additional disclosures need be made at that time. Similarly, if a consumer has three accounts subject to disclosure on October 28, 2004, the bank need only provide one disclosure to that consumer.

For each consumer who actually receives a substitute check, the disclosure will be delivered at the time the consumer asks for a check or copy and receives a substitute check (no later than the time at which the substitute check is provided to the consumer). This is in addition to any disclosure that might have been sent generally to customers who receive original and/or substitute checks in their statements.

Checks on Credit Card or Home Equity Lines
Credit card and home equity lines of credit are not "consumer accounts" as defined in the regulation. Therefore, the expedited recrediting provisions applicable to checks drawn on consumer accounts will not apply to checks charged to credit card or home equity accounts. It is conceivable, however, that a consumer account could be affected by a charge-back of a credit card or home equity line check previously deposited to the consumer account. If the consumer receives a substitute check instead of the original credit card or home equity line check, the consumer could have an expedited recredit right with respect to that check (assuming there is a warranty or other claim) because it was charged to the consumer asset account (as a charged-back item).

E-Sign Does Not Apply
The Board stated that it believes "that because the Check 21 Act specifically addresses alternative means of providing written information required by that Act, the E-Sign Act does not apply." The Board further suggests that a bank need not comply with E-Sign when providing materials electronically under the Check 21 Act, although it may choose to do so.

The Fed's statement does not, however, affect the applicability of the E-Sign Act to electronic delivery of written notices and disclosures under the rest of Regulation CC and the Expedited Funds Availability Act.

Definitions and Choice of Language
In several instances, the Board changed the wording of the regulation to avoid conflict with usage in the UCC. For example, the word "person" is used instead of "party" where new subpart D contemplates a meaning of the word "party" that differs from the meaning in the UCC. The word "accept" is replaced with more appropriate verbs, such as "receive" or "take."

Concerns About the MICR Line
One of the most hotly-argued provisions in the proposed rule was the handling of the MICR line on substitute checks. The final rule shifts the definition of what will be acceptable variations between the original check and the substitute check to the industry standard in ANS X9.100-140 (the new designation for the former X9.90 standard).

Indorsements and Identification Standards
The Board agreed with industry commenters that requiring a switch to black ink indorsements could prove burdensome if mandated in October 2004. The Board has inserted a mandatory compliance date for this provision (in Appendix D) of January 1, 2006. The Board also abandoned for now the idea of placing some indorsements on the front of checks or substitute checks. The location requirements for identification of truncating and reconverting banks have been loosened.

Clarification of Expedited Recredit Claims
The final rule commentary provides more detail about how a bank might demonstrate to a consumer that a claim is not valid under the regulation.

Clear and Conspicuous Standard
As it did with its other major consumer regulation, the Board has withdrawn its proposed Commentary language for Regulation CC that would have addressed the concept of clear and conspicuous disclosures.

Remotely Created Demand Drafts
By far the majority (74 of 76) of comments on this issue, which is separate from Check 21 but was addressed in the proposed rules, were in favor of the Board's creation of a single federal rule providing for warranties of authorization shifting the risk of unauthorized demand drafts to their creators and/or the bank accepting them for deposit. The Board indicated it intends to issue a separate proposal later this year.

Preliminary Review
This has been a preliminary review of the provisions of the final Check 21 amendments to Regulation CC. BankersOnline will be providing reliable, authoritative analyses of the rule in the days and weeks to come.