The Check 21 Act

In 2000, the Federal Reserve Board began to investigate the ramifications of promoting check truncation and electronic check presentment in the United States. The initial concept was to allow a financial institution to substitute a “machine-readable” check copy (or a “substitute check”) for the original check for forward collection or return. It also looked at creating requirements for “substitute checks” that would allow them to be legal replacements for original checks.

In December 2001, the check truncation and electronic check presentment proposal was sent by Chairman Greenspan to the Chairs and Ranking members of the Senate and House Banking Committees. Both committees introduced bills to Congress in 2003. In 2003, the Check Clearing for the 21st Century Act, or Check 21 Act, was signed into law and became effective in 2004. It is an historic Act for two reasons:

  • It is the first and only time the Federal Reserve proposed new legislation to Congress; and
  • The entire financial industry actively supported the law.

The Substitute Check

The Check 21 Act introduces the substitute check, which is a negotiable instrument that permits checks to be truncated at any point in the process. The Check 21 Act was created with the following objectives in mind:

  • To facilitate truncation by authorizing substitute checks;
  • To foster innovation in the check collection system without mandating receipt of checks in electronic form; and
  • To improve the overall efficiency of the Nation’s payment systems.

The Check 21 Act defines what a substitute check (or image replacement document) is and how to make it a legal equivalent to an original check. The following are the approved standards for a substitute check:

  • Is similar in size to a corporate check.
  • Must contain an image of the front and back of the original check.
  • Must contain the legal legend.
  • Must contain the identification of the financial institution that created the substitute check.
  • Must include the identification of the financial institution that truncated the original check as well as the reason for the return (if applicable).
  • The back of the substitute check must have areas for printed endorsements.

Furthermore, a substitute check must also contain a special code in the EPC field, or Position 44 (just before the ABA routing number) of the MICR line. This identifies the item as a substitute check, and provides assurance that the image of the original check has already been reduced for printing on the substitute check and should not be reduced again. The number “4” should be placed in Position 44 for a forward substitute check, and the number “5” for a return substitute check.


How Does the Check 21 Act Affect You?

There are four main ways the Check 21 Act may affect you in your day-to-day use of your checks:

  • It virtually ends check “float time.” The period of a check’s float time (the time between when you write a check and when it is cleared) will be significantly shorter. That means your bills or other expense will get paid faster and more efficiently. In fact, even balancing your checkbook is easier when you think about it. In the past, check float time has been between two and four days; now your checks may be cleared in as little as 24 hours.
  • You may not receive your original cancelled checks in a statement. With the implementation of substitute checks, you may not receive your original check back in your statement. However, you will receive substitute checks back, which are the legal equivalent of an original check. Therefore, if you need a check as proof of payment, the substitute check is just as valid as your original check.
  • It gives you recredit rights. One of the regulations outlined in the Check 21 Act is the ability for you to be recredited an amount due to a substitute check being charged incorrectly to your account or if it is altered in some way. The key thing to remember is that this “recredit” is ONLY valid for substitute checks. To learn more about your recredit rights, click here.
  • It requires mandatory notification to all account holders at a financial institution. As an account holder, you must be given proper notification if you are to receive a substitute check instead of an original check. Click here to learn more about notification requirements.

Tips for Dealing with the Check 21 Act

The following are some tips you can follow to effectively follow the Check 21 Act and continue doing “business as usual” in your life:

  • Use debit cards. With a debit card, all transactions are covered by a different law (Regulation E), which gives you the right for recredit on all transactions. In other words, if you use a debit card to make a purchase and there is a mistake made on your account, your financial institution must resolve the problem or put the disputed amount back in your account within 10 days.
  • Use automatic debit for recurring bills. Use of automatic debit for your recurring bills may be a perfect solution for you. This allows merchants and businesses to deduct your payments directly and automatically from your checking account. No hassles…no fuss. And, you will actually have more rights under Regulation E to dispute any errors related to your account.
  • Use overdraft protection. Consider signing up for overdraft protection; this service will save you from NSF and other fees. Most financial institutions have a line of credit you can use for this service.
  • Use a bill payment service. Many people have been concerned with using a bill payment service because of the risk of fraud they feel may be attached to it. However, if you take steps to keep yourself safe, such as keeping your anti-virus software updated, you are just as safe as you would be writing a check. In fact, because the electronic bill payment service is considered to be “electronic payments,” you are under the protection of Regulation E. Furthermore, if your payment is lost in some way, it can be tracked; mailing your bills cannot be traced.


View Certificate