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Federal Reserve Bank of Dallas
2200 N. PEARL ST.
DALLAS, TX 75201-2272

HELEN E. HOLCOMB
FIRST VICE PRESIDENT AND
CHIEF OPERATING OFFICER

August 13, 2004

Notice 04-51

TO: The Chief Operating Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

SUBJECT
Final Amendments to Regulation CC
(Availability of Funds and Collection of Checks)
DETAILS
The Board of Governors has published final amendments to Regulation CC that add
new subpart D, with commentary, to implement the Check Clearing for the 21st Century Act.
These amendments set forth the requirements of the act that apply to banks, a model consumer
awareness disclosure and other model notices, and indorsement and identification requirements
for substitute checks. The final amendments also clarify some existing provisions of the rule and
commentary.
This rule becomes effective October 28, 2004, except for model form C–5A in
appendix C, which became effective August 4, 2004, and paragraph (4) of appendix D, which
becomes effective January 1, 2006.
ATTACHMENT
A copy of the Board’s notice as it appears on pages 47290–328, Vol. 69, No. 149 of
the Federal Register dated August 4, 2004, is attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

-2MORE INFORMATION
For more information, please contact Don Jackson, Payments Services Department,
(214) 922-5431. Paper copies of this notice or previous Federal Reserve Bank notices can be
printed from our web site at www.dallasfed.org/banking/notices/index.html.
Sincerely,

Wednesday,
August 4, 2004

Part IV

Federal Reserve
System
12 CFR Part 229
Availability of Funds and Collection of
Checks; Final Rule

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47290

Federal Register / Vol. 69, No. 149 / Wednesday, August 4, 2004 / Rules and Regulations

FEDERAL RESERVE SYSTEM
12 CFR Part 229
[Regulation CC; Docket No. R–1176]

Availability of Funds and Collection of
Checks
Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
AGENCY:

SUMMARY: The Board of Governors is
publishing final amendments to
Regulation CC that add a new subpart D,
with commentary, to implement the
Check Clearing for the 21st Century Act.
These amendments set forth the
requirements of the Act that apply to
banks, a model consumer awareness
disclosure and other model notices, and
indorsement and identification
requirements for substitute checks. The
final amendments also clarify some
existing provisions of the rule and
commentary.
DATES: This rule is effective on October
28, 2004, except for model form C–5A
in appendix C, which is effective
August 4, 2004, and paragraph (4) of
appendix D, which is effective on
January 1, 2006.
FOR FURTHER INFORMATION CONTACT: Jack
K. Walton, II, Assistant Director ((202)
452–2660), or Joseph P. Baressi, Senior
Financial Services Analyst ((202) 452–
3959), Division of Reserve Bank
Operations and Payment Systems; or
Stephanie Martin, Associate General
Counsel ((202) 452–3198), or Adrianne
G. Threatt, Counsel ((202) 452–3554),
Legal Division; for users of
Telecommunication Devices for the Deaf
(TDD) only, contact (202) 263–4869.
SUPPLEMENTARY INFORMATION:

Background
I. The Need for and General Provisions
of the Check 21 Act
Under current law, a bank must
present the original paper check for
payment unless the paying bank has
agreed to accept presentment in some
other form.1 Sections 3–501(b)(2) and 4–
110 of the Uniform Commercial Code
(U.C.C.) specifically authorize banks
and other persons to agree to alternative
means of presentment, such as
electronic presentment. However, to
engage in broad-based electronic
presentment, a presenting bank would
need electronic presentment agreements
with each bank to which it presents
checks. This has proven impracticable
because of both the large number of
1 See, e.g., section 3–501(b) of the Uniform
Commercial Code.

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paying banks and the unwillingness of
some paying banks to receive electronic
presentment.2 The requirement that
banks present the original check absent
agreement to the contrary and the
difficulty of obtaining alternate
presentment agreements with all paying
banks impedes the ability of banks that
want to process checks electronically to
take full advantage of that technology.
As a result, the payment system as a
whole has not achieved the efficiencies
and potential cost savings associated
with handling checks electronically.
By authorizing the use of a new
negotiable instrument called a substitute
check, the Check Clearing for the 21st
Century Act (the Check 21 Act or the
Act) facilitates the broader use of
electronic check processing without
mandating that any bank change its
current check collection practices.3 A
substitute check is a paper reproduction
of an original check that contains an
image of the front and back of the
original check, is suitable for automated
processing in the same manner as the
original check, and meets other
technical requirements. A bank that for
consideration transfers, presents, or
returns a substitute check (or a paper or
electronic representation of a substitute
check) warrants that (1) the substitute
check contains an accurate image of the
front and back of the original check and
a legend stating that it is the legal
equivalent of the original check, and (2)
no depositary bank, drawee, drawer, or
indorser will be asked to pay a check
that it already has paid. A substitute
check that meets the Check 21 Act’s
requirements regarding accuracy, bears
the legend, and for which a bank has
made the substitute check warranties is
the legal equivalent of the original check
for all purposes and all persons.
The use of legally equivalent
substitute checks should facilitate
collection and return of checks in
electronic form. For example, a
depositary bank in California that
receives a check drawn on a bank in
New York now must send the original
paper check for collection unless it, or
an intermediary collecting bank that
presents checks sent by it, has an
electronic presentment agreement with
the paying bank. Under the Check 21
Act, by contrast, the California bank
could transfer check information
electronically to a collecting bank in
New York with which it had an
2 Some paying banks and bank customers prefer
to receive checks in paper form for operational or
other reasons.
3 Pub. L. 108–100, 117 Stat. 1177 (codified at 12
U.S.C. 5001–5018). The Check 21 Act was enacted
on October 28, 2003, and takes effect on October 28,
2004.

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agreement to do so. The New York
collecting bank then could create a
substitute check to present to the New
York paying bank. The New York
paying bank would be required to take
presentment of a substitute check that
met all the legal equivalence
requirements. Thus, instead of
processing and transporting the original
check across the country, the California
bank could collect the substitute check
using only local New York
transportation.
II. How the Check 21 Act Affects Banks
A. In General
Although the Check 21 Act is
designed to enable more efficient use of
electronic check processing by allowing
use of one piece of paper in place of
another, the law does not require any
bank to use electronic check processing,
receive electronic presentment, or create
a substitute check. The Check 21 Act
also does not make electronic check
images or electronic check information
the legal equivalent of an original check.
Moreover, the Check 21 Act does not
alter existing arrangements under which
banks agree to return paid paper checks
to account holders with periodic
account statements. However, after the
effective date of the Check 21 Act,
account holders that receive paid checks
with their statements may receive a mix
of original checks and substitute checks.
The characteristics of a substitute
check are such that a bank receiving a
substitute check would be able to
process that substitute check to the
same extent that it could process the
original check. As a result, banks would
not be required to change their check
processing equipment because of the
Check 21 Act, and, except as described
in the next section, there would be no
need for a bank to treat original checks
and substitute checks differently during
the check collection and return process.
Because a legally equivalent substitute
check contains an accurate
representation of the information on the
original check and all indorsement
information associated with the check,
drawers and other persons should be
able to rely on a substitute check just as
they would an original check for other
purposes, such as proof of payment.
B. Provisions Affecting All Banks
Certain provisions of the Check 21
Act will affect all banks, even those that
do not choose to create substitute
checks. For example, any bank that
transfers, presents, or returns a
substitute check (or a paper or
electronic representation of a substitute
check) for consideration would make

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Federal Register / Vol. 69, No. 149 / Wednesday, August 4, 2004 / Rules and Regulations
the substitute check warranties and
would be responsible for indemnifying
any person that suffered a loss due to
the receipt of a substitute check instead
of the original check. A bank that
transferred a substitute check to a
consumer who incurred a loss
associated with the substitute check also
might be required to provide an
expedited recredit to that consumer. A
bank that provides paid checks to
consumer customers with periodic
account statements or that otherwise
provides a substitute check to a
consumer customer must provide a
disclosure that describes substitute
checks and substitute check rights.
Although the Check 21 Act does not
require banks to make processing
changes to receive substitute checks, a
bank will be required to qualify a
substitute check for return differently
than it does an original check. A bank
must place a ‘‘2’’ in position 44 of the
MICR line of a qualified returned
original check. A bank that qualifies a
substitute check for return instead must
encode position 44 of the substitute
check’s qualified return MICR line with
a ‘‘5.’’
C. Provisions Affecting Banks That
Create Substitute Checks
Although the foregoing provisions of
the Check 21 Act would apply to all
banks, the law is designed so that losses
associated with a substitute check
ultimately would be borne by the party
that first transferred, presented, or
returned the substitute check (the
reconverting bank).4 A bank that paid a
warranty claim or provided an
indemnity or expedited recredit for a
substitute check that it received from
another bank could, in turn, bring a
warranty, indemnity, or interbank
expedited recredit claim against the
bank that transferred the substitute
check to it and thereby pass the
associated loss back to the reconverting
bank.5 Thus, if there is a duplicative
check payment involving a substitute
check, a substitute check indemnity
claim, or a breach of the legal
equivalence warranty, the Check 21 Act
places ultimate responsibility on the
4 A reconverting bank is (1) the bank that creates
a substitute check or (2) the first bank that receives
a substitute check created by a person that is not
a bank and transfers either that substitute check or
in lieu thereof the first paper or electronic
representation of that substitute check.
5 Banks may further allocate liability amongst
themselves as part of their agreements to handle
checks electronically. A reconverting bank that
received a check in electronic form therefore could,
by agreement, pass back to the sender of that item
some or all of the losses the reconverting bank
incurred if it used the electronic item to create a
substitute check that gave rise to a Check 21 Act
warranty, indemnity, or expedited recredit claim.

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47291

reconverting bank.6 The Check 21 Act
also requires the reconverting bank to
identify itself as such and to preserve
the indorsements of parties that
previously handled the check in any
form.

sought general comment on several
issues, including whether it should
include in Regulation CC a new U.C.C.
warranty regarding the drawer’s
authorization of remotely-created
demand drafts.

III. Overview of the Board’s Proposed
Rule
The Board in January 2004 proposed
to implement the Check 21 Act by
adding to Regulation CC a new subpart
D that would incorporate the
requirements of the Act applicable to
banks that create, receive, or provide
substitute checks or paper or electronic
representations of substitute checks.7
The Board proposed that subpart D
would contain provisions concerning
requirements a substitute check must
meet to be the legal equivalent of an
original check, reconverting bank
duties, the warranties and indemnity
associated with substitute checks,
expedited recredit procedures for
consumers and banks, liability for
violations of subpart D, and the
interaction between subpart D and
existing federal and state laws. The
Board proposed new model notices in
appendix C for the consumer awareness
disclosure and other consumer notices
regarding substitute checks.
The Board also proposed amendments
to implement the Check 21 Act that
would affect some existing provisions of
Regulation CC and its commentary. For
example, the Board proposed to
supplement some existing defined terms
in § 229.2 for which the Check 21 Act
had slightly different definitions and to
define several new terms used in
subpart D. The Board also proposed to
amend the magnetic ink character
recognition (MICR) line requirements
for qualified returned checks to allow
for differences to facilitate the
processing of substitute checks and to
amend § 229.35 and appendix D to
include indorsement and identification
standards for substitute checks.
The Board also proposed revisions to
several other provisions of Regulation
CC and its commentary that were
unrelated to the Check 21 Act. For
example, the Board proposed amending
the commentary to clarify that a
returned check notice need not be
written, clarify the application of the
Electronic Signatures in Global and
National Commerce Act (the E-Sign Act)
to consumer disclosures that Regulation
CC requires to be in writing, and clarify
the time by which a paying bank may
extend the return or notice of
nonpayment deadline. The Board also

Overview of Comments on the Proposed
Rule

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7 69

see footnote 5.
FR 1470 (Jan. 8, 2004).

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The Board received comments on the
proposed rule from 168 commenters,
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
one United States Senator). The vast
majority of these commenters generally
approved of the Check 21 Act and the
Board’s proposed rule but expressed
views about how the Board could
change specific provisions of the rule.
Specific substantive comments are
discussed in more detail in the portions
of the Section-by-Section Analysis that
analyze the commented-upon
provisions.
I. Comments Expressing General
Concerns
Several commenters expressed
general disapproval of the Check 21 Act
and the Board’s proposed rule. These
commenters expressed concern that the
use of substitute checks would increase
fraud, benefit banks at the expense of
consumers, and confuse consumers and
bank employees.8
The commenters concerned about
consumer harm argued that the Check
21 Act would shorten the time needed
to collect checks and would not reduce
fees for consumers.9 The Board expects
that the Check 21 Act ultimately will
decrease the time needed to collect
checks, which is an outcome that the
Board deems desirable, and will result
in other benefits to banks and their
8 Some commenters argued that banks would be
unable to make an informed decision about whether
to process checks physically or switch to electronic
processing because of uncertainty about the relative
costs of each option. There are a variety of factors
in determining the relative costs of check
processing options, some of which are institutionspecific. The Board expects that most banks should
be able to analyze their own cost structures and
make informed processing decisions.
9 Some commenters also expressed concern that
existing hold periods for deposited checks were
either too long or too short. The existing hold
periods in subpart B of Regulation CC are those set
forth in the Expedited Funds Availability Act, and
the Board is required to shorten (but may not
lengthen) those hold periods as the time periods for
clearing local and nonlocal checks improve on a
widespread basis. The Board will adjust the hold
periods in subpart B if and when the check clearing
timeframes for checks improve substantially enough
to warrant such adjustments.

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customers.10 For example, processing
changes that a bank makes in reliance
on the Check 21 Act could enable the
bank to offer its depositors later cutoff
times for certain deposits or to make
check images available to consumers
online. These changes would allow
consumers faster access to deposited
funds and to records relating to their
check payments, respectively.
Several commenters noted that people
already are confused because some
checks are used to obtain information to
initiate an automated clearing house
(ACH) debit rather than to effect the
payment transaction by check. These
commenters expressed concern that
adding substitute checks to the payment
system would exacerbate confusion
about the rights associated with checks.
The Board agrees with commenters that
substitute checks could increase
confusion about the ways in which
checks can be used to process payments
and the legal rights associated with each
processing choice. The Board plans to
prepare guidance on these topics.
II. Comments Urging Action
Inconsistent With the Check 21 Act
Several commenters suggested that
the Board take actions that would be
inconsistent with the language or intent
of the Check 21 Act.
Three commenters suggested that the
Board delay the effective date of the rule
beyond the effective date of the statute.
However, to implement the Check 21
Act effectively, the rule generally must
take effect no later than the effective
date of the statute.11
One commenter suggested that the
Board establish standards for the
exchange of electronic check images.
This would go beyond the scope of the
provisions of the Check 21 Act, which
only relate to substitute checks.
Electronic presentment will continue to
be governed, as it is today, by
agreements between the paying bank
and the presenting bank.12
10 The more time needed to collect a check, the
greater the risk that the depositary bank will make
funds deposited by check available for withdrawal
before it knows whether the paying bank will pay
or return the check. The Board’s policies therefore
seek to reduce, rather than preserve, the time for
collecting checks. See, e.g., the Board’s Policy
Statement on Delayed Disbursement, Fed. Res. Reg.
Service ¶ 9–750, p. 9–247.
11 Model disclosure C–5A in appendix C takes
effect immediately so that banks need not delay
their use of that model in preparing the consumer
awareness disclosure required by § 229.57. The
requirement in appendix D that all indorsements be
printed in black ink does not take effect until
January 1, 2006, to give banks a transition period
to make necessary processing changes.
12 One commenter suggested that the Federal
Reserve Banks publish a list of banks that have
agreed to send or receive checks in electronic form.

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Another commenter opined that the
costs of using substitute checks should
be borne by paying banks and bank
customers that demand paper checks.
This would be at odds with the Act’s
intent to allow banks that choose to
process checks electronically to do so
and create substitute checks in a manner
that is transparent to banks and other
persons that require paper checks.
Several commenters expressed
particular concern that the use of
substitute checks would make the
original check more difficult to obtain,
which in turn would impede law
enforcement’s ability to obtain physical
evidence, such as fingerprints, pen
pressure analysis, and other forensic
evidence from paper checks.13 These
commenters requested that the Board
impose original check retention
requirements in subpart D. Original
checks are truncated in today’s
environment, and the U.C.C. requires
the person that truncates the check to
give the original check to the drawer,
keep the original check, or destroy the
original check but maintain the ability
to provide a legible copy for a specified
period of time (usually seven years).
The Board expects that, after the Check
21 Act takes effect, more checks
potentially will be truncated and
destroyed. The Check 21 Act does not
impose any additional requirements on
original check retention, and the Board
is not imposing any such requirements
by regulation. Rather, the choice of
whether, and after what period of time,
to destroy a check will remain a
business decision for the bank or other
person that removes the check from the
collection or return process. Banks and
other persons that destroy checks may
take fraud risks into account when
deciding whether to destroy a truncated
check. For example, some banks may
choose to keep original checks above a
certain dollar amount due to the
potentially greater risks associated with
those items.
Reserve Banks and other collecting banks may
publish lists of banks that accept electronic
presentment from them. However, any such lists
will reflect only the agreements of the listed banks
to receive presentment electronically from that
particular collecting bank and would not indicate
a general agreement of the receiving bank to receive
presentment electronically.
13 The commenters did not quantify how often or
how many checks are used for forensic purposes by
law enforcement; however, the Board understands
from staff of the Financial Management Service of
the Department of Treasury that cases in which
examination of an original Treasury check is
necessary to determine a fraud or forgery are
relatively rare.

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III. Comments That Misunderstood the
Check 21 Act or the Board’s Proposed
Rule
The Board received numerous
comments that indicated confusion
about the scope, requirements, or effects
of the Check 21 Act or the proposed
rule.
Fourteen individuals expressed
concern that the Act would preclude
them from receiving paper checks with
their periodic account statements, and
four individuals stated that consumers
should be able to stop banks from
converting their checks to substitute
checks. The Check 21 Act does not
preclude arrangements whereby
customers receive paid checks, although
it does make a substitute check
acceptable for that purpose.
Two other commenters argued that
the Act and the proposed rule would
make it more difficult to comply with
requirements to produce original checks
and suggested that the Board confirm
that the Internal Revenue Service (IRS)
would accept substitute checks or fullsized photocopies for tax purposes.
Substitute checks that meet the legal
equivalence requirements of the Check
21 Act can, by the terms of the Act, be
used wherever an original check is
required. The Board also notes that the
IRS currently allows documents other
than original checks to be used for tax
purposes.14
Three commenters asked the Board to
ensure that banks’ implementation of
electronic check processing services as
contemplated by the Check 21 Act
would not impede nonbanks’ ability to
arrange for checks deposited at
disparate locations to be returned to a
single location. A check is returned to
the bank whose routing number appears
in the depositary bank indorsement on
the back of the check. To facilitate
banks’ ability to receive returned checks
at a centralized location, § 229.35(d) of
Regulation CC permits banks to agree
that the depositary bank indorsement
applied to the back of the check can be
the indorsement of a bank other than the
bank into which the check was
deposited. The Check 21 Act and the
Board’s final rule do not affect
§ 229.35(d), and the Board accordingly
expects centralized returned check
arrangements to function with respect to
substitute checks just as they do with
respect to original checks today. The
Board also notes that industry standards
include fields within electronic check
records that are specifically designed to
14 See, e.g., IRS Publication 552—Recordkeeping
for Individuals, which discusses the permissibility
of account statements to prove payments made by
check, credit card, or electronic fund transfers.

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facilitate centralized check return
programs.
Another commenter was concerned
that the Act and subpart D would
impede banks’ ability to use ‘‘positive
pay’’ and ‘‘positive payee’’ programs to
detect fraud. Under a positive pay
program, a bank compares the check
number and amount of a presented
check against a list of check numbers
and amount information provided by
the drawer. The use of a substitute
check should not affect this program. In
a positive payee program, the drawer
identifies the payee of a check, and the
bank scans the payee field of a
presented check to verify that the payee
information is correct. The payee
information on a substitute check will
appear in a different location than on an
original check, because the image of the
original check is reduced and shifted
when it is placed on a substitute check.
However, position 44 of the MICR line
of a substitute check is required to bear
a ‘‘4’’ for forward collection or a ‘‘5’’ for
qualified return. This information
should allow the paying bank’s checkprocessing equipment to identify the
document being scanned as a substitute
check and to adjust the location at
which it scans the payee field
accordingly.
Overview of the Board’s Final Rule
The Board’s final rule is substantially
similar to the rule that the Board
proposed for comment. However, the
Board has made a number of clarifying
changes in response to comments
received and its own further analysis.
These changes include adjustments to
certain definitions, particularly
regarding how MICR-line variations
affect a document’s status as a substitute
check. The commentary to the final rule
provides further clarification about the
flow of responsibility for the warranties
and indemnity. In addition, the final
rule clarifies the scope of, and
timeframes that apply to, expedited
recredit claims and the general
consumer awareness notice
requirement. The Board also has
provided additional commentary in
response to comments that indicated
confusion about the interaction between
particular provisions of the Check 21
Act and particular provisions of the
U.C.C.
Section-by-Section Analysis
This section-by-section analysis
focuses on the provisions of the rule
that the Board changed or considered
changing in light of comments or the
Board’s further consideration. This
analysis does not discuss provisions of
the final rule that are substantially

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similar to the corresponding provision
of the proposed rule and on which the
Board received no substantive comment.
Regarding the Board’s reasoning for
those provisions, the section-by-section
analysis of the Board’s proposed rule is
incorporated by reference.
I. Amendments To Implement the Check
21 Act
A. Definitions and Word Usage
1. In General. Three commenters
suggested that the final rule should use
terms that are defined in Articles 3 and
4 of the U.C.C. in a manner consistent
with the U.C.C.’s usage of those terms.
The commenters argued that to do
otherwise would produce uncertainty
and increase the likelihood of litigation.
In particular, these commenters stated
that the commentary of the proposed
rule used the terms accept and party in
ways not contemplated by the U.C.C.
The Board agrees that subpart D’s word
usage should be consistent with the
U.C.C. The final rule and commentary
therefore replace the word accept with
more appropriate verbs, such as take or
receive, and replace the word party with
person where subpart D contemplates a
meaning of the term party that is
different from the meaning in the U.C.C.
2. Section 229.2(a) Account; Section
229.2(n) Consumer Account. Four
commenters expressed concern about
aspects of the Board’s proposed
definitions of account and consumer
account.
One commenter suggested that the
Board’s expansion of the definition of
account to include any deposit account
at a bank for purposes of subpart D was
inappropriately broad. The broad
account definition for purposes of the
Check 21 Act and subpart D is statutory,
and the final rule retains it. Although
the Board has not substantively
modified the account definition, it has
revised the language of the rule and
commentary to distinguish more clearly
accounts for purposes of subpart D from
accounts for purposes of the other
subparts of Regulation CC.
One commenter expressed confusion
about when interbank deposits would
be excluded from the account
definition. Existing Regulation CC
excludes interbank accounts for
purposes of all subparts of Regulation
CC. However, the context in which
subpart C uses the term account clearly
indicates that interbank accounts are
meant to be included within that term.
The final rule retains the proposed
rule’s exclusion of interbank accounts
for purposes of only subpart B and, in
connection therewith, subpart A. The
commentary to the final rule explicitly

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notes that interbank deposits are
included in the account definition for
purposes of subparts C and D.
To determine when a consumer
awareness notice would be necessary,
one commenter asked whether the term
consumer account included an omnibus
clearing account held by a brokerage
firm at a bank for purposes of allowing
the brokerage firm to pay checks drawn
by consumers. The commentary to the
final rule clarifies that this type of
account is not a consumer account. The
commentary to the consumer account
definition also clarifies that a credit card
account or home equity line of credit
that a consumer can access by check is
not a consumer account for purposes of
Regulation CC because in those cases
the consumer’s relationship with the
bank is a loan rather than a deposit
relationship.
3. Section 229.2(m) Check Processing
Region. One commenter stated that the
commentary to § 229.2(m) erroneously
states that there are 46 check processing
regions. A check processing region is
defined as the area served by a Reserve
Bank’s main office, branch, or other
office for check processing purposes.
Because the number of Reserve Bank
locations that process checks is not
static, the final rule omits any numerical
reference.
4. Section 229.2(z) Paying Bank. One
commenter expressed concern that the
proposed rule’s definition of paying
bank stated that the Treasury of the
United States or the U.S. Postal Service
was a paying bank for a check payable
by that entity and sent to that entity for
collection, whereas the statutory
definition states that these entities are
paying banks to the extent that they act
as payors. The commenter expressed
concern that the proposed rule’s
definition could be read to exclude
Treasury checks and postal service
money orders that are sent to Federal
Reserve Banks for collection rather than
sent directly to the Treasury or the U.S.
Postal Service.
The proposed amendment to the
paying bank definition was intended to
parallel the construction of the existing
definition and not to alter the meaning
of the Check 21 Act’s definition. The
final rule retains the proposed
definition. The Board has amended the
commentary to the definition to clarify
that, because the Federal Reserve Banks
act as fiscal agents for the Treasury and
U.S. Postal Service, Treasury checks and
U.S. Postal Service money orders that
are sent to the Reserve Banks for
collection are deemed to be sent to the
Treasury or the U.S. Postal Service,
respectively.

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5. Section 229.2(ww) Original Check.
One commenter expressed confusion
about the proposed definition of original
check and stated that the definition
could be read to mean that only one
substitute check could be created with
respect to any original check. As
indicated in the proposed rule and
commentary, the Board defined the term
original check to distinguish the first
paper item authorized by the drawer
from any later electronic file or
substitute check that represents that
item. The Board has left the definition
unchanged but has provided
commentary to clarify that multiple
substitute checks could be created at
various points in the collection and
return process to represent the same
original check.
6. Section 229.2(vv) MICR Line. The
final rule identifies the applicable
industry standards for MICR-line
printing and adds a sentence to the
commentary to highlight that those
standards can vary the technical aspects
of printing the MICR line. This would
include, for example, the circumstances
under which magnetic ink is not
required. This revision responds to
comments suggesting that a bank not be
required to use magnetic ink when
printing a paid substitute check solely
for the purpose of providing it to the
account holder.
7. Section 229.2(xx) Paper or
Electronic Representation of a
Substitute Check. The phrase ‘‘paper or
electronic representation of a substitute
check’’ was used at many points of the
proposed rule and commentary,
particularly with respect to the flow of
the warranties and indemnity. Several
commenters expressed confusion about
the need for this phrase or asked that
the Board provide more detail about
what types of documents or files were
included within its scope.
The statute intends that the chain of
banks that make the warranties and
indemnity will flow uninterrupted from
the first reconverting bank to the
claimant regardless of how many times
the form of the item changed after
creation of the first substitute check.
The phrase ‘‘paper or electronic
representation of a substitute check’’
ensures that responsibility for the
warranties and indemnity will flow
from the reconverting bank to the last
bank that for consideration transfers,
presents, or returns the substitute check
or representation thereof. The phrase
also ensures, as contemplated by the
statute, that drawers will have the
ability to make a warranty claim under
the Check 21 Act even if they received
a paper or electronic representation of a
substitute check instead of a substitute

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check. The final rule therefore defines
the phrase, and the commentary to the
new definition provides examples to
illustrate its scope.
8. Section 229.2(zz) Reconverting
Bank (corresponding to Section
229.2(yy) of the proposed rule). Several
commenters expressed concern about
the proposed definition of reconverting
bank and the accompanying
commentary.15 Most of these comments
focused on the portion of the definition
describing the identity of the
reconverting bank when a nonbank
created the substitute check.
A few commenters opined that the
rule should prohibit a person other than
a bank from creating a substitute check.
However, the statutory text defining a
reconverting bank explicitly
contemplates nonbank creation of a
substitute check, because it states that a
bank can be a reconverting bank if it is
the first bank to transfer or present a
substitute check created by a person
other than a bank. The legislative
history also explicitly states that
Congress intended to allow nonbanks to
create substitute checks.16 The Board
therefore has retained the portion of the
definition pertaining to nonbank
creation of substitute checks.
One commenter was confused by the
provision in the proposed rule that a
bank receiving a substitute check for
deposit from a nonbank would be the
reconverting bank if, in lieu of the
substitute check, that bank transferred
the first paper or electronic
representation of the substitute check.
This provision ensures that ultimate
responsibility under the Act for the
substitute check warranties and
15 One commenter was confused that the rule
used the term reconverting, rather than converting,
bank. Reconverting bank is the statutory term and
reflects the fact that the original check is converted
to electronic form and then later reconverted back
to a paper substitute check.
16 When discussing circumstances under which
the substitute check warranties are made, the House
Report on the Check 21 Act states as follows:
The Committee intends that this language allow
depositing customers of a bank to create substitute
checks with the same legal protections for
recipients under this legislation as if they had been
converted by a financial institution at the point of
first deposit. If a bank allows its depositing
customer to create substitute checks, the bank is
warrantor for the substitute checks created by its
depositing customer. For example, if a grocery store
creates a substitute check, the bill makes the
grocery store’s bank, and not the grocery store,
responsible for the section 4 warranties. A bank
may choose to pass along, by agreement with the
depositor that creates the substitute check, any
liability it may incur due to the depositor in this
regard. The Committee believes that requiring a
bank’s credit to stand behind a substitute check will
provide strong protections when paper checks are
removed from the system at the point of sale or
purchase before they are deposited at, or presented
to a financial institution. H.R. Rep. No. 108–132, at
17 (2003).

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indemnity will flow back to the bank
that received the substitute check from
the nonbank. Without this provision, if
a bank received a substitute check but
instead transferred an electronic
representation of that substitute check
and a subsequent bank created a second
substitute check, that second bank
would not be able to pass back losses
under the Act to the initial depositary
bank. The final rule therefore retains the
proposed provision.
Several commenters expressed
concern about the potential for a bank
to become a reconverting bank without
its knowledge and consent. For
example, commenters were concerned
that a nonbank customer could create
and deposit a substitute check without
first consulting the bank about its
willingness to accept substitute checks
in lieu of original checks. The first bank
that transfers, presents, or returns a
substitute check created by a nonbank
(or in lieu therefore the first paper or
electronic representation of that
substitute check) is the reconverting
bank regardless of whether it explicitly
agreed to do so. However, generally only
large corporate depositors would be
equipped to create and deposit
substitute checks. Banks therefore
should be able to address this issue
through their deposit agreements.
One commenter requested that the
commentary to the reconverting bank
definition provide an example about the
identity of the reconverting bank if a
bank used a nonbank service provider to
create a substitute check on its behalf.
The proposed rule already had such an
example and the final rule retains it
with minor revisions. The Board also
has revised the proposed commentary to
describe more clearly how to identify
the reconverting bank for a check
created by a nonbank and to provide
additional examples about when a bank
would or would not be a reconverting
bank.
9. Section 229.2(aaa) Substitute Check
(corresponding to Section 229.2(zz) of
the proposed rule).
a. General Comments. One
commenter stated that the industry
standard for substitute checks supported
substitute checks as well as other types
of ‘‘image replacement documents,’’
such as photocopies in lieu of the
original check. The commenter
requested clarification about whether
the other types of documents
contemplated by the standard would be
substitute checks.
At the time of the proposed rule, the
draft standard developed by the
Accredited Standards Committee X9
and approved for trial use by the
American National Standards Institute

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was labeled ANS X9.90 and
contemplated three different types of
documents, one of which was the
substitute check that the Check 21 Act
authorizes. Going forward, this standard
will be known as ANS X9.100–140 and
apply only to substitute checks.
However, any document that met all the
requirements of 229.2(aaa) would be a
substitute check.
Nine commenters expressed concerns
about the image standards and other
quality standards that apply to
substitute checks. Three commenters
suggested that the Board identify or give
examples of industry standards for
substitute checks, and one commenter
suggested that the industry standards for
substitute checks that the Board
identified should not disrupt existing
industry standards for checks. The
proposed commentary to the substitute
check definition identified ANS X9.90
as the industry standard for substitute
checks. Because that standard was
renamed, the final rule identifies the
industry standard for substitute checks
as ANS X9.100–140 (unless the Board
by rule or order determines that a
different standard applies), notes that
that standard is exclusive standard, and
further notes that ANS X9.100–140
incorporates by reference other existing
generally applicable industry standards
for checks. The Board has included the
‘‘unless the Board by rule or order
determines that a different standard
applies’’ language to indicate
specifically that the Board ultimately
determines what standard applies to
substitute checks. The Board does not
expect to change the identified
standard. In the unlikely event that the
Board does identify a different standard,
it almost certainly would do so by
amending Regulation CC. The Board in
no case would change the standard
without providing notice of such
change.
Three commenters requested that the
Board establish standards regarding
image quality for substitute checks. In
particular, these commenters suggested
that substitute checks should be
required to use gray-scale, as opposed to
black-and-white, images. The Board
believes that this level of detail is more
appropriately left to industry standards.
Although ANS X9.100–140 does not
prescribe image standards, that standard
may evolve as the industry gains more
experience with substitute checks.
A few commenters had particular
questions about how the image of the
original check would be applied to a
substitute check. Two of these
commenters erroneously believed that a
second substitute check would contain
an image of the full front and back of the

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previous substitute check. Persons
wishing to obtain detailed information
regarding the layout of a substitute
check should consult ANS X9.100–140.
This standard generally provides that
the images of the front and back of the
original check will be reduced so that
they can be placed on the first substitute
check. A subsequent substitute check
would not contain an image of the entire
first substitute check. Rather, a
subsequent substitute check would
contain the image of the original check
as that image appeared at the time the
previous substitute check was converted
to electronic form, and the remainder of
the front of the second substitute check
would contain identification, MICRline, and legend information applied by
the second reconverting bank. By
contrast, the back of a subsequent
substitute check would contain an
image of the full length of the back of
the previous substitute check in order to
preserve previous indorsements. The
commentary to the substitute check
definition and the commentary to
§ 229.35 regarding indorsement
requirements explain image and
indorsement requirements for latergeneration substitute checks in detail.
b. Substitute Checks and ACH Debits.
Several commenters requested
clarification about how, if at all, checks
that are used as source documents to
create ACH debits are covered under the
Check 21 Act, particularly whether such
checks can be used to create substitute
checks.
A substitute check must be a
representation of an original check.
Therefore, something that is not an
original check cannot be reconverted to
a substitute check. The final rule defines
an original check as the first paper
check issued with respect to a particular
payment transaction. Under U.C.C. 3–
105, a check is issued when it is
delivered by a drawer with the purpose
of giving rights on the check to any
person.
The drawer’s authorization regarding
the use of a check it provides to initiate
an ACH debit will determine whether
the drawer has issued the check within
the meaning of Regulation CC and thus
whether the check may be used to create
a substitute check. If the drawer
authorizes the check only to be used as
a source document for an ACH debit
and does not authorize the check to be
collected as a check, then the check has
not been issued because it has not been
delivered in a manner that gives any
person rights on the check. Therefore, a
check authorized for use solely as an
ACH debit source document is not an
original check within the meaning of

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Regulation CC, and a bank cannot create
a substitute check from that document.
c. MICR-line Requirement. The
Board’s proposed rule adopted the
statutory definition of substitute check
without substantive change, although
the commentary provided extensive
discussion of how the MICR line of a
substitute check could vary from the
MICR line of the original check.
Specifically, the proposed commentary
clarified that (1) position 44 of the MICR
line must contain a ‘‘4’’ or a ‘‘5,’’ (2) a
bank could correct an encoding error
that appeared on the original check
when applying a MICR line to the
substitute check, (3) a bank could
encode an amount on the substitute
check if the original check’s MICR line
did not contain that information, and (4)
no other variation from the original
check’s MICR line would be permitted.
The proposed commentary highlighted
that an impermissible error could be
caused, for example, if a check readersorter misread or failed to read the
MICR line of the original check, causing
the MICR line applied to the substitute
check to contain an error that did not
appear on the original check. The
proposed rule further provided that a
document that failed to meet the
substitute check definition only because
of a MICR-line error (i.e., a document
that ‘‘purported’’ to be a substitute
check) would be treated as if it were a
substitute check for purposes of the
liability and consumer-related
provisions of subpart D but would not
be the legal equivalent of the original
check.
The Board received comments on its
proposed treatment of the MICR-line
component of the substitute definition
from numerous commenters, most of
which were depository institutions or
organizations representing depository
institutions. Some of these commenters
generally approved of the MICR-line
clarifications and the related purported
substitute check provision proposed by
the Board. However, the vast majority of
commenters on these issues disagreed
with the proposed approach.
Commenters that disagreed with the
proposed rule expressed concern that
the proposed commentary would create
confusion because it would allow
substitute check MICR lines to contain
some variations from the original check
but not others. These commenters also
expressed concern that paying banks
could not charge a customer’s account
for a document that was not a substitute
check because of a MICR-line error and
therefore not the legal equivalent of the
original check. These commenters
advocated that a document with any
MICR-line error should be a substitute

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check that could be the legal equivalent
of the original check. Commenters also
stated that the proposed rule provided
insufficient guidance about (1) the
requirement for encoding position 44 of
the MICR line on a qualified return
substitute check, (2) whether a bank that
failed to encode a substitute check
properly would be liable under the
Check 21 Act or existing encoding
warranties, and (3) which bank
ultimately would bear liability for
substitute check encoding errors. Many
of these commenters suggested that
encoding of substitute checks should be
covered by existing encoding
warranties. Commenters opposing the
Board’s proposed treatment of the
MICR-line requirement also expressed
concern that the proposed rule
inadequately addressed the extent to
which banks could repair a MICR-line
error. These commenters generally
indicated that the rules for repairing the
MICR line of a substitute check should
parallel as closely as possible the rules
for repairing the MICR line of an
original check.17
The MICR-line component of the
substitute check definition in the Check
21 Act provides that a substitute check
is a paper representation of an original
check that ‘‘bears a MICR line
containing all the information appearing
on the MICR line of the original check,
except as provided under generally
applicable industry standards for
substitute checks to facilitate the
processing of substitute checks.’’
ANS X9.100–140 requires a substitute
check used for forward collection to
bear a ‘‘4’’ in position 44 and a qualified
returned substitute check to bear a ‘‘5’’
in that position. Proper encoding of
position 44 ensures that downstream
banks will be on notice that the
document they have received is a
substitute check and can, if converting
such an item to electronic form or
qualifying it for return, handle it
appropriately. The final commentary to
the substitute check definition therefore
clarifies that a reconverting bank or a
bank qualifying a substitute check for
return must encode position 44 with a
‘‘4’’ or a ‘‘5,’’ as appropriate.
The final rule clarifies that a
substitute check MICR line must have
17 In response to the many concerns expressed
about the Board’s proposed treatment of the MICRline replication requirement, the Board’s staff
invited commenters that addressed MICR-line
issues to a meeting to explore these issues further.
The meeting took place on May 3, 2004, at the
Board, and representatives of 53 commenters
attended in person or by conference call. A
summary of this meeting, including a list of
participants, is available at www.federalreserve.gov/
SECRS/2004/May/20040625/R–1176/R–
1176_150_1.pdf.

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information in each field of the MICR
line that was encoded on the original
check at any time before an image of the
original check was captured. This
would include all of the information
preprinted on the original check, plus
any additional information, such as the
amount, that was encoded prior to the
time the image of the original check was
captured.
In light of the highly technical nature
of the MICR line and its important
operational role in check processing, the
Board’s final rule leaves the details
regarding permissible MICR-line
variations up to ANS X9.100–140
instead of identifying them in the rule
and commentary. The Board believes
that allowing the MICR line of a
substitute check to vary from the
original check’s MICR line as specified
in ANS X9.100–140 is appropriate
because the full range of issues relating
to MICR-line errors and the most
practical solutions to those issues will
be revealed through operational
experience with substitute checks.
The Board expects that the variations
from the original check’s MICR line
permitted by ANS X9.100–140 would be
kept to the minimum necessary to
facilitate substitute check processing in
the same manner as the original checks.
Such variations could include, for
example, allowing reconverting banks to
correct errors appearing on the MICRline of the original check. The
commentary to the final rule clarifies,
however, that industry standards cannot
allow a substitute check MICR line to
omit a field that, at any time prior to
truncation, was encoded on the original
check’s MICR line. The Board further
expects that, in determining what
variations from the original check’s
MICR line should be permitted, the
standards committee will incorporate
the overriding goal of the Check 21 Act
that substitute checks should function
as much as possible like original checks
so that paying banks and other persons
that demand paper checks will not bear
costs associated with receiving a
substitute check instead of an original
check. If the Board concludes that the
variations permitted by ANS X9.100–
140 are inconsistent with this or other
purposes of the Check 21 Act, the Board
will consider identifying permissible
MICR-line variations by rule or order
instead of relying on ANS X9.100–140.
Through revisions to § 229.34(c)(3)
and its commentary, the final rule
provides that application of MICR-line
information to a substitute check is
subject to Regulation CC’s encoding
warranties. The commentary to the
substitute check definition also notes
that, once a document that meets the

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substitute check definition has been
created, banks may apply MICRencoded strips to that document as
necessary to complete the collection and
return process.
10. Section 229.2(bbb) Sufficient Copy
and Copy (corresponding to § 229.2(aaa)
of the proposed rule). The final rule’s
definition of sufficient copy more
closely tracks the statutory language in
the indemnity section of section 6(d)(1)
of the Check 21 Act than did the
proposed rule. The Board also has
reorganized and revised the
commentary to illustrate more clearly
the definitions of copy and sufficient
copy.
Several commenters were confused
about the relationship between copy
and sufficient copy, which are defined
as paper documents, and § 229.58,
which allows banks to provide
information electronically if the
recipient agrees. Although the terms
copy and sufficient copy, as well as the
term original check, refer only to
particular pieces of paper, a bank that is
required to provide a paper check or
copy may satisfy that requirement by
instead providing an electronic image of
the check or copy in accordance with
§ 229.58.
11. Section 229.2(ccc) Transfer and
consideration (corresponding to Section
229.2(bbb) of the proposed rule). In
response to a comment, the Board has
revised the definition of consideration
to clarify that a bank receives
consideration for the substitute check
(or paper or electronic representation
thereof) that it transfers to a nonbank if
the bank has received value for the
check in that or any other form.
The proposed rule contained an
exception from the consideration
definition stating that a bank would not
receive consideration for a substitute
check solely in response to a warranty,
indemnity, expedited recredit, or other
claim with respect to the substitute
check. The Board proposed this
exception so that a bank could respond
to an indemnity or expedited recredit
claim by providing a substitute check
without a legal equivalence legend as a
sufficient copy without automatically
breaching the legal equivalence
warranty. Several commenters were
confused about the operation of this
exception. The Board has deleted the
exception from the final rule. Because
industry standards require application
of the legal equivalence legend to a
substitute check, the problem that the
exception was designed to address is
not likely to arise in practice. Moreover,
on further consideration, the Board
believes that it would be appropriate for
a substitute check provided in response

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to a claim to carry full warranty,
indemnity, and recredit rights.
12. Section 229.2(ddd) Truncate;
Section 229.2(eee) Truncating Bank
(corresponding to sections 229.2(ccc)
and 229.2(ddd) of the proposed rule,
respectively). Several commenters
expressed concern about the definitions
of and commentary to truncate and
truncating bank. For example, one
commenter expressed concern that the
definition of truncate would preclude
banks from truncating items that are not
handled on a cash basis. Another
commenter suggested that the Board
clarify that a truncating bank does not
make the substitute check warranties
and indemnity under §§ 229.52 and
229.53, but that a bank receiving a check
electronically could by agreement pass
back to the truncating bank losses that
the recipient bank incurred under those
sections.
The proposed rule used the statutory
definition of truncate, and the final rule
retains that definition. However, the
Board has amended the commentary to
truncating bank to clarify that a bank
receiving a check electronically from the
truncating bank may pass back losses by
agreement.
B. Section 229.30(d) Identification of
Returned Checks
Section 229.30(d) requires a paying
bank to identify its reason for returning
a check unpaid on the front of the
returned check but does not require a
specific location for that information.
The Board has revised this section and
the accompanying commentary to
clarify that a paying bank that returns a
substitute check must place the reason
for return within the image of the
original check. This requirement
ensures that the reason for return would
be retained on any subsequent
substitute check.
C. Issues Relating to Indorsement and
Identification Standards—Sections
229.35 and 229.38 and Appendix D
The Board proposed to require all
indorsements to be in black ink and to
make depositary bank name/location
information optional as opposed to
mandatory. The Board requested
comment about whether returning banks
should retain the option to indorse a
check on the front. The Board proposed
applying to existing substitute checks
the indorsement standards in § 229.35
and appendix D, with proposed
amendments, that would apply to
original checks. The Board proposed
separate indorsement and identification
requirements that would apply to
reconverting banks at the time they
create substitute checks.

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The Board received a number of
comments relating to its proposed
treatment of indorsements. Several of
these commenters generally questioned
whether the proposed changes would
improve the legibility of indorsements,
particularly because some indorsements
on substitute checks would be preserved
through images of a previous item. The
Board believes that it is too early to
determine how the use of substitute
checks ultimately will affect the
legibility of indorsements. It is likely, as
commenters stated, that more
indorsements will be preserved through
images of previous items. It also is likely
that, as the efficiency of the collection
process improves through wider use of
electronic processing and substitute
checks, fewer banks will handle and
thus be required to indorse a check. A
reduction in the number of
indorsements on an item should
contribute to greater legibility of the
indorsements that are applied.
A few commenters stated that, in
some cases, check-handling equipment
would first capture an image of a check
and then spray a physical indorsement
on the check. These commenters
requested that the Board clarify that in
such cases the indorsement applied
after the check image was captured
would be conveyed as an electronic
indorsement rather than an image of the
physical indorsement. The Board agrees
with these commenters’ analysis of how
such an indorsement would be carried
forward and has revised the
commentary to the substitute check
definition and § 229.35 accordingly.18
The Board has made additional
clarifying changes to these portions of
the commentary to address questions
posed by commenters regarding the
application and preservation of
indorsements.
Commenters generally agreed with the
Board’s proposal to require
indorsements to be in black ink,
although several indicated that
requiring banks to switch from purple to
black ink immediately would be
burdensome and requested a grace
period.19 The final rule retains the black
ink requirement but delays the
18 One commenter requested clarification about
how a second depositary bank should indorse a
substitute check that was returned and redeposited.
Substitute checks in such a case would be indorsed
just as a redeposited original check is indorsed
today.
19 One commenter suggested that the Board
should delay the effective date for all the new
reconverting bank indorsement and identification
requirements. The requirement that a substitute
check contain a reconverting bank identification is
statutory and takes effect on the effective date of the
Check 21 Act.

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mandatory compliance date until
January 1, 2006.
Three commenters stated that name
and location information in the
indorsement should be optional, while
three others stated that many banks
relied on that information and
recommended that it remain mandatory.
Three other commenters indicated that
electronic indorsement standards did
not provide for name/location
information and suggested that the
Board make name/location information
mandatory for physically-applied
indorsements but optional for
electronically-applied indorsements.
The final rule adopts this suggested
approach.
A few commenters opined that
indorsement on the front of the check
would be useful under some
circumstances, although they differed
on what those circumstances would be.
By contrast, the majority of commenters
that addressed this issue stated that any
indorsement on the front of the check
would clutter the front of the check and
potentially obscure other necessary
information. To reduce the risk of
obscuring information on the front of
the check, the final rule provides that all
indorsements must appear on the back
of the check.
A few commenters stated that the new
indorsement and identification
standards with which a reconverting
bank must comply when creating a
substitute check were too detailed. The
Board notes that, in general, the level of
detail for indorsement location
information for substitute checks at the
time of creation parallels that for
existing paper checks. The Board
therefore has retained specific
indorsement location information for
newly-created substitute checks.
However, the Board has removed
specific location information for the
reconverting and truncating bank
identifications that appear on the front
of the check and simply provided that
such identifications must be outside the
image of the original check. For
purposes of the Check 21 Act,
reconverting banks should be required
to place this information on the front of
the check in a manner that does not
obscure necessary MICR-line and
payment information. The Board
believes that the precise location of that
information is best left to industry
standards.
A few commenters expressed concern
that the reconverting bank and
truncating bank identifications applied
to the front of substitute checks would
be considered acceptances or
indorsements of such checks under the
U.C.C. The Board therefore has clarified

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in the commentary that identifications
applied to the front of the check are not
acceptances or indorsements. A
reconverting bank that is a paying bank
must place its routing number on the
back of the check to ensure that its
identification as a reconverting bank is
not lost if there is a subsequent
substitute check.20 The Board also has
clarified in the commentary to
§§ 229.35(a) and 229.51(b) that this use
of the paying/reconverting bank’s
routing number is for identification only
and is not an indorsement.
The proposed rule contained
amendments to the text of and
commentary to § 229.38(d) to clarify a
reconverting bank’s liability for
indorsements that, although applied in
accordance with § 229.35 and appendix
D, were illegible because of the
reduction in size of the original check
image that appeared on the first
substitute check and the corresponding
shifting in the placement of
indorsements preserved within the
image of the original check. Several
commenters requested clarification
about how this provision would work in
practice. The final rule clarifies that the
reconverting bank is liable if the
reduction in size and placement of the
original check image on the substitute
check caused an indorsement
previously applied to the original check
in accordance with § 229.35 and
appendix D to be rendered illegible by
a subsequent indorsement that also was
applied to the substitute check in
accordance with those standards. The
final rule also clarifies that the
reconverting bank is liable if the shift in
placement on a substitute check of an
indorsement that was applied to the
original check in accordance with
§ 229.35 and appendix D precluded the
subsequent bank from legibly applying
its indorsement to the substitute check
in accordance with those standards.21
20 One commenter questioned why a reconverting
bank must apply its routing number twice to a
substitute check. The routing number on the front
of the substitute check identifies the bank as the
reconverting bank for that particular check. The
front of a subsequent substitute check thus would
bear the routing number of the reconverting bank
for that substitute check but not the routing number
of the reconverting bank for the previous substitute
check. A reconverting bank’s routing number on the
back of the check therefore serves both as its
indorsement (except when the reconverting bank
also is the paying bank) and also, because it is set
off by asterisks, preserves its identity as a
reconverting bank on subsequent substitute checks.
21 Subsequent substitute checks will contain an
image of the entire back of the previous substitute
check and therefore should not perpetuate the
shifting indorsement problem.

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D. Section 229.51 General Provisions
Governing Substitute Checks
1. Legal Equivalence. Section 229.51
combined the legal equivalence and
warranty concepts in sections 4(a) and
4(b) of the Check 21 Act by stating that
a substitute check would be the legal
equivalent of the original check for all
purposes and all persons if (1) a bank
had made the substitute check
warranties in § 229.52 and (2) the
substitute check accurately represented
all the information on the front and back
of the original check as of the time of
truncation and bore the required legal
equivalence legend.
a. General Comments about Legal
Equivalence. The Board received several
general comments about legal
equivalence. One commenter agreed
with the concept that a substitute check
should not be legally equivalent to an
original check unless the substitute
check were subject to bank warranties.
Two commenters opined that a
substitute check created by a nonbank
should not be a legal equivalent unless
the first bank to transfer that substitute
check explicitly agreed to do so.
However, the definition of reconverting
bank indicates that a bank that transfers
a substitute check created by a nonbank
thereby becomes the reconverting bank,
even if that bank did not explicitly agree
to accept the item. If such a substitute
check met the accuracy and legend
requirements for legal equivalence, it
would become a legally equivalent
substitute check as of the time the bank
transferred it for consideration and
thereby made the substitute check
warranties. As discussed in the analysis
of the reconverting bank definition,
banks should be able to work with
customers that wish to create and
deposit substitute checks so that the
banks do not become reconverting banks
unwittingly.
b. Accuracy of Information and Image
Quality. Commenters generally
supported the concept that a substitute
check must contain an accurate
representation of all the information on
the original check as a condition of legal
equivalence. One commenter requested
clarification that a substitute check need
not be more legible than an original
check to meet the legal equivalence
requirements. The Board agrees that a
substitute check is not held to a higher
standard of accuracy in order to satisfy
the legal equivalence requirements. The
Board has clarified in the commentary
that an accurate image of an illegible
original check would, if all other
requirements for legal equivalence were
satisfied, be a legally equivalent
substitute check. This commenter

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further suggested that, if the back of the
original check contained no
indorsement information, only an image
of the front of that item should be
required for a substitute check
associated with that item. The Check 21
Act defines a substitute check as a
representation of an original checks that
bears ‘‘an image of the front and back of
the original check.’’ A bank that creates
a document without an image of the
back of the original check and sends
that document as if it were a substitute
check therefore bears the associated risk
of doing so.
Several commenters raised specific
concerns about the proposed
commentary to the accuracy
requirement. The commentary to that
requirement generally stated that ‘‘all
the information’’ on the original check
that must be retained includes the
information preprinted on the original
check, payment information added to
the check, and other required
information added to the check.
Requiring features that do not survive
the image capturing process to appear
on a substitute check as a condition of
legal equivalence would preclude the
use of substitute checks, thus
undermining the primary purpose of the
Check 21 Act. The proposed
commentary therefore noted that
watermarks, micro printing, and other
security features that cannot survive the
imaging process need not be represented
on a substitute check as a condition of
legal equivalence.
Some commenters expressed concern
about the loss of security features during
the creation of a legally equivalent
substitute check. Although the loss of
some paper-based security features will
be inevitable, the Board expects that the
industry will develop additional
security features that can survive the
image capturing process.22 Other
commenters expressed concern about
whether the accuracy requirement for
legal equivalence would be met if the
drawer or a bank applied payment
22 One commenter expressed concern because the
proposed commentary indicated that a latent
security feature that became clearer after an image
was captured (such as a void watermark that is faint
on an original check but is revealed clearly on a
photocopy or other image) would not cause a
substitute check to fail the accuracy requirement,
provided that it did not render any of the required
information illegible. The presence of the void
language on the substitute check is problematic to
the extent that the recipient of the substitute check
is unable to determine if the substitute check
reproduced a fraudulent original item that
contained clear void language before it was
truncated or a legitimate original check on which
the void language was latent. A person that suffered
a loss because of this uncertainty would have an
indemnity claim under § 229.53 and possibly an
expedited recredit claim under § 229.54.

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information to the check using an ink
color or ink type that would not survive
the image capturing process. The
commentary to the final rule clarifies
that payment information always must
be accurately represented on a
substitute check because that
information is an essential element of a
negotiable instrument. If a substitute
check failed the legal equivalence
requirement because of ink choice or
some other feature, such as check color
or a decorative image, the reconverting
bank would be responsible for
associated liabilities. However, a
reconverting bank could attempt to
address this issue through agreements
with its depositors and the banks that
send checks to it.
Several commenters expressed
concern about the lack of uniform
standards that apply to the image
requirements for substitute checks. The
Board understands that some banks
intend to capture black and white
images of items converted to electronic
form, while other banks intend to
capture gray scale images that contain a
wider range of tones. Any substitute
check that is subject to bank warranties,
contains an accurate representation of
the front and back of the original check,
and bears the legal equivalence legend
is the legal equivalent of the original
check regardless of whether the image is
black and white or gray scale. If issues
relating to capturing images of checks
prove problematic in the creation of
substitute checks, the Board expects that
industry standards would evolve to
address those issues.
2. Section 229.51(c) Applicable Law.
One commenter requested clarification
about whether a substitute check that
represented a fraudulent original check
would have legal equivalence. The
commentary to the final rule clarifies
that such a substitute check, if it met the
legal equivalence requirements, would
be legally equivalent to the underlying
check but as such would be treated in
the same manner as the original
fraudulent item for purposes of other
law. For example, a bank could not
properly charge a customer’s account for
a substitute check that represented a
fraudulent original check.
This commenter also enquired about
the legal status of a substitute check that
did not meet the legal equivalence
requirements. An item that meets the
substitute check definition is a check
even if it does not meet the additional
requirements for legal equivalence. The
proposed commentary to the check
definition acknowledged that such
substitute checks would be subject to
the U.C.C. and Regulation CC. The final
rule retains this sentence and, in

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addition, amends the check definition to
state specifically that the term check
includes an original check and a
substitute check.
3. Purported Substitute Checks. In the
proposed rule, the Board recognized
that some banks attempting to create a
substitute check would instead create a
document that failed to satisfy the
MICR-line replication requirement to be
a substitute check. The proposed rule
referred to these documents as
purported substitute checks. In many
cases, a purported substitute check
would be processed just like a check but
because of the MICR-line error would
cause a loss. For example, a document
with a MICR-line error only in the
amount field or the account number
field likely would go through the entire
collection process but may be charged
for the wrong amount or to the wrong
account, respectively. Because
purported substitute checks would not
be subject to the Check 21 Act, a person
suffering such a loss would not have the
Act’s rights and protections regarding
substitute checks. To fill this gap and
protect persons who collect, pay, or
otherwise receive a purported substitute
check, § 229.51(d) of the proposed rule
provided that a purported substitute
check would be subject to the warranty,
indemnity, and consumer-related
provisions of the Check 21 Act and
subpart D.
Several commenters generally
supported the concept of the purported
substitute check, although some of these
commenters suggested specific revisions
to this provision or clarifications about
its application. A few commenters that
supported the provision requested that
it be expanded to apply to a document
that failed any of the four substitute
check requirements. One commenter
neither supported nor opposed the
purported substitute check concept but
requested clarification about how a
document would purport to be a
substitute check.
The majority of commenters,
however, suggested that the Board
delete the purported substitute check
provision. These commenters suggested
that a document should be a substitute
check and a legal equivalent if it
contained any MICR-line error, thus
obviating the purported substitute check
provision.
The final rule leaves the scope of
permissible MICR-line variations to
ANS X9.100–140. The Board expects
this standard to identify the
circumstances under which a substitute
check’s MICR line may vary from the
original check in order to facilitate
processing of substitute checks. An item
that satisfies all the requirements of

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47299

ANS X9.100–140 is a substitute check
that is legally equivalent to the original
check (provided all the other
requirements for substitute checks and
legal equivalency are met).
Regardless of how ANS X9.100–140
addresses permissible MICR-line
variations and other substitute check
requirements, there inevitably will be
instances where a document intended to
be a substitute check will fail one or
more components of the substitute
check definition and thus will not be a
substitute check.
The Board notes that there are cases
in the current check-processing
environment where documents that are
not checks or the legal equivalent
thereof (for example, photocopies and
image replacement documents)
nonetheless go through the collection
and return process and ultimately are
paid, resulting in a charge to a
customer’s account. It is uncertain how
often a bank attempting to create a
substitute check instead will create a
document with a MICR line that does
not satisfy the substitute check
definition. The Board therefore has
removed the purported substitute check
provision from the final rule. If the
purported substitute check problem
appears broad in scope, creates
uncertainty for paying banks regarding
whether to make payments, or is
detrimental to drawers, the Board will
consider addressing those problems by
rule or order.
E. Section 229.52 Substitute Check
Warranties
The Check 21 Act provides that any
bank that transfers, presents, or returns
a substitute check for consideration
warrants that the substitute check meets
the requirements for legal equivalence
and that no depositary bank, drawee,
drawer, or indorser will be asked to
make a duplicative payment.
Section 229.52 of the proposed rule
reorganized the statutory language and
clarified that the responsibility for the
warranties flows with the substitute
check and with a paper or electronic
representation of that substitute check.
The proposed commentary also clarified
that warranties associated with the first
substitute check continue to flow if a
second substitute check is created.
These clarifications were intended to
ensure that the warranty chain would
continue from the first reconverting
bank all the way through to the final
recipient of a substitute check or
representation thereof. The proposed
commentary also clarified that a bank’s
responsibility for the warranties would
run only to subsequent parties that
received a substitute check or a paper or

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electronic representation thereof, not to
parties that handled only the original
check or that handled the substitute
check or representation prior to the
warranting bank.
The final rule adopts the text of
proposed § 229.52 without revision.
However, the Board has revised the
commentary to clarify further the issues
identified in the previous paragraph and
additional issues identified by
commenters.
1. Legal Equivalence Warranty.
Several commenters expressed concern
about a reconverting bank being held
liable for breaching the legal
equivalence warranty because of
something that was beyond its control,
for example if the drawer wrote
payment information on the original
check in a type of ink that did not
survive the image capturing process
well. One commenter suggested that the
paying bank should bear the loss for
breach of the legal equivalence warranty
in such cases because it can control for
ink type and the use of security features
by agreements with its depositors. This
commenter also suggested that the
drawer in such cases should not be
permitted to make an indemnity claim
or expedited recredit claim if the legal
equivalence defect was attributable to
the drawer’s action. Another commenter
requested clarification about whether a
bank would have an obligation not to
convert a check that would not legibly
survive the image capturing process.
The Check 21 Act contemplates that
a bank can create a substitute check to
represent any check as defined in
§ 229.2(k) and use that substitute check
instead of the original check. However,
the statute also attempts to place as little
burden as possible on those that receive
substitute checks, such as a drawer that
receives paid checks or a paying bank
that demands presentment of a paper
check. Because the reconverting bank
chose to use a substitute check instead
of the original check, the Check 21 Act
allocates liability to the reconverting
bank for a substitute check that, at the
time of its creation, did not meet the
legal equivalence requirements.
However, a reconverting bank may by
agreement pass this liability back to the
party that sent the electronic check
image to it.
2. Duplicative Payment Warranty.
One commenter stated that the
duplicative payment warranty should
apply regardless of the order in which
duplicative payment requests occur.
The commentary to the final rule makes
this point explicitly.
Several commenters acknowledged
that the commentary to the proposed
rule stated that a reconverting bank

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would be liable for breach of the
duplicative payment warranty even if a
duplicative payment was caused by a
fraud of which the bank was unaware.
However, some of these commenters
suggested that the reconverting bank
should not be liable for a warranty
breach under these circumstances.
Responsibility under the Check 21 Act
for the duplicative payment warranty
does not depend upon the warranting
bank’s knowledge or fault, although a
bank can further allocate such liability
by agreement or under provisions of
otherwise applicable check law. The
final rule therefore contains a fraudulent
duplicative payment example.
The Board’s proposed rule did not
directly address whether a payment
made through an ACH debit, as opposed
to a check payment made by electronic
presentment, would be subject to the
duplicative payment warranty. The
Board noted that the language of the
warranty, which states that a person
will not be asked to pay a check it
already has paid, could be read to
exclude a payment made by ACH debit.
The Board specifically requested
comment on this issue.
Several commenters stated that an
ACH debit should be covered under the
duplicative payment warranty because
recipients of such debits were not
adequately protected by Regulation E
and the NACHA rules. Approximately
60 commenters stated that the
duplicative payment warranty should
not apply to ACH debits because such
debits are already adequately covered by
existing laws and rules.
The statutory language indicates that
the duplicative payment warranty
applies to charges initiated by check,
and ACH debits are not checks. The
Board therefore believes that the best
reading of the Check 21 Act is to
exclude ACH debits from coverage
under the Act’s duplicative payment
warranty. The Board notes that the
U.C.C. applies to unauthorized check
payments and the NACHA rules apply
to unauthorized ACH debits. In
addition, Regulation E applies to
unauthorized ACH debits to consumer
accounts.
F. Section 229.53 Substitute Check
Indemnity
The Check 21 Act indemnity protects
against losses that any recipient of a
substitute check suffers due to receipt of
a substitute check instead of an original
check. The Board’s proposed rule and
commentary clarified that, like the
Check 21 warranties, all banks that
transfer a substitute check or a paper or
electronic representation of a substitute
check make the indemnity. This is to

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ensure that, if an indemnity recipient
makes a claim for a loss caused by
receipt of a substitute check, that loss
would be passed back to the first
reconverting bank regardless of the
number of times the item changed
forms. The proposed rule and
commentary also attempted to clarify
that, unlike a warranty claim, which can
be triggered by receipt of a substitute
check or a representation of a substitute
check, an indemnity claim is triggered
in the first instance only by a loss that
is due to receipt of a substitute check
instead of the original check. The
proposed commentary further clarified
the scope of losses recoverable under
the indemnity. The Board has adopted
the regulatory text of the proposed
indemnity section and the
accompanying commentary with
changes, discussed in the following
paragraphs, designed to further clarify
operation of that provision.
One commenter indicated that the
Board should more clearly distinguish
between the flow of responsibility for
making the indemnity and the flow of
an indemnity claim back up the chain
of indemnifying banks. In particular, the
commenter requested that the Board
better articulate that an indemnity claim
must be based on a loss due to any
person’s receipt of a substitute check.
The proposed commentary noted that an
indemnity claim must be ‘‘ultimately
traceable’’ to the receipt of a substitute
check, but another commenter objected
to that language and preferred that the
Board return to the statutory ‘‘due to’’
language. The commentary to the final
rule addresses these concerns.
Several commenters requested
clarification about the interaction
between the substitute check indemnity
and other law. Two commenters
suggested clarification about the
measure of damages under the
indemnity section and the general
liability provision (§ 229.56). The
proposed commentary contained
examples of the indemnity amount with
and without a warranty breach, and the
final rule further clarifies this
distinction. The Board also has added a
paragraph describing how production of
the original check or a sufficient copy
by the indemnifying bank will limit that
bank’s damages under § 229.53.
Production of that item, however, would
not absolve the indemnifying bank from
warranty claims under any other law. In
response to a comment, the Board has
clarified that Regulation CC and the
U.C.C. are sources of such other
warranties.
Three commenters suggested that the
Board establish a time limit for bringing
an indemnity claim. The liability

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provisions of the Check 21 Act, as
implemented at § 229.56 of Regulation
CC, already establish a one-year statute
of limitations for claims under the
Check 21 Act.
Several commenters indicated that the
examples the Board provided in the
commentary to § 229.53 to illustrate the
application of the indemnity provision
were useful, although some commenters
requested that the Board include
additional examples. Although the
Board has clarified the existing
examples, the final rule does not
provide additional examples. If
experience indicates that there are
particular aspects of the indemnity that
call for greater clarification, the Board
may add examples.
G. Section 229.54
for Consumers

Expedited Recredit

The Board’s proposed rule
reorganized the structure of the
consumer expedited recredit provision
and clarified how to calculate the time
periods that applied for consumer and
bank action. The proposed commentary
provided a number of examples about
how the expedited recredit provision
would work in practice.
1. General Comments. Numerous
commenters, including consumers and
consumer groups, stated that the
expedited recredit provision should
apply even if the consumer was not
provided a substitute check. These
commenters argued that the Check 21
Act produces this result because the
information a consumer must provide to
make a claim does not include a
statement that the consumer received a
substitute check. These commenters
also suggested that the legislative
history indicated a congressional intent
that the expedited recredit apply any
time a substitute check was used to
process a check. Several of these
commenters further suggested that, if
the Board retained the requirement that
a consumer must receive a substitute
check as a condition of the expedited
recredit right, then provision of a
substitute check or a paper or electronic
representation of a substitute check
should meet that requirement.23
The requirement that a consumer
must receive a substitute check to have
an expedited recredit claim comes
directly from section 7(a) of the Check
23 Another commenter understood the rule to
mean that the expedited recredit procedure would
apply if a consumer received a substitute check that
was returned unpaid to the consumer’s account but
was concerned that the introductory paragraph to
the model consumer awareness disclosure (which
focused on checks written by consumers) might
obscure that point. The Board has amended the
model notice to address this concern.

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21 Act, which states that a consumer
may make an expedited recredit claim if
he or she can assert in good faith that,
among other things, ‘‘the bank charged
the consumer’s account for a substitute
check that was provided to the
consumer’’ (emphasis added).24 When
the Check 21 Act gives rights to a person
that received a paper or electronic
representation of a substitute check, it
explicitly so indicates. For example,
section 5 states that the warranties are
given to the listed persons ‘‘regardless of
whether the warrantee receives the
substitute check or another paper or
electronic form of the substitute check
or original check.’’ The consumer
expedited recredit provision contains no
language to indicate that receipt of
something other than a substitute check
is meant to trigger the right. In addition,
only those consumers who receive
substitute checks are entitled to the
consumer awareness disclosure that
explains expedited recredit rights,
which further demonstrates that the
right applies only to recipients of
substitute checks.
The expedited recredit procedure is
intended to place consumers who
receive substitute checks in the same
position to the extent practicable as if
they had received the original check.
The right is not intended to apply to
consumers who already have agreed not
to receive paper checks. Giving
consumers an expedited recredit right in
the additional situations suggested by
the commenters thus would exceed both
the text and the underlying intent of the
statute. The Board therefore has not
expanded the scope of § 229.54.
Several commenters requested
clarification about whether the
expedited recredit right would apply to
checks that are not drawn on a
consumer account, such as travelers’
checks, credit card checks, and checks
used to access a home equity line of
credit. The statute specifically states
that a substitute check is subject to the
expedited recredit right if the bank
holding the consumer’s account charged
the account for that substitute check.
The Act specifically defines the term
account to be a deposit account.
Therefore, a consumer generally would
not have an expedited recredit right
associated with a check that was not
drawn on his or her deposit account.
However, the consumer could have an
expedited recredit right for such a check
deposited into his or her account if the
24 Section 7(h) further provides that ‘‘a consumer
who was provided a substitute check may make a
claim for an expedited recredit under this section
with regard to a transaction involving the substitute
check whether or not the consumer is in possession
of the substitute check’’ (emphasis added).

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check was returned to the consumer
unpaid in the form of a substitute check
for which the bank debited the
consumer’s account. A consumer who
did not have an expedited recredit right
for a substitute check that he or she
wrote but that was not charged to his or
her account nonetheless might have a
substitute check warranty or indemnity
claim or a U.C.C. claim with respect to
that item. The Board has clarified these
points in the commentary to § 229.54(a).
Several commenters objected to the
portion of the proposed commentary to
§ 229.54 stating that any warranty claim,
not just a claim for a substitute check
warranty provided in § 229.52, could
trigger an expedited recredit right. The
Board notes that the returned check
warranties in § 229.34(b) of Regulation
CC would run to the drawer of the
check. In addition, the Check 21 Act
states that a consumer may use the
expedited recredit procedure to recover
for ‘‘a warranty claim’’ and does not
limit such claims to the substitute check
warranties. The final commentary
therefore retains the concept that losses
associated with any warranty breach are
recoverable under § 229.54, although the
Board has provided more detail about
the additional warranties contemplated.
Several commenters suggested that, if
a consumer requests an original check,
then the bank should be required to
provide either the original check or a
legally equivalent substitute check.
Such a requirement is beyond the scope
of the Check 21 Act, which does not
establish requirements for when an
original check or substitute check must
be given but rather establishes the
circumstances under which a substitute
check may be used as the legal
equivalent of the original check. Such a
requirement also would go beyond the
scope of U.C.C. 4–406, which, as
adopted in most states, does not require
a bank to provide original checks to
consumers or to retain original checks.25
The Board therefore has not adopted the
commenters’ suggestion.
The Board also has clarified in the
commentary that the amount a
consumer may claim as a loss under the
consumer expedited recredit section
includes the amount of the improper
charge as well as any resulting fees that
the consumer believes were improper,
up to the amount of the substitute
check. The commentary provides
examples about the amount a consumer
could claim.
25 However, State law in New York and
Massachusetts requires banks to give their
customers the option of receiving paid paper checks
with periodic account statements.

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2. Time Period for Consumer Action.
The Check 21 Act states that the
consumer must make a claim within 40
days of the later of two dates: either the
date on which the relevant account
statement was mailed (or delivered by
other means to which the consumer
agreed) or the date on which the
problematic substitute check was made
available to the consumer. The proposed
rule combined these concepts by stating
that the claim was due within 40 days
of the date that the relevant account
statement or substitute check was
mailed or delivered. The accompanying
commentary clarified that the term
delivery includes making the account
statement or substitute check available
through various means agreed to by the
consumer, including in-person delivery.
The Board received numerous
comments expressing concerns about
the events that should trigger the 40-day
time period within which a consumer
must make an expedited recredit claim
and what a consumer must do to
constitute timely action within that
period. A few commenters suggested
that the final rule’s construction should
parallel that of the statute.
The Board has retained the ‘‘mailed or
delivered’’ language in the rule text
because the Board believes this
construction clarifies rather than
changes the statute’s meaning. The
Board has amended the final
commentary to clarify that delivery
includes making the statement or check
available at the bank for the customer’s
retrieval pursuant to the customer’s
request.
Several commenters suggested that
the Board adjust the 40-day time period
for consumer action to parallel
Regulation E (which gives consumers a
60-day period to make a claim for a
disputed electronic fund transfer) or the
U.C.C. (which gives consumers a
reasonable period to examine a bank
statement for errors). These commenters
were concerned that having three
different yet somewhat related timing
requirements for consumer action
would be confusing. Some commenters
also were concerned that a consumer
might receive a substitute check that
triggered the time period for making a
claim well after the underlying
transaction, which could compromise
the bank’s ability to make a timely
interbank expedited recredit claim
under § 229.55.
The 40-day period in the proposed
rule comes directly from the statute, and
the Board has retained it in the final
rule. A bank concerned about
differences between Regulation E and
§ 229.54 could choose to give a
consumer a longer period than required

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by § 229.54 to bring a substitute check
claim.
Several commenters asked for further
clarification about what constituted
extenuating circumstances that would
require a bank to extend the consumer’s
40-day period for making a claim. The
proposed rule paralleled the approach
in Regulation E by stating the existence
of the extenuating circumstances
extension in the rule text but moving to
the commentary the statutory examples
of what might justify an extension. The
Board is unaware of any problems in
applying the Regulation E extension
provision and does not expect problems
applying the corresponding provision in
§ 229.54. The Board therefore is not
further clarifying the extenuating
circumstances provision at this time.
Several commenters requested further
clarification about what action by the
consumer would satisfy the requirement
to ‘‘submit’’ a claim within the specified
period. These commenters noted that
some portions of the rule and
commentary referred to a consumer’s
making the claim, while others
appeared to focus on the bank’s receipt
of the claim. Other commenters
requested further clarification about the
interaction between the consumer’s
ability to make an oral claim and the
bank’s right to require a consumer to
submit a claim in writing.
The Board has clarified in the final
rule that a consumer must submit his or
her claim such that the bank receives it
within the 40-day time period (extended
if necessary) described in the regulation.
The final rule also clarifies that, if a
consumer submits a claim orally and the
bank requires a written claim, the bank
must inform the consumer of the written
claim requirement at that time and may
require the consumer to submit that
written claim such that the bank
receives it within 10 business days of
the oral claim. This time period
parallels the corresponding period in
Regulation E for written confirmation of
oral claims. In such a case, the
consumer’s claim would be timely if the
bank received the oral claim within the
40-day period and the written claim
within the 10-day period. In addition,
the final rule and commentary provide
that if a consumer attempts to submit a
claim in any form and does not provide
all the information required to
constitute a claim, the bank must inform
the consumer that the claim is
incomplete and identify what
information is missing.
One commenter requested that the
Board clarify that a consumer who fails
to bring a timely expedited recredit
claim under § 229.54 nonetheless might
have claims under other law, such as a

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warranty or indemnity claim under
§ 229.52 or § 229.53, respectively, or a
claim under the U.C.C. The Board has
made this clarification in the
commentary.
3. Form of Claim and Time Period for
Bank Action on Consumer Claims. The
statute provides that a bank must act on
a consumer expedited recredit claim
within 10 business days after the
business day on which the consumer
submits the claim. The proposed rule
changed the latter occurrence of
business day to banking day to parallel
other provisions of Regulation CC. The
Board received numerous comments on
this clarification, all but four of which
supported the adjustment. The final rule
retains the proposed rule’s use of the
term banking day. The final rule also
clarifies that the 10-day period within
which the bank must act on the
consumer’s claim does not begin until
the bank receives the claim. The Board
believes that it is appropriate to focus
on the bank’s receipt, rather than the
date of the consumer’s mailing or
delivery to provide certainty to the bank
about the time period within which it
must take action.
The final rule retains, with some
revisions, the proposed rule’s provision
stating that the time period for bank
action is measured from the bank’s
receipt of the written claim if the bank
requires a consumer to submit an initial
oral claim in writing. The final rule and
commentary also clarify, in response to
a comment, that a bank that requires a
claim to be in writing must state that
requirement in the consumer awareness
disclosure it provides under § 229.57
and always must inform a consumer
who makes a claim orally of the
requirement at the time of the oral
claim.
4. Bank Action on Consumer Claims.
a. Bank Action Generally. The
proposed rule reorganized and clarified
the provisions of the Check 21 Act
related to the bank’s options for
responding to consumer claims and the
notices associated with each of those
options. Commenters that addressed the
Board’s reorganization strongly
supported it. The final rule therefore
retains the proposed organization of the
bank action and notice provisions, but
with some specific revisions suggested
by commenters.
b. A Bank’s Choices for Responding to
a Consumer Claim. Under the Act and
final rule, a bank may grant or deny a
consumer’s claim or provisionally
recredit a consumer’s account pending
further investigation. The bank may
reverse a recredit if it later determines
the claim was invalid. A bank must
provide a specific notice for each of

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these actions. In addition, a bank that
denies a claim must demonstrate to the
consumer why the claim is not valid
and provide the original check or a
sufficient copy. One commenter asked
whether a bank must retain a copy of
expedited recredit claims that it
receives. The Check 21 Act does not
contain a retention requirement,
although other record retention laws
and regulations to which the bank is
subject might apply.
Regarding provisional recredits, one
commenter requested that the Board
clarify that the interest due on a
provisional recredit would be interest
only on the amount of the recredit,
rather than on the entire amount
claimed by the consumer if that amount
is greater than the recredit. The Board
agrees that this is the correct result
under the rule and therefore has not
revised the final rule or commentary to
address this point.
A few commenters expressed concern
that the Board had diminished the
requirement that the bank ‘‘demonstrate
to the consumer that the claim is not
valid’’ because the proposed rule
instead stated that the bank must
explain to the consumer the basis for its
denial. The Board did not intend to
deviate from the statutory requirement
but rather to describe more specifically
how a bank would satisfy it. These
commenters also suggested that the
consumer, rather than the bank, is the
person that should determine whether a
copy provided with a denied claim was
sufficient to determine that the claim
was not valid. In response to these
comments, the text of the final rule uses
the statutory language, and the
commentary provides more detail about
how a bank would demonstrate to the
consumer that a claim is not valid.
In describing the bank’s ability to
reverse a recredit on a later
determination that a claim was not
valid, the proposed rule clarified that
the bank could reverse the basic amount
of the recredit plus interest on that
amount. All commenters that addressed
this point supported allowing a bank to
reverse associated interest, although
some suggested that the Board further
clarify that the interest to be reversed
included both the interest component of
the initial recredit and the interest that
accrued on the entire recredited
amount. The final rule and commentary
make this clarification.
Several commenters expressed
concern about the provision of the
proposed rule allowing the bank to
reverse a recredit, particularly the
statement that the bank may reverse a

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recredit ‘‘at any time.’’26 The Board has
removed the quoted language from the
text of the final rule and clarified in the
commentary that the time period for the
bank’s reversal is subject to the
applicable statute of limitations.
5. Delayed Availability. In response to
comments, the commentary to the final
rule clarifies that the rule allows a bank
to delay the availability of both the base
amount of the recredit and any interest
on that amount. The Board in response
to comments also has clarified in the
commentary that the new account and
repeated overdraft exceptions in subpart
D apply as described in the commentary
to the corresponding exceptions in
subpart B.
6. Notice Requirements. Several
commenters suggested that a bank
should not be required to notify a
consumer of a recredit if the bank
affirmatively determines that the
consumer’s claim is valid. Section
7(f)(2) requires a notice for all recredits,
not just those that are made
provisionally pending further
investigation. The Board therefore has
retained the requirement in § 229.54
that a bank always notify the consumer
of a recredit.
Notices regarding expedited recredit
claims are deemed to be given on the
business day that they are mailed or
otherwise delivered in a manner agreed
to by the consumer. One commenter
suggested that electronic delivery of the
consumer expedited recredit notices
should be subject to the E-Sign Act. The
E-Sign Act applies to notices that other
law requires to be in writing (rather than
in electronic form) and requires a
consumer to affirmatively consent to
electronic delivery of a written notice
after the bank provides a detailed notice
concerning electronic delivery. The
Check 21 Act specifically states that a
bank may provide the expedited recredit
notices through any means to which the
consumer has agreed. The Board
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. A bank therefore need
not comply with E-Sign when providing
materials electronically under the Check
21 Act, although a bank voluntarily may
choose to do so.
26 One commenter suggested that the Board
clarify that a bank cannot use the recredit reversal
provision as a blanket right of set off to recover
amounts from the consumer that are unrelated to
the recredit claim. The recredit reversal provision
of the rule only allows a bank to reverse a
previously-provided recredit and does not apply to
other amounts that the consumer might owe the
bank.

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7. Other Claims Not Affected. One
commenter questioned the need for
§ 229.54(f) of the proposed rule, which
stated that providing a consumer
expedited recredit under § 229.54 does
not absolve a bank from liability under
other law. This provision of the Board’s
proposed rule came directly from the
statute. A consumer may recover only
up to the amount of the substitute check
under § 229.54, although the consumer’s
losses associated with the substitute
check may exceed that amount.
Paragraph (f) is intended to clarify that
a consumer may be able to recover those
additional losses under other provisions
that allow for proximately-caused
damages exceeding the amount of the
check, such as the substitute check
indemnity or U.C.C. 4–402. The Board
has added a reference to the U.C.C. in
the rule text and a paragraph in the
commentary that explains the intent and
application of § 229.54(f).
8. Sufficiency of Commentary and
Examples. The Board specifically
requested comment on whether
additional commentary to § 229.54 was
needed. Commenters’ reactions to this
request were mixed. Thirteen
commenters requested more
commentary. Some of these were
general requests, while other
commenters offered specific examples
that they wanted the Board to include.
By contrast, ten commenters argued that
no additional examples were needed,
and some of these commenters even
suggested that the Board omit certain of
the proposed examples.
The Board has retained the examples
from the commentary to the proposed
rule with some clarifying changes. The
Board has not, however, added
examples or commentary except as
noted in the preceding paragraphs. The
Board expects that use of the consumer
expedited recredit provision will be
relatively rare and that the commentary
addresses the most likely questions that
banks might have regarding practical
application of that provision. The Board
will consider adding or deleting
commentary and examples if experience
indicates that the level of detail in the
commentary is inappropriate.
H. Section 229.55 Expedited Recredit
Procedures for Banks
Several banks expressed concern that
the interbank recredit right would not
work well in practice and identified
various reasons for that concern. For
example, some commenters stated that a
bank that received an interbank
expedited recredit claim might not
know within the 10-day period for
acting on that claim whether it could
produce an original check or sufficient

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copy. Such a bank might seek to obtain
the original check or sufficient copy by
submitting its own interbank recredit
claim, which also would be subject to a
10-day response time. One commenter
requested that the Board identify which
transaction gave rise to a bank’s claim
and thus started the clock for making an
interbank expedited recredit claim. A
commenter also requested that the
Board specify a particular method for
calculating interest on a claim.27 Other
commenters requested additional
clarification about who would enforce
the interbank recredit process. Still
another commenter asked how a
consumer’s receipt of an extension to
make a consumer expedited recredit
claim would affect the timing
requirements for the interbank recredit
process.
The Board has amended the time
periods in § 229.55(b)–(c) for making
and responding to an interbank claim to
parallel the Board’s amendments to the
corresponding provisions of the
consumer expedited recredit section. In
response to a comment, the final
commentary also clarifies which
transaction triggers the claimant bank’s
120-day period for making a claim.
Aside from those changes, the Board has
adopted § 229.55 and the accompanying
commentary as proposed. The interbank
recredit section may be varied by
agreement. If banks determine that
particular provisions of § 229.55 are
problematic, they may agree to modify
those provisions by agreement as they
deem appropriate.
I. Section 229.56 Liability
The Board has adopted the provisions
of proposed § 229.56 with some minor
changes suggested by commenters.
In response to a comment,
§ 229.56(a)(1)(i) now contains language
that parallels § 229.53(b)(1)(ii) when
describing that losses recoverable under
subpart D are, in the absence of a
warranty and indemnity claim, limited
to the amount of the substitute check
plus interest and expenses.
Several commenters expressed
concern that the Board’s proposed rule
included the identity of the party to be
27 Another commenter questioned why banks had
120 days to make a claim when the corresponding
provision of § 229.54 gives consumers only 40 days.
As the commentary to the proposed rule explained,
the 120-day period for a bank to make a claim
allows time for the statement to be delivered to the
consumer and for the consumer to make a timely
claim, plus it allows for multiple interbank claims
with respect to the same substitute check. The
Board thinks this explanation is more appropriate
in the preamble, which discusses the basis for the
rule’s provisions, than in the commentary, which
clarifies the application of those provisions. The
Board accordingly has omitted this text from the
commentary to the final rule.

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sued as an element of accrual of a cause
of action under § 229.56. The Board
included this clarification in the
proposed rule to make the standard for
accrual parallel to the standard for
making a timely claim. The final rule
therefore retains the proposed accrual
language regarding the identity of the
party to be sued.
Two commenters expressed concern
or confusion about the interaction of
§ 229.54, which requires a consumer to
bring an expedited recredit claim within
40 days of the delivery of the relevant
account statement or substitute check,
with the timing requirements of
§ 229.56. One commenter noted that
§ 229.56 generally states that a claim
must be made within 30 days of accrual
to be timely, whereas § 229.54 provides
that a consumer has 40 days from
delivery of the relevant account
statement or substitute check to make a
timely expedited recredit claim. This
commenter suggested that a consumer
be allowed this same 40-day period to
make a timely claim for purposes of
§ 229.56. The Board notes that the
statute and rule produce this result by
providing that a timely consumer
recredit claim under § 229.54 satisfies
the timing requirement of § 229.56.
J. Section 229.57 and Appendix C
Consumer Awareness and the Board’s
Model Language
1. Consumer Awareness Disclosure in
General. The Board has amended the
text of § 229.57 of the rule to parallel the
statutory text more closely by providing
that the consumer awareness disclosure
required by subpart D must be brief.
The proposed rule required banks to
provide the disclosure to consumers
who received paid checks and
consumers who received substitute
checks on an occasional basis. Several
commenters suggested that banks
should be required to provide the
disclosure to all consumers, not just
those who receive substitute checks.
Requiring notice for consumers who do
not receive substitute checks would go
beyond the requirements of the statute
and could confuse consumers who
receive a notice describing rights that
they do not have. The Board therefore
has not altered the basic scope of the
consumer disclosure requirement.
However, the final rule and commentary
clarify that the reference to paid checks
means paid original checks and paid
substitute checks and does not refer to
a statement that contains multiple check
images per page.
The proposed rule stated that a bank
responding to a request for a check by
providing a substitute check must
provide the disclosure in connection

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with that substitute check ‘‘unless [the]
bank already has provided the
disclosure’’ to a consumer who receives
paid checks. Some commenters
understood the proposed rule to mean
that a bank that already had provided
the notice to a consumer who received
paid checks with account statements
would not be required to provide an
additional notice when responding to a
consumer’s request for a check. Other
commenters believed that notice upon
provision of a substitute check always
would be required.
The final rule provides that a bank
always is required to provide the
disclosure when responding to a request
for a check by providing a substitute
check. This approach more closely
parallels the statutory language, which
does not provide an exception to the
requirement to provide a disclosure
when providing a substitute check on an
occasional basis. Moreover, the time
that a consumer receives a substitute
check in response to a particular request
is likely when the disclosure will be
most useful.
One commenter suggested that a bank
should not be required to provide the
substitute check disclosure in a separate
mailing but rather should be allowed to
provide the disclosure along with other
account information. The rule would
permit a bank to combine the substitute
check disclosure with other
information.
One commenter suggested that the
consumer awareness disclosure should
be required based on the consumer
relationship rather than the account
relationship, such that a bank need not
provide an additional disclosure if an
existing consumer customer opened a
new account. The text of the final rule
incorporates this interpretation. Another
commenter suggested that the Board
explain how the consumer awareness
disclosure would apply in the context of
joint account relationships. This
commenter stated that notice to one
account holder on a joint account
should suffice as notice to each
consumer on the account. The final rule
includes language similar to that in
§ 229.15(c) regarding notice to joint
account holders.
2. Timing for a Disclosure Provided in
Response to a Consumer’s Request for a
Check. The statute requires a bank that
provides a substitute check in response
to a consumer’s request for a check to
provide the consumer awareness
disclosure to the consumer ‘‘at the time
of the request.’’ There are some cases in
which a bank would be able to provide
the notice at the time of the consumer’s
request in a manner that is useful to the
consumer, while other requests may

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present practical difficulties for banks.
For example, a bank may not know at
the time of the request what it will
provide in response. Ultimately, the
bank might provide something other
than a substitute check to the consumer.
If that bank had given the substitute
check disclosure to the consumer at the
time of the request, the consumer might
be confused by receipt of a disclosure
explaining rights that did not apply to
the document (s)he received. Moreover,
the consumer may make his or her
request in such a manner (such as by
telephone) that the bank is unable to
provide the disclosure at the time of the
request.
In light of the foregoing difficulties,
the Board proposed two alternatives for
when a bank must provide the
disclosure to a consumer who requests
a substitute check and requested
comment on which alternative was
preferable. The first alternative used the
statutory language, while the second
would have allowed the bank in all
cases to provide the disclosure at the
time it provided a substitute check in
response to the consumer’s request.
Commenters overwhelmingly preferred
the second alternative.
The final rule takes an approach that
combines elements from the first and
second alternatives. The final rule states
that a bank must provide the disclosure
to a consumer who requests a check or
check copy at the time of the request if
feasible and otherwise must provide the
disclosure no later than the time at
which the bank provides a substitute
check in response to the request. The
commentary provides examples of when
it would not be feasible to provide the
disclosure at the time of the request.
3. Model Language for the Disclosure
Required by § 229.57. The Check 21 Act
requires the Board to publish model
language that banks could use to satisfy
the consumer awareness disclosure
requirement and that, when used
appropriately, would be deemed to
comply with that requirement. The
Board requested comment on the model
language that it proposed to include in
existing appendix C.
The Board received numerous
comments on the proposed model
disclosure. Several commenters
generally opined that the proposed
language was adequate, although some
of these commenters suggested that the
model disclosure could be more
concise. Numerous commenters
expressed concern that the proposed
language was so detailed that it would
discourage consumers from reading the
disclosure. These commenters suggested
a specific, alternative model disclosure
that was much shorter than the Board’s

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proposed disclosure. By contrast, five
commenters suggested that the model
disclosure should provide consumers
with more detail about expedited
recredit rights.28 Many commenters
made specific wording suggestions for
the Board’s consideration.
The final model disclosure, published
as model 5A in appendix C, is shorter
than the proposed model. In crafting
this model disclosure, the Board has
attempted to balance the requirement
that the disclosure be brief and the need
for the disclosure to contain enough
information to enable a consumer to
understand and, if necessary, exercise
the expedited recredit right in § 229.54.
The Board’s revisions also reflect its
consideration of the specific wording
concerns expressed by commenters.
4. Additional Model Language for
Consumer Expedited Recredit Notices.
Although not required to do so by
statute, the Board published for
comment model notices that banks
could use to respond to consumer
expedited recredit claims under
§ 229.54(e). The Check 21 Act does not
provide a safe harbor for appropriate use
of these model notices, and the Board
requested comment on whether having
model language would be useful for
banks in the absence of a safe harbor.
Commenters strongly supported
inclusion of the model notices, although
many requested that the Board either
give the language safe harbor status or
specifically state that appropriate use of
the models in the Board’s view would
constitute compliance with the Check
21 Act.
The Board has retained the model
consumer expedited recredit notices in
appendix C but has revised them. The
proposed models focused on responding
to claims for an improper charge to a
consumer account, but the final models
instead focus on whether the
consumer’s claim is or is not valid.
These revisions will allow banks to use
the model notices to respond to a
consumer’s claim regarding an improper
charge to his or her account or regarding
a warranty breach. Because the statute
does not provide safe harbor status to
these model notices, the Board has not
indicated that appropriate use of the
notice constitutes compliance with the
rule. However, the Board has revised the
language discussing the status of the
model notices to indicate that the Board
28 These commenters also suggested that the
Board should require banks to respond accurately
to consumer enquiries about how a particular check
was processed. The Check 21 Act does not contain
such a requirement. However, banks have a
business incentive to respond appropriately to
consumer enquiries on this and other topics.

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has provided these models to help
banks to comply with the rule.
K. Section 229.58 Mode of Delivery of
Information Required by This Subpart
One commenter suggested that the
Board should delete § 229.58, which
contains the rule for electronic delivery
of documents that applies to all of
subpart D, and instead discuss
electronic delivery of documents in
each place in the rule where that
concept is relevant. The Board has
retained the proposed organization
because it believes that discussing the
issue of electronic delivery in one
section and cross-referencing that
section when appropriate is
straightforward and efficient.
L. Section 229.60
Agreement

Variation by

The Check 21 Act and final rule
provide that the only provision that may
be varied by agreement is the interbank
recredit provision at section 8 of the Act
and § 229.55 of the rule. The final rule
provides commentary clarifying that
this provision does not prevent a bank
from taking action that is more favorable
to the consumer than required by the
Check 21 Act or the final rule.
II. Changes Unrelated to the Check 21
Act
In addition to the changes necessary
to implement the Check 21 Act, the
Board also proposed changes to a
number of existing provisions in
Regulation CC based on a general review
of the rule. Commenters generally
supported these proposed changes,
although some expressed particular
concerns as noted in the following
paragraphs. With the exception of the
changes discussed in the following
paragraphs, the Board is adopting the
proposed revisions to existing
provisions in substantially the same
form as in the Board’s proposed rule.
A. Section 229.15
Requirements

General Disclosure

The Board proposed to amend the
commentary to § 229.15 to require that
disclosures under subpart B be clear and
conspicuous. The Board proposed this
change in Regulation CC to parallel
proposed changes to its consumer
regulations.29 However, the Board
received numerous comments opposing
the proposed changes to the consumer
rules, and several commenters opposed
inclusion of clear and conspicuous
29 See 68 FR 68786, 68788, 68791, 68793, 68799
(all dated Dec. 10, 2003).

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language in the Regulation CC
commentary.
In response to concerns expressed
regarding the proposed consumer
regulations, the Board recently
withdrew all the proposed amendments
to the consumer rules.30 In connection
with that action, the Board determined
that the goal of ensuring that consumers
receive noticeable and understandable
information should be achieved by
developing proposals that focus on
improving individual disclosures rather
than the adoption of general definitions
and standards applicable across all
regulations.
The existing notice requirements in
subparts B and C of Regulation CC have
been in effect since 1988, and the Board
is not aware that recipients of those
notices have expressed concerns
regarding the manner in which banks
provide them. The Board therefore has
determined that adding a clear and
conspicuous requirement is unnecessary
at this time and has not amended the
commentary as proposed. The Board
will reevaluate this issue in connection
with its future periodic reviews of
Regulation CC.
B. Section 229.30(c)(1) Paying Bank’s
Responsibility for Return of Checks
Section 229.30(c)(1) currently
provides that a paying bank’s midnight
deadline for returning a check is
extended if it uses a means of delivery
that ordinarily would result in receipt
by the receiving bank’s next banking
day. In response to a case holding that
Reserve Banks have a 24-hour banking
day for processing checks (see Oak
Brook v. Northern Trust, 256 F.3d 638
(7th Cir., 2001)), the Board proposed to
amend § 229.30(c)(1) to provide that the
deadline would be extended if a paying
bank used a means of delivery that
ordinarily would result in the receiving
bank’s receipt of the check before the
cutoff hour for its next processing cycle
if sent to a returning bank or before its
next banking day if sent to a depositary
bank.
The Board received several comments
on this proposed change, most of which
indicated that using the cutoff hour for
the next processing cycle would be
confusing and difficult to apply. These
commenters noted that some banks have
more than one such cutoff hour and that
paying banks might not know the
relevant times for each of the banks to
which they return checks.
In response to these comments, the
final rule provides that a paying bank
must return a check ‘‘on or before the
receiving bank’s next banking day
30 See

69 FR 35541 (June 25, 2004).

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following the otherwise applicable
deadline by the earlier of the close of
that banking day or a cutoff hour of 2
p.m. or later set by the receiving bank
under U.C.C. 4–108.’’ This approach
should provide the certainty of
identifying a specific cutoff hour but
also allow the receiving bank to set a
cutoff hour of 2 p.m. or later or to close
before 2 p.m.
C. Other Comments Concerning NonCheck 21-Related Changes
1. Manner of Providing Subpart B
notices. Commenters generally
supported the proposed changes to the
commentary to §§ 229.13 and 229.15
that clarified the application of the ESign Act to notices and disclosures that
subpart B requires to be in writing.
However, one commenter expressed
concern about existing language in the
commentary stating that a notice is in a
form that the consumer can keep if it
can be ‘‘downloaded or printed.’’ This
commenter suggested that the standard
be changed to ‘‘downloaded and
printed.’’ The Board is not aware of
consumer problems associated with this
requirement and notes that
downloading information on a computer
allows the recipient to access and use
the information later. The Board also
believes that it would be unusual for a
bank to send an electronic notice such
that it could not be printed. The Board
therefore has retained the existing
language.
Another commenter expressed
concern about the requirement that
notices and disclosures required by
§§ 229.13(g), 229.16(c)(2), and 229.33(a)(b) must include an account number,
which the commenter interpreted to
mean the entire account number. The
commenter suggested that a bank should
be permitted to redact all but the last
four digits for information security
purposes. The Board has amended
§§ 229.13(g) and 229.16(c)(2) to allow
for the proposed redaction. The Board
has not amended § 229.33(a)–(b)
because the notice required by that
section is an interbank notice, and the
receiving bank likely would need full
account information for the notice to
serve its intended purpose.
2. Section 229.33 Notice of
Nonpayment. The Board received
eleven comments concerning its request
for comment on whether the time period
for giving the notice of nonpayment
should be reduced. Only two
commenters opined that an adjustment
was necessary. The Board therefore has
left the time period unchanged. One
commenter suggested that the Board
amend this section to state that the bank
must ‘‘provide or give’’ the notice, as

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opposed to the ‘‘send or give’’ language
proposed by the Board. This commenter
was concerned that the Board’s
proposed language might be read to
exclude providing notice by e-mail. The
Board believes that the send or give
language is sufficiently broad to allow
notice in any form, and the proposed
commentary explicitly stated that
electronic notice would suffice if sent to
the address specified by the recipient
for that purpose. The Board therefore
has adopted the language as proposed.
Another commenter suggested that
the Board amend § 229.33 to provide
that a bank could provide notice in the
form of a substitute check or another
paper or electronic representation of a
check. The Board believes that the text
of § 229.33(a), when combined with the
revised commentary addressing the
form of the nonpayment notice, already
produces this result.
III. Responses to Specific Requests for
Comment
In addition to proposing Check 21related and non-Check 21-related
changes, the Board also requested
comment on several specific issues.
A. Remotely-Created Demand Drafts
The Board requested comment on
whether Regulation CC should
incorporate a U.C.C. warranty that
would shift liability for an unauthorized
remotely-created demand draft from the
paying bank to the depositary bank,
although the Board did not propose
specific regulatory language.
Approximately 76 commenters
addressed this issue, all but two of
which strongly supported the general
idea of covering liability for remotelycreated demand drafts in Regulation CC.
However, many commenters advocated
changes from the uniform version of the
warranty. For example, some
commenters stated that the warranty
should apply to all remotely-created
demand drafts instead of only those
drafts drawn on consumer accounts, and
others suggested that the warranty
should extend to all the draft’s terms
instead of the amount only. Many
commenters encouraged the Board to
propose specific language for comment
in a separate rulemaking. The Board
intends to issue a separate proposal
regarding remotely-created demand
drafts later this year.
B. Treatment of Industry Standards
The Board also received comments
regarding whether it should identify
specific industry standards in the rule
text or the commentary. The vast
majority of commenters on this issue
preferred the Board’s proposed

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approach of placing a general reference
to industry standards in the text of the
rule and identifying specific standards
in the commentary. However,
particularly with respect to substitute
checks, many commenters preferred that
the Board should indicate that a
particular standard is exclusive.
In cases where the Board intends that
an exclusive industry standard apply,
such as the standards relating to MICRline printing and substitute checks, the
Board has identified a specific standard
in the text of the final rule. The Board
believes that this approach is more
transparent for the reader and will better
facilitate compliance with the rule.
C. Plain Language
The Board received four comments
about whether the proposed rule and
commentary were in plain language.
Two of these commenters opined that
the rule and commentary were in plain
language, especially in light of the
complexity of some provisions of the
law. Another commenter suggested that
the rule could be shortened if some
elements were moved to an appendix
but did not identify specific changes it
would make. Another commenter
requested that the rule better clarify the
application or non-application of the
Check 21 Act to non-consumer
accounts. The Board has addressed this
concern through its revisions to the
account and consumer account
definitions and through revisions to
certain parts of the commentary.
Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995 (PRA) (44 U.S.C.
3506; 5 CFR 1320 Appendix A.1), the
Board reviewed the final rule under the
authority delegated to the Board by the
Office of Management and Budget
(OMB). The final rule contains
requirements subject to the PRA. The
collection of information that is
required by this final rule is found in 12
CFR 229.54, 229.55, and 229.57. This
information is required to obtain a
benefit for consumers and mandatory
for depository institutions.
All depository institutions, of which
there are approximately 19,280,
potentially are affected by this
collection of information, and thus are
respondents for purposes of the PRA,
because all depository institutions may
respond to and make expedited recredit
claims under §§ 229.54 and 229.55,
respectively. In addition, all depository
institutions that provide paid checks to
consumer customers with periodic
account statements or that otherwise
provide substitute checks to consumer
customers must provide the consumer

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awareness notice in § 229.57. However,
the extent to which this collection of
information affects a particular
depository institution will depend on
whether and under what circumstances
that depository institution provides
substitute checks to consumers. For
example, institutions that do not
provide paid checks with account
statements or provide substitute checks
in response to consumers’ occasional
requests for paid checks will have
significantly fewer consumer awareness
disclosures and expedited recredit
notices than will depository institutions
that routinely provide paid checks to
consumers.
The collection of information in this
regulation is a new requirement for
which the Federal Reserve has no direct
method for estimating burden. The
following average burden estimates for
respondents regulated by the Federal
Reserve therefore are based on the
Federal Reserve’s experience under
similar, existing regulations with
respect to the 1,244 state member banks
and uninsured U.S. branches and
agencies of foreign banks for which the
Federal Reserve has administrative
enforcement authority (collecting
referred to in the following paragraphs
as respondents regulated by the Federal
Reserve) and for consumers who submit
claims to those depository institutions.
The following average burden estimates
for respondents regulated by the Federal
Reserve also represent an average across
all such respondents and reflect
variations between institutions based on
their size, complexity, and practices.
The Federal Reserve also has estimated
the total annual burden associated with
each notice both for respondents
regulated by the Federal Reserve and for
all affected depository institutions. The
Federal Reserve estimates that half of all
depository institutions affected by this
rule do not provide paid checks with
account statements or provide substitute
checks and thus would have little or no
burden for these requirements. The
Federal Reserve has taken this fact into
account by estimating total burden for
all affected depository institutions on a
weighted basis. The other banking
agencies are responsible for estimating
and reporting to OMB the total
paperwork burden for the depository
institutions for which they have
administrative enforcement authority.
They may, but are not required to, use
the Federal Reserve’s burden estimates.
Except as noted in the following
paragraphs, the burden estimates for the
final rule are the same as those the
Federal Reserve identified for the
proposed rule. One commenter
expressed concern that the Federal

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47307

Reserve’s proposed paperwork burden
estimates in its proposed rule were too
low. However, that commenter did not
suggest specific revisions to those
estimates.
The first notice, described in
§ 229.54(b)(2), is the information a
consumer would provide when making
an expedited recredit claim in writing.
The Federal Reserve estimates that each
respondent regulated by the Federal
Reserve will receive, on average, 25 of
these claims per year. The Federal
Reserve estimates that it will take
consumers, on average, 15 minutes to
complete and send this claim. The
Federal Reserve estimates that the total
annual burden for consumers
submitting claims to respondents
regulated by the Federal Reserve is
7,775 hours. Using the Federal Reserve’s
methodology, the total annual burden
for consumers submitting claims to all
depository institutions would be
approximately 67,300 hours.
The second notice, described in
§ 229.54(e), is required when a
depository institution validates the
consumer’s claim, denies a consumer’s
recredit claim, or reverses a consumer’s
recredit claim. The Federal Reserve
estimates that each respondent
regulated by the Federal Reserve will
send, on average, 35 of these notices per
year. The Federal Reserve estimates that
it will take each such respondent, on
average, 15 minutes to prepare and
distribute these notices (the Board has
provided a model disclosure that
depository institutions may use for this
purpose). The estimated total annual
burden for the respondents regulated by
the Federal Reserve to respond to
consumer claims is 10,885 hours. Using
the Federal Reserve’s, the total annual
burden for all depository institutions
would be approximately 94,200 hours.
The third notice, described in
§ 229.55 (b)(2), is required for each
depository institution that is required to
make a written claim against an
indemnifying depository institution for
a substitute check. The Federal Reserve
estimates that each respondent
regulated by the Federal Reserve will
submit, on average, 15 of these claims
per year. The Federal Reserve estimates
that it will take each such respondent,
on average, 15 minutes to complete and
send each claim. The estimated total
annual burden for respondents
regulated by the Federal Reserve to
submit interbank recredit claims is
4,665 hours. Using the Federal Reserve’s
methodology, the total annual burden
for all depository institutions would be
approximately 40,400 hours.
Finally, § 229.57 describes the
requirements for depository institutions

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to provide consumer awareness
disclosures to consumers who receive
paid checks with their periodic
statements, who receive a substitute
check in response to a request for a
check, and who receive a returned
check in the form of a substitute check.
A model disclosure that depository
institutions may use is provided in
appendix C–5A.
The proposed rule contained an
exception to the disclosure requirement
for a depository institution that
provided a substitute check on an
occasional basis to a consumer who
already had received the disclosure. The
final rule, by contrast, requires that a
depository institution always provide
the disclosure when providing a
substitute check on an occasional basis.
The Federal Reserve believes that
provision of a substitute check on an
occasional basis in response to a
consumer’s request will be rare and thus
does not expect that elimination of the
proposed rule’s exception will
appreciably increase the number of
disclosures. The final rule’s paperwork
burden estimate for notices provided on
an occasional basis therefore is only
slightly higher than that in the proposed
rule.
The Federal Reserve estimates that
each respondent regulated by the
Federal Reserve will, on average,
provide 510 disclosures per year (as
compared with 500 disclosures per year
in the proposed rule) and that, on
average, it will take one minute to
prepare and distribute the disclosure to
each consumer. The one-minute
estimate is a change from the proposed
rule due to further analysis. The
consumer awareness disclosures are
standardized and machine-generated
and do not substantively change from
one individual account to another; thus,
the average time for providing the
disclosure to all consumers who are
entitled to receive it should be small.
The Federal Reserve estimated that the
estimated total annual burden for
respondents regulated by the Federal
Reserve to provide the consumer
awareness disclosure is 10,574 hours.
Using the Federal Reserve’s
methodology, the total annual burden
for all depository institutions would be
approximately 91,500 hours.
The final rule would increase the total
burden under Regulation CC for
respondents regulated by the Federal
Reserve and consumers submitting
claims to those respondents by 33,899
hours, from 327,052 to 360,951. Using
the methodology explained above, the
final rule would increase total burden
under Regulation CC for all depository

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institutions by approximately 293,400
hours.
The Federal Reserve may not conduct
or sponsor, and an organization is not
required to respond to, this information
collection unless it displays a currently
valid OMB control number. The OMB
control number is 7100–0235.
Regulatory Flexibility Act
The Board has prepared a final
regulatory flexibility analysis as
required by the Regulatory Flexibility
Act (see 12 U.S.C. 604).
I. Need for and Objective of Rule
The Board is adopting this rule to
implement the Check 21 Act. The Act
requires the Board to publish a model
disclosure that depository institutions
may use to satisfy their consumer
awareness disclosure requirements. The
Act also authorizes the Board to adopt
rules necessary to implement, prevent
circumvention or evasion of, or facilitate
compliance with the Act. The final rule
adopts the text of the Check 21 Act with
clarifying changes and commentary
designed to aid depository institutions’
understanding of and compliance with
the Act. The final rule is incorporated
into existing Regulation CC so that all
the Board’s generally applicable check
collection requirements will be
contained within one rule.
II. Summary of Issues Raised by
Comments in Response to the Initial
Regulatory Flexibility Analysis
The Board received two comments on
its initial regulatory flexibility analysis.
One commenter opined that the impact
of the rule on small depository
institutions should be proportional to
that on larger depository institutions
and should not be adverse to either. The
other commenter expressed concern that
the use of substitute checks could
increase fraud and that small depository
institutions would not have sufficient
resources to develop fraud prevention
techniques to respond to such increased
risks. This commenter acknowledged
that additional fraud risks associated
with substitute checks could not yet be
quantified but expressed concern that
these risks would be burdensome. These
comments did not provide specific
information about the impact of the
proposed rule on affected small
depository institutions. The Board has
not made regulatory changes based on
the comments.
III. Description of Affected Small
Entities
Under section 3 of the Small Business
Act, as implemented at 13 CFR part 121,
a bank is considered a ‘‘small entity’’ or

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‘‘small bank’’ if it has $150 million or
less in assets. Based on March 2004 call
report data, the Board estimates that
there are approximately 14,251
depository institutions with assets of
$150 million or less.
The Check 21 Act does not require
any depository institution to create
substitute checks or change its general
check collection procedures, although
after the Act’s effective date any
depository institution may receive a
substitute check instead of an original
check. The provisions of the Check 21
Act and the final rule potentially apply
to all depository institutions regardless
of their size. However, the extent to
which any depository institution will be
economically affected by the final rule
depends on several variables, including
how many substitute checks a
depository institution handles and
whether it creates those substitute
checks. Even though all depository
institutions that handle a substitute
check for value make the substitute
check warranties and indemnity and
potentially are responsible for providing
expedited recredit for a substitute check
to a consumer or another depository
institution, the final rule allocates most
associated losses to the reconverting
depository institution that first
transferred, presented, or returned the
substitute check for value. Thus, a
depository institution’s costs associated
with substitute check-related problems
primarily will depend on whether it
chooses to create substitute checks. In
addition, whether a depository
institution must provide the consumer
awareness disclosure contained in the
final rule will depend on the depository
institution’s specific practices regarding
providing checks to consumers.
Due to current uncertainty about each
of the foregoing variables, aside from the
burden estimates in the Paperwork
Reduction Act section, the Board cannot
at this time determine the number of
small depository institutions that will
be directly affected by the final rule or
the rule’s overall economic impact on
small depository institutions.
IV. Recordkeeping, Reporting, and
Compliance Requirements
The final rule does not contain
recordkeeping or reporting
requirements. However, a depository
institution that provides paid checks to
consumer customers with account
statements or otherwise provides a
substitute check to a consumer must
provide consumer awareness
disclosures. In addition, a depository
institution that receives an expedited
recredit claim from a consumer or other
depository institution must comply with

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the requirements of the relevant
expedited recredit provision, including
the requirements regarding timing for
and notification of the depository
institution’s determination regarding the
claim. The final rule allows depository
institutions to vary by agreement the
terms of the interbank recredit
provision, but not the consumer
expedited recredit provision.
V. Steps Taken To Minimize the
Economic Impact on Small Entities
The requirements of the Check 21 Act
that potentially affect small depository
institutions are statutory. The Board has
minimal flexibility to vary those
requirements by regulation, but when
possible it has indicated steps
depository institutions may take to
minimize risks under the Act. The
substitute check warranties and
indemnity are made as a matter of law
when a depository institution transfers,
presents, or returns a substitute check,
but the final rule and commentary
clarify in various places that depository
institutions may further allocate liability
amongst themselves by agreement. The
maximum periods for acting on claims
and the notices and other
documentation that depository
institutions must provide in connection
with providing an expedited recredit to
a consumer are specifically prescribed
by the statute, but § 229.60 of the
Board’s final rule and the associated
commentary clarify that a depository
institution may choose to act in a
manner more favorable to the consumer
than the Act requires. Although the final
rule also uses the statute’s requirements
regarding interbank expedited recredits,
§ 229.60 specifically notes that
depository institutions themselves may
vary any of those requirements by
agreement. Finally, the statute
specifically sets forth the events that
trigger provision of and the timing
requirements that apply to the consumer
awareness disclosure, but
§ 229.57(b)(2)(i) gives depository
institutions flexibility to provide
disclosures for a substitute check given
in response to specific request for a
check at a later date when necessary.
Administrative Procedure Act
In accordance with 12 U.S.C.
553(d)(3), the Board for good cause finds
that model disclosure C–5A in appendix
C is effective immediately. The Check
21 Act requires the Board to publish
model disclosure C–5A three months
before the Act’s effective date. A bank’s
appropriate use of model C–5A would
constitute compliance with the
consumer awareness disclosure
requirements in section 12 of the Act

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and § 229.57 of the final rule. The Board
believes that delaying the effective date
of model disclosure C–5A would
undermine the Act’s intent that banks
be able to rely on the model language as
soon as the Board publishes it.

■

§ 229.2

*

47309

B. Designate paragraph (a) as
paragraph (a)(1) and revise the first
sentence of that paragraph;
■ C. Designate the undesignated
paragraph as paragraph (2) and revise
that paragraph; and
■ D. Add a new paragraph (3).
12 CFR Chapter II
The revisions and addition read as
List of Subjects in 12 CFR Part 229
follows:
(a) Account. (1) Except as provided in
Banks, Banking, Federal Reserve
paragraphs (a)(2) and (a)(3) of this
System, Reporting and recordkeeping
section, account means a deposit as
requirements.
defined in 12 CFR 204.2(a)(1)(i) that is
Authority and Issuance
a transaction account as described in 12
CFR 204.2(e). * * *
■ For the reasons set forth in the
(2) For purposes of subpart B of this
preamble, the Board is amending 12 CFR
part and, in connection therewith, this
part 229 to read as follows:
subpart A, account does not include an
account where the account holder is a
PART 229—AVAILABILITY OF FUNDS
bank, where the account holder is an
AND COLLECTION OF CHECKS
office of an institution described in
(REGULATION CC)
paragraphs (e)(1) through (e)(6) of this
■ 1. The authority citation for part 229 is
section or an office of a ‘‘foreign bank’’
amended to read as follows:
as defined in section 1(b) of the
International Banking Act (12 U.S.C.
Authority: 12 U.S.C. 4001–4010, 12 U.S.C.
3101) that is located outside the United
5001–5018.
States, or where the direct or indirect
§ 229.1 [Amended]
account holder is the Treasury of the
■ 2. In § 229.1, revise paragraph (a) and
United States.
add a new paragraph (b)(4) to read as
(3) For purposes of subpart D of this
follows:
part and, in connection therewith, this
(a) Authority and purpose. This part
subpart A, account means any deposit,
is issued by the Board of Governors of
as defined in 12 CFR 204.2(a)(1)(i), at a
the Federal Reserve System (Board) to
bank, including a demand deposit or
implement the Expedited Funds
other transaction account and a savings
Availability Act (12 U.S.C. 4001–4010 )
deposit or other time deposit, as those
(the EFA Act) and the Check Clearing
terms are defined in 12 CFR 204.2.
for the 21st Century Act (12 U.S.C.
*
*
*
*
*
5001–5018) (the Check 21 Act).
■ 5. In § 229.2(e), remove the phrase
(b) Organization. * * *
‘‘subpart C’’ from the last, undesignated
(4) Subpart D of this part contains
paragraph and add the phrase ‘‘subparts
rules relating to substitute checks. These
C and D’’ in its place, and after the
rules address the creation and legal
undesignated paragraph add a new
status of substitute checks; the
paragraph to read as follows:
substitute check warranties and
(e) * * *
indemnity; expedited recredit
Note:
For purposes of subpart D of this part
procedures for resolving improper
and, in connection therewith, this subpart A,
charges and warranty claims associated
bank also includes the Treasury of the United
with substitute checks provided to
States or the United States Postal Service to
consumers; and the disclosure and
the extent that the Treasury or the Postal
notices that banks must provide.
Service acts as a paying bank.
[Amended]

3. In § 229.2, revise the introductory
sentence to read as follows:
As used in this part, and unless the
context requires otherwise, the
following terms have the meanings set
forth in this section, and the terms not
defined in this section have the
meanings set forth in the Uniform
Commercial Code:
*
*
*
*
*
■ 4. In § 229.2(a):
■ A. Redesignate existing paragraphs (1),
(2), (3), (4), and (5) as paragraphs (a)(1)(i),
(a)(1)(ii), (a)(1)(iii), (a)(1)(iv), and
(a)(1)(v), respectively;
■

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*
*
*
*
6. In § 229.2(k):
A. After paragraph (6), add a new
paragraph (7) to read as follows:
(k) * * *
(7) The term check includes an
original check and a substitute check.
■ B. Designate the undesignated
paragraph with the word ‘‘Note’’
followed by a colon and remove the
phrase ‘‘subpart C’’ from the last
sentence of that paragraph and add the
phrase ‘‘subparts C and D’’ in its place.
■ 7. In § 229.2(q), add the phrase ‘‘to a
collecting bank for settlement or’’
between the words ‘‘basis’’ and ‘‘to.’’
■
■

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Document—IRD, X9.100–140
(hereinafter ANS X9.100–140) for a
substitute check (unless the Board by
rule or order determines that different
standards apply).
(ww) Original check means the first
paper check issued with respect to a
particular payment transaction.
Note: For purposes of subpart D of this part
(xx) Paper or electronic representation
and, in connection therewith, this subpart A,
of a substitute check means any copy of
paying bank also includes the Treasury of the
or information related to a substitute
United States or the United States Postal
check that a bank handles for forward
Service for a check that is payable by that
collection or return, charges to a
entity and that is sent to that entity for
customer’s account, or provides to a
payment or collection.
person as a record of a check payment
*
*
*
*
*
made by the person.
■ 9. In § 229.2(ff), add a new sentence
(yy) Person means a natural person,
after the first sentence to read as follows: corporation, unincorporated company,
(ff) * * * For purposes of subpart D
partnership, government unit or
of this part and, in connection
instrumentality, trust, or any other
therewith, this subpart A, state also
entity or organization.
means Guam, American Samoa, the
(zz) Reconverting bank means—
Trust Territory of the Pacific Islands, the
(1) The bank that creates a substitute
Northern Mariana Islands, and any other check; or
territory of the United States.
(2) With respect to a substitute check
that was created by a person that is not
*
*
*
*
*
a bank, the first bank that transfers,
■ 10. In § 229.2, revise paragraph (qq) to
presents, or returns that substitute check
read as follows:
or, in lieu thereof, the first paper or
*
*
*
*
*
electronic representation of that
(qq) Claimant bank means a bank that
substitute check.
submits a claim for a recredit for a
(aaa) Substitute check means a paper
substitute check to an indemnifying
reproduction of an original check that—
bank under § 229.55.
(1) Contains an image of the front and
■ 11. In § 229.2, after paragraph (qq) add
back of the original check;
the following new paragraphs (rr)
(2) Bears a MICR line that, except as
through (eee), to read as follows:
provided under ANS X9.100–140
(unless the Board by rule or order
*
*
*
*
*
determines that a different standard
(rr) Collecting bank means any bank
handling a check for forward collection, applies), contains all the information
appearing on the MICR line of the
except the paying bank.
(ss) Consumer means a natural person original check at the time that the
who—
original check was issued and any
(1) With respect to a check handled
additional information that was
for forward collection, draws the check
encoded on the original check’s MICR
on a consumer account; or
line before an image of the original
(2) With respect to a check handled
check was captured;
for return, deposits the check into or
(3) Conforms in paper stock,
cashes the check against a consumer
dimension, and otherwise with ANS
account.
X9.100–140 (unless the Board by rule or
(tt) Customer means a person having
order determines that a different
an account with a bank.
standard applies); and
(uu) Indemnifying bank means a bank
(4) Is suitable for automated
that provides an indemnity under
processing in the same manner as the
§ 229.53 with respect to a substitute
original check.
check.
(bbb) Sufficient copy and copy. (1) A
(vv) Magnetic ink character
sufficient copy is a copy of an original
recognition line and MICR line mean the check that accurately represents all of
numbers, which may include the
the information on the front and back of
routing number, account number, check the original check as of the time the
number, check amount, and other
original check was truncated or is
information, that are printed near the
otherwise sufficient to determine
bottom of a check in magnetic ink in
whether or not a claim is valid.
(2) A copy of an original check means
accordance with American National
any paper reproduction of an original
Standard Specifications for Placement
check, including a paper printout of an
and Location of MICR Printing, X9.13
electronic image of the original check, a
(hereinafter ANS X9.13) for an original
photocopy of the original check, or a
check and American National Standard
Specifications for an Image Replacement substitute check.

8. In § 229.2(z), remove the phrase
‘‘subpart C’’ from the undesignated
paragraph and add the phrase ‘‘subparts
C and D’’ in its place, and after the
undesignated paragraph add a new
paragraph to read as follows:
*
*
*
*
*
■

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(ccc) Transfer and consideration. The
terms transfer and consideration have
the meanings set forth in the Uniform
Commercial Code and in addition, for
purposes of subpart D—
(1) The term transfer with respect to
a substitute check or a paper or
electronic representation of a substitute
check means delivery of the substitute
check or other representation of the
substitute check by a bank to a person
other than a bank; and
(2) A bank that transfers a substitute
check or a paper or electronic
representation of a substitute check
directly to a person other than a bank
has received consideration for the
substitute check or other paper or
electronic representation of the
substitute check if it has charged, or has
the right to charge, the person’s account
or otherwise has received value for the
original check, a substitute check, or a
representation of the original check or
substitute check.
(ddd) Truncate means to remove an
original check from the forward
collection or return process and send to
a recipient, in lieu of such original
check, a substitute check or, by
agreement, information relating to the
original check (including data taken
from the MICR line of the original check
or an electronic image of the original
check), whether with or without the
subsequent delivery of the original
check.
(eee) Truncating bank means—
(1) The bank that truncates the
original check; or
(2) If a person other than a bank
truncates the original check, the first
bank that transfers, presents, or returns,
in lieu of such original check, a
substitute check or, by agreement with
the recipient, information relating to the
original check (including data taken
from the MICR line of the original check
or an electronic image of the original
check), whether with or without the
subsequent delivery of the original
check.
§ 229.3

[Amended]

■ 12. In § 229.3, remove the phrase ‘‘the
Act’’ from paragraphs (b)(1) and (c)(2)(ii)
and add the phrase ‘‘the EFA Act’’ in its
place.

§ 229.13

[Amended]

13. Revise § 229.13(g)(1)(i)(A) to read
as follows:
(g) * * *
(1) * * *
(i) * * *
(A) A number or code, which need
not exceed four digits, that identifies the
customer’s account;

■

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Federal Register / Vol. 69, No. 149 / Wednesday, August 4, 2004 / Rules and Regulations
§ 229.16

[Amended]

14. Revise § 229.16(c)(2)(i)(A) to read
as follows:
(c) * * *
(2) * * *
(i) * * *
(A) A number or code, which need
not exceed four digits, that identifies the
customer’s account.

■

reason for return. If the check is a
substitute check, the paying bank shall
place this information within the image
of the original check that appears on the
front of the substitute check.
*
*
*
*
*
§ 229.31

[Amended]

18. In the undesignated paragraph after
§ 229.31(a)(2)(iii), remove the third
§ 229.20 [Amended]
sentence and add the following
■ 15. In § 229.20, remove the phrase ‘‘the
sentences in its place:
(a) * * *
Act’’ wherever it appears and add the
(2) * * *
phrase ‘‘the EFA Act’’ in its place.
(iii) * * *
§ 229.21 [Amended]
* * * A qualified returned check
■ 16. In § 229.21(g)(2), remove the phrase shall be encoded in magnetic ink with
the routing number of the depositary
‘‘the Act’’ and add the phrase ‘‘the EFA
bank, the amount of the returned check,
Act’’ in its place.
and a ‘‘2’’ in the case of an original
§ 229.30 [Amended]
check (or a ‘‘5’’ in the case of a
substitute check) in position 44 of the
■ 17. In § 229.30:
qualified return MICR line as a return
■ A. In the undesignated paragraph after
paragraph (a)(2)(iii), remove the next-to- identifier. A qualified returned original
last sentence and add two new sentences check shall be encoded in accordance
with ANS X9.13, and a qualified
in its place; and
returned substitute check shall be
■ B. Revise paragraphs (c)(1) and (d).
encoded in accordance with ANS
The revisions and addition read as
X9.100–140. * * *
follows.
(a) * * *
*
*
*
*
*
(2) * * *
§ 229.33 [Amended]
(iii) * * *
* * * A qualified returned check
■ 19. In § 229.33:
shall be encoded in magnetic ink with
■ A. In paragraph (b), remove the phrase
the routing number of the depositary
‘‘with question marks’’ from the last
bank, the amount of the returned check, sentence of the undesignated paragraph;
and a ‘‘2’’ in the case of an original
and
check (or a ‘‘5’’ in the case of a
■ B. In paragraph (d), add the phrase ‘‘or
substitute check) in position 44 of the
give’’ between the words ‘‘send’’ and
qualified return MICR line as a return
‘‘notice.’’
identifier. A qualified returned original
§ 229.34 [Amended]
check shall be encoded in accordance
with ANS X9.13, and a qualified
■ 20. In § 229.34(c), add a new sentence
returned substitute check shall be
at the end of paragraph (3) to read as
encoded in accordance with ANS
follows:
X9.100–140. * * *
(c) * * *
(3) * * * For purposes of this
*
*
*
*
*
paragraph, the information encoded
(c) * * *
after issue on the check or returned
(1) On or before the receiving bank’s
check includes any information placed
next banking day following the
in the MICR line of a substitute check
otherwise applicable deadline by the
that represents that check or returned
earlier of the close of that banking day
check.
or a cutoff hour of 2 p.m. or later set by
the receiving bank under U.C.C. 4–108,
*
*
*
*
*
for all deadlines other than those
§ 229.35 [Amended]
described in paragraph (c)(2) of this
section; this deadline is extended
■ 21. In § 229.35, revise paragraph (a) to
further if a paying bank uses a highly
read as follows:
(a) Indorsement standards. A bank
expeditious means of transportation,
(other than a paying bank) that handles
even if this means of transportation
would ordinarily result in delivery after a check during forward collection or a
returned check shall indorse the check
the receiving bank’s next cutoff hour or
in a manner that permits a person to
banking day referred to above; or
interpret the indorsement, in
*
*
*
*
*
(d) Identification of returned check. A accordance with the indorsement
standard set forth in appendix D of this
paying bank returning a check shall
clearly indicate on the front of the check part.
that it is a returned check and the
*
*
*
*
*

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■

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§ 229.38

47311

[Amended]

22. In § 229.38(d)(1), designate the last
sentence with the word ‘‘Note’’ and
revise it, and add a new sentence after
the second sentence to read as follows:
(d) Responsibility for certain aspects
of checks—(1) * * * A reconverting
bank is responsible for damages under
paragraph (a) of this section to the
extent that the condition of the back of
a substitute check transferred,
presented, or returned by it—
(i) Adversely affects the ability of a
subsequent bank to indorse the check
legibly in accordance with § 229.35; or
(ii) Causes an indorsement that
previously was applied in accordance
with § 229.35 to become illegible.
■

Note: Responsibility under this paragraph
(d) shall be treated as negligence of the
paying bank, depositary bank, or
reconverting bank for purposes of paragraph
(c) of this section.

*

*
*
*
*
23. In § 229.38(f), remove the phrase
‘‘the Act’’ and add the phrase ‘‘the EFA
Act’’ in its place.
■ 24. Add a new subpart D to read as
follows:
■

Subpart D—Substitute Checks
Sec.
229.51 General provisions governing
substitute checks.
229.52 Substitute check warranties.
229.53 Substitute check indemnity.
229.54 Expedited recredit for consumers.
229.55 Expedited recredit for banks.
229.56 Liability.
229.57 Consumer awareness.
229.58 Mode of delivery of information.
229.59 Relation to other law.
229.60 Variation by agreement.
Authority: 12 U.S.C. 5001–5018.

Subpart D—Substitute Checks
§ 229.51 General provisions governing
substitute checks.

(a) Legal equivalence. A substitute
check for which a bank has provided the
warranties described in § 229.52 is the
legal equivalent of an original check for
all persons and all purposes, including
any provision of federal or state law, if
the substitute check—
(1) Accurately represents all of the
information on the front and back of the
original check as of the time the original
check was truncated; and
(2) Bears the legend, ‘‘This is a legal
copy of your check. You can use it the
same way you would use the original
check.’’
(b) Reconverting bank duties. A bank
shall ensure that a substitute check for
which it is the reconverting bank—
(1) Bears all indorsements applied by
parties that previously handled the

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check in any form (including the
original check, a substitute check, or
another paper or electronic
representation of such original check or
substitute check) for forward collection
or return;
(2) Identifies the reconverting bank in
a manner that preserves any previous
reconverting bank identifications, in
accordance with ANS X9.100–140 and
appendix D of this part; and
(3) Identifies the bank that truncated
the original check, in accordance with
ANS X9.100–140 and appendix D of this
part.
(c) Applicable law. A substitute check
that is the legal equivalent of an original
check under paragraph (a) of this
section shall be subject to any provision,
including any provision relating to the
protection of customers, of this part, the
U.C.C., and any other applicable federal
or state law as if such substitute check
were the original check, to the extent
such provision of law is not inconsistent
with the Check 21 Act or this subpart.
§ 229.52

Substitute check warranties.

(a) Content and provision of substitute
check warranties. A bank that transfers,
presents, or returns a substitute check
(or a paper or electronic representation
of a substitute check) for which it
receives consideration warrants to the
parties listed in paragraph (b) of this
section that—
(1) The substitute check meets the
requirements for legal equivalence
described in § 229.51(a)(1)–(2); and
(2) No depositary bank, drawee,
drawer, or indorser will receive
presentment or return of, or otherwise
be charged for, the substitute check, the
original check, or a paper or electronic
representation of the substitute check or
original check such that that person will
be asked to make a payment based on
a check that it already has paid.
(b) Warranty recipients. A bank makes
the warranties described in paragraph
(a) of this section to the person to which
the bank transfers, presents, or returns
the substitute check or a paper or
electronic representation of such
substitute check and to any subsequent
recipient, which could include a
collecting or returning bank, the
depositary bank, the drawer, the
drawee, the payee, the depositor, and
any indorser. These parties receive the
warranties regardless of whether they
received the substitute check or a paper
or electronic representation of a
substitute check.
§ 229.53

Substitute check indemnity.

(a) Scope of indemnity. A bank that
transfers, presents, or returns a
substitute check or a paper or electronic

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representation of a substitute check for
which it receives consideration shall
indemnify the recipient and any
subsequent recipient (including a
collecting or returning bank, the
depositary bank, the drawer, the
drawee, the payee, the depositor, and
any indorser) for any loss incurred by
any recipient of a substitute check if
that loss occurred due to the receipt of
a substitute check instead of the original
check.
(b) Indemnity amount—(1) In general.
Unless otherwise indicated by
paragraph (b)(2) or (b)(3) of this section,
the amount of the indemnity under
paragraph (a) of this section is as
follows:
(i) If the loss resulted from a breach
of a substitute check warranty provided
under § 229.52, the amount of the
indemnity shall be the amount of any
loss (including interest, costs,
reasonable attorney’s fees, and other
expenses of representation) proximately
caused by the warranty breach.
(ii) If the loss did not result from a
breach of a substitute check warranty
provided under § 229.52, the amount of
the indemnity shall be the sum of—
(A) The amount of the loss, up to the
amount of the substitute check; and
(B) Interest and expenses (including
costs and reasonable attorney’s fees and
other expenses of representation) related
to the substitute check.
(2) Comparative negligence. (i) If a
loss described in paragraph (a) of this
section results in whole or in part from
the indemnified person’s negligence or
failure to act in good faith, then the
indemnity amount described in
paragraph (b)(1) of this section shall be
reduced in proportion to the amount of
negligence or bad faith attributable to
the indemnified person.
(ii) Nothing in this paragraph (b)(2)
reduces the rights of a consumer or any
other person under the U.C.C. or other
applicable provision of state or federal
law.
(3) Effect of producing the original
check or a sufficient copy—
(i) If an indemnifying bank produces
the original check or a sufficient copy,
the indemnifying bank shall—
(A) Be liable under this section only
for losses that are incurred up to the
time that the bank provides that original
check or sufficient copy to the
indemnified person; and
(B) Have a right to the return of any
funds it has paid under this section in
excess of those losses.
(ii) The production by the
indemnifying bank of the original check
or a sufficient copy under paragraph
(b)(3)(i) of this section shall not absolve
the indemnifying bank from any

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liability under any warranty that the
bank has provided under § 229.52 or
other applicable law.
(c) Subrogation of rights—(1) In
general. An indemnifying bank shall be
subrogated to the rights of the person
that it indemnifies to the extent of the
indemnity it has provided and may
attempt to recover from another person
based on a warranty or other claim.
(2) Duty of indemnified person for
subrogated claims. Each indemnified
person shall have a duty to comply with
all reasonable requests for assistance
from an indemnifying bank in
connection with any claim the
indemnifying bank brings against a
warrantor or other person related to a
check that forms the basis for the
indemnification.
§ 229.54

Expedited recredit for consumers.

(a) Circumstances giving rise to a
claim. A consumer may make a claim
under this section for a recredit with
respect to a substitute check if the
consumer asserts in good faith that—
(1) The bank holding the consumer’s
account charged that account for a
substitute check that was provided to
the consumer (although the consumer
need not be in possession of that
substitute check at the time he or she
submits a claim);
(2) The substitute check was not
properly charged to the consumer
account or the consumer has a warranty
claim with respect to the substitute
check;
(3) The consumer suffered a resulting
loss; and
(4) Production of the original check or
a sufficient copy is necessary to
determine whether or not the substitute
check in fact was improperly charged or
whether the consumer’s warranty claim
is valid.
(b) Procedures for making claims. A
consumer shall make his or her claim
for a recredit under this section with the
bank that holds the consumer’s account
in accordance with the timing, content,
and form requirements of this section.
(1) Timing of claim. (i) The consumer
shall submit his or her claim such that
the bank receives the claim by the end
of the 40th calendar day after the later
of the calendar day on which the bank
mailed or delivered, by a means agreed
to by the consumer—
(A) The periodic account statement
that contains information concerning
the transaction giving rise to the claim;
or
(B) The substitute check giving rise to
the claim.
(ii) If the consumer cannot submit his
or her claim by the time specified in
paragraph (b)(1)(i) of this section

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because of extenuating circumstances,
the bank shall extend the 40-calendarday period by an additional reasonable
amount of time.
(iii) If a consumer makes a claim
orally and the bank requires the claim
to be in writing, the consumer’s claim
is timely if the oral claim was received
within the time described in paragraphs
(b)(1)(i)–(ii) of this section and the
written claim was received within the
time described in paragraph (b)(3)(ii) of
this section.
(2) Content of claim. (i) The
consumer’s claim shall include the
following information:
(A) A description of the consumer’s
claim, including the reason why the
consumer believes his or her account
was improperly charged for the
substitute check or the nature of his or
her warranty claim with respect to such
check;
(B) A statement that the consumer
suffered a loss and an estimate of the
amount of that loss;
(C) The reason why production of the
original check or a sufficient copy is
necessary to determine whether or not
the charge to the consumer’s account
was proper or the consumer’s warranty
claim is valid; and
(D) Sufficient information to allow the
bank to identify the substitute check
and investigate the claim.
(ii) If a consumer attempts to make a
claim but fails to provide all the
information in paragraph (b)(2)(i) of this
section that is required to constitute a
claim, the bank shall inform the
consumer that the claim is not complete
and identify the information that is
missing.
(3) Form and submission of claim;
computation of time for bank action.
The bank holding the account that is the
subject of the consumer’s claim may, in
its discretion, require the consumer to
submit the information required by this
section in writing. A bank that requires
a written submission—
(i) May permit the consumer to
submit the written claim electronically;
(ii) Shall inform a consumer who
submits a claim orally of the written
claim requirement at the time of the oral
claim and may require such consumer
to submit the written claim such that
the bank receives the written claim by
the 10th business day after the banking
day on which the bank received the oral
claim; and
(iii) Shall compute the time periods
for acting on the consumer’s claim
described in paragraph (c) of this
section from the date on which the bank
received the written claim.
(c) Action on claims. A bank that
receives a claim that meets the

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requirements of paragraph (b) of this
section shall act as follows:
(1) Valid consumer claim. If the bank
determines that the consumer’s claim is
valid, the bank shall—
(i) Recredit the consumer’s account
for the amount of the consumer’s loss,
up to the amount of the substitute
check, plus interest if the account is an
interest-bearing account, no later than
the end of the business day after the
banking day on which the bank makes
that determination; and
(ii) Send to the consumer the notice
required by paragraph (e)(1) of this
section.
(2) Invalid consumer claim. If a bank
determines that the consumer’s claim is
not valid, the bank shall send to the
consumer the notice described in
paragraph (e)(2) of this section.
(3) Recredit pending investigation. If
the bank has not taken an action
described in paragraph (c)(1) or (c)(2) of
this section before the end of the 10th
business day after the banking day on
which the bank received the claim, the
bank shall—
(i) By the end of that business day—
(A) Recredit the consumer’s account
for the amount of the consumer’s loss,
up to the lesser of the amount of the
substitute check or $2,500, plus interest
on that amount if the account is an
interest-bearing account; and
(B) Send to the consumer the notice
required by paragraph (e)(1) of this
section; and
(ii) Recredit the consumer’s account
for the remaining amount of the
consumer’s loss, if any, up to the
amount of the substitute check, plus
interest if the account is an interestbearing account, no later than the end
of the 45th calendar day after the
banking day on which the bank received
the claim and send to the consumer the
notice required by paragraph (e)(1) of
this section, unless the bank prior to
that time has determined that the
consumer’s claim is or is not valid in
accordance with paragraph (c)(1) or
(c)(2) of this section.
(4) Reversal of recredit. A bank may
reverse a recredit that it has made to a
consumer account under paragraph
(c)(1) or (c)(3) of this section, plus
interest that the bank has paid, if any,
on that amount, if the bank—
(i) Determines that the consumer’s
claim was not valid; and
(ii) Notifies the consumer in
accordance with paragraph (e)(3) of this
section.
(d) Availability of recredit—(1) Nextday availability. Except as provided in
paragraph (d)(2) of this section, a bank
shall make any amount that it recredits
to a consumer account under this

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47313

section available for withdrawal no later
than the start of the business day after
the banking day on which the bank
provides the recredit.
(2) Safeguard exceptions. A bank may
delay availability to a consumer of a
recredit provided under paragraph
(c)(3)(i) of this section until the start of
the earlier of the business day after the
banking day on which the bank
determines the consumer’s claim is
valid or the 45th calendar day after the
banking day on which the bank received
the oral or written claim, as required by
paragraph (b) of this section, if—
(i) The consumer submits the claim
during the 30-calendar-day period
beginning on the banking day on which
the consumer account was established;
(ii) Without regard to the charge that
gave rise to the recredit claim—
(A) On six or more business days
during the six-month period ending on
the calendar day on which the
consumer submitted the claim, the
balance in the consumer account was
negative or would have become negative
if checks or other charges to the account
had been paid; or
(B) On two or more business days
during such six-month period, the
balance in the consumer account was
negative or would have become negative
in the amount of $5,000 or more if
checks or other charges to the account
had been paid; or
(iii) The bank has reasonable cause to
believe that the claim is fraudulent,
based on facts that would cause a wellgrounded belief in the mind of a
reasonable person that the claim is
fraudulent. The fact that the check in
question or the consumer is of a
particular class may not be the basis for
invoking this exception.
(3) Overdraft fees. A bank that delays
availability as permitted in paragraph
(d)(2) of this section may not impose an
overdraft fee with respect to drafts
drawn by the consumer on such
recredited funds until the fifth calendar
day after the calendar day on which the
bank sent the notice required by
paragraph (e)(1) of this section.
(e) Notices relating to consumer
expedited recredit claims—(1) Notice of
recredit. A bank that recredits a
consumer account under paragraph (c)
of this section shall send notice to the
consumer of the recredit no later than
the business day after the banking day
on which the bank recredits the
consumer account. This notice shall
describe—
(i) The amount of the recredit; and
(ii) The date on which the recredited
funds will be available for withdrawal.
(2) Notice that the consumer’s claim
is not valid. If a bank determines that a

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substitute check for which a consumer
made a claim under this section was in
fact properly charged to the consumer
account or that the consumer’s warranty
claim for that substitute check was not
valid, the bank shall send notice to the
consumer no later than the business day
after the banking day on which the bank
makes that determination. This notice
shall—
(i) Include the original check or a
sufficient copy, except as provided in
§ 229.58;
(ii) Demonstrate to the consumer that
the substitute check was properly
charged or the consumer’s warranty
claim is not valid; and
(iii) Include the information or
documents (in addition to the original
check or sufficient copy), if any, on
which the bank relied in making its
determination or a statement that the
consumer may request copies of such
information or documents.
(3) Notice of a reversal of recredit. A
bank that reverses an amount it
previously recredited to a consumer
account shall send notice to the
consumer no later than the business day
after the banking day on which the bank
made the reversal. This notice shall
include the information listed in
paragraph (e)(2) of this section and also
describe—
(i) The amount of the reversal,
including both the amount of the
recredit (including the interest
component, if any) and the amount of
interest paid on the recredited amount,
if any, being reversed; and
(ii) The date on which the bank made
the reversal.
(f) Other claims not affected.
Providing a recredit in accordance with
this section shall not absolve the bank
from liability for a claim made under
any other provision of law, such as a
claim for wrongful dishonor of a check
under the U.C.C., or from liability for
additional damages, such as damages
under § 229.53 or § 229.56 of this
subpart or U.C.C. 4–402.
§ 229.55

Expedited recredit for banks.

(a) Circumstances giving rise to a
claim. A bank that has an indemnity
claim under § 229.53 with respect to a
substitute check may make an expedited
recredit claim against an indemnifying
bank if—
(1) The claimant bank or a bank that
the claimant bank has indemnified—
(i) Has received a claim for expedited
recredit from a consumer under
§ 229.54; or
(ii) Would have been subject to such
a claim if the consumer account had
been charged for the substitute check;

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(2) The claimant bank is obligated to
provide an expedited recredit with
respect to such substitute check under
§ 229.54 or otherwise has suffered a
resulting loss; and
(3) The production of the original
check or a sufficient copy is necessary
to determine the validity of the charge
to the consumer account or the validity
of any warranty claim connected with
such substitute check.
(b) Procedures for making claims. A
claimant bank shall send its claim to the
indemnifying bank, subject to the
timing, content, and form requirements
of this section.
(1) Timing of claim. The claimant
bank shall submit its claim such that the
indemnifying bank receives the claim by
the end of the 120th calendar day after
the date of the transaction that gave rise
to the claim.
(2) Content of claim. The claimant
bank’s claim shall include the following
information—
(i) A description of the consumer’s
claim or the warranty claim related to
the substitute check, including why the
bank believes that the substitute check
may not be properly charged to the
consumer account;
(ii) A statement that the claimant bank
is obligated to recredit a consumer
account under § 229.54 or otherwise has
suffered a loss and an estimate of the
amount of that recredit or loss,
including interest if applicable;
(iii) The reason why production of the
original check or a sufficient copy is
necessary to determine the validity of
the charge to the consumer account or
the warranty claim; and
(iv) Sufficient information to allow
the indemnifying bank to identify the
substitute check and investigate the
claim.
(3) Requirements relating to copies of
substitute checks. If the information
submitted by a claimant bank under
paragraph (b)(2) of this section includes
a copy of any substitute check, the
claimant bank shall take reasonable
steps to ensure that the copy cannot be
mistaken for the legal equivalent of the
check under § 229.51(a) or sent or
handled by any bank, including the
indemnifying bank, for forward
collection or return.
(4) Form and submission of claim;
computation of time. The indemnifying
bank may, in its discretion, require the
claimant bank to submit the information
required by this section in writing,
including a copy of the paper or
electronic claim submitted by the
consumer, if any. An indemnifying bank
that requires a written submission—
(i) May permit the claimant bank to
submit the written claim electronically;

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(ii) Shall inform a claimant bank that
submits a claim orally of the written
claim requirement at the time of the oral
claim; and
(iii) Shall compute the 10-day time
period for acting on the claim described
in paragraph (c) of this section from the
date on which the bank received the
written claim.
(c) Action on claims. No later than the
10th business day after the banking day
on which the indemnifying bank
receives a claim that meets the
requirements of paragraph (b) of this
section, the indemnifying bank shall—
(1) Recredit the claimant bank for the
amount of the claim, up to the amount
of the substitute check, plus interest if
applicable;
(2) Provide to the claimant bank the
original check or a sufficient copy; or
(3) Provide information to the
claimant bank regarding why the
indemnifying bank is not obligated to
comply with paragraph (c)(1) or (c)(2) of
this section.
(d) Recredit does not abrogate other
liabilities. Providing a recredit to a
claimant bank under this section does
not absolve the indemnifying bank from
liability for claims brought under any
other law or from additional damages
under § 229.53 or § 229.56.
(e) Indemnifying bank’s right to a
refund. (1) If a claimant bank reverses a
recredit it previously made to a
consumer account under § 229.54 or
otherwise receives reimbursement for a
substitute check that formed the basis of
its claim under this section, the
claimant bank shall provide a refund
promptly to any indemnifying bank that
previously advanced funds to the
claimant bank. The amount of the
refund to the indemnifying bank shall
be the amount of the reversal or
reimbursement obtained by the claimant
bank, up to the amount previously
advanced by the indemnifying bank.
(2) If the indemnifying bank provides
the claimant bank with the original
check or a sufficient copy under
paragraph (c)(2) of this section,
§ 229.53(b)(3) governs the indemnifying
bank’s entitlement to repayment of any
amount provided to the claimant bank
that exceeds the amount of losses the
claimant bank incurred up to that time.
§ 229.56

Liability.

(a) Measure of damages—(1) In
general. Except as provided in
paragraph (a)(2) or (a)(3) of this section
or § 229.53, any person that breaches a
warranty described in § 229.52 or fails
to comply with any requirement of this
subpart with respect to any other person
shall be liable to that person for an
amount equal to the sum of—

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Federal Register / Vol. 69, No. 149 / Wednesday, August 4, 2004 / Rules and Regulations
(i) The amount of the loss suffered by
the person as a result of the breach or
failure, up to the amount of the
substitute check; and
(ii) Interest and expenses (including
costs and reasonable attorney’s fees and
other expenses of representation) related
to the substitute check.
(2) Offset of recredits. The amount of
damages a person receives under
paragraph (a)(1) of this section shall be
reduced by any amount that the person
receives and retains as a recredit under
§ 229.54 or § 229.55.
(3) Comparative negligence. (i) If a
person incurs damages that resulted in
whole or in part from that person’s
negligence or failure to act in good faith,
then the amount of any damages due to
that person under paragraph (a)(1) of
this section shall be reduced in
proportion to the amount of negligence
or bad faith attributable to that person.
(ii) Nothing in this paragraph (a)(3)
reduces the rights of a consumer or any
other person under the U.C.C. or other
applicable provision of federal or state
law.
(b) Timeliness of action. Delay by a
bank beyond any time limits prescribed
or permitted by this subpart is excused
if the delay is caused by interruption of
communication or computer facilities,
suspension of payments by another
bank, war, emergency conditions,
failure of equipment, or other
circumstances beyond the control of the
bank and if the bank uses such diligence
as the circumstances require.
(c) Jurisdiction. A person may bring
an action to enforce a claim under this
subpart in any United States district
court or in any other court of competent
jurisdiction. Such claim shall be
brought within one year of the date on
which the person’s cause of action
accrues. For purposes of this paragraph,
a cause of action accrues as of the date
on which the injured person first learns,
or by which such person reasonably
should have learned, of the facts and
circumstances giving rise to the cause of
action, including the identity of the
warranting or indemnifying bank
against which the action is brought.
(d) Notice of claims. Except as
otherwise provided in this paragraph
(d), unless a person gives notice of a
claim under this section to the
warranting or indemnifying bank within
30 calendar days after the person has
reason to know of both the claim and
the identity of the warranting or
indemnifying bank, the warranting or
indemnifying bank is discharged from
liability in an action to enforce a claim
under this subpart to the extent of any
loss caused by the delay in giving notice
of the claim. A timely recredit claim by

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47315

a consumer under § 229.54 constitutes
timely notice under this paragraph.

recipient has agreed to receive that
information electronically.

§ 229.57

§ 229.59

Consumer awareness.

Relation to other law.

(a) General disclosure requirement
and content. Each bank shall provide, in
accordance with paragraph (b) of this
section, a brief disclosure to each of its
consumer customers that describes—
(1) That a substitute check is the legal
equivalent of an original check; and
(2) The consumer recredit rights that
apply when a consumer in good faith
believes that a substitute check was not
properly charged to his or her account.
(b) Distribution—(1) Disclosure to
consumers who receive paid checks
with periodic account statements. A
bank shall provide the disclosure
described in paragraph (a) of this
section to a consumer customer who
receives paid original checks or paid
substitute checks with his or her
periodic account statement—
(i) No later than the first regularly
scheduled communication with the
consumer after October 28, 2004, for
each consumer who is a customer of the
bank on that date; and
(ii) At the time the customer
relationship is initiated, for each
customer relationship established after
October 28, 2004.
(2) Disclosure to consumers who
receive substitute checks on an
occasional basis.
(i) The bank shall provide the
disclosure described in paragraph (a) of
this section to a consumer customer of
the bank who requests an original check
or a copy of a check and receives a
substitute check. If feasible, the bank
shall provide this disclosure at the time
of the consumer’s request; otherwise,
the bank shall provide this disclosure
no later than the time at which the bank
provides a substitute check in response
to the consumer’s request.
(ii) The bank shall provide the
disclosure described in paragraph (a) of
this section to a consumer customer of
the bank who receives a returned
substitute check, at the time the bank
provides such substitute check.
(3) Multiple account holders. A bank
need not give separate disclosures to
each customer on a jointly held account.

The Check 21 Act and this subpart
supersede any provision of federal or
state law, including the Uniform
Commercial Code, that is inconsistent
with the Check 21 Act or this subpart,
but only to the extent of the
inconsistency.

§ 229.58

Substitute Checks and Your Rights—
[Important Information About Your
Checking Account]

Mode of delivery of information.

A bank may deliver any notice or
other information that it is required to
provide under this subpart by United
States mail or by any other means
through which the recipient has agreed
to receive account information. If a bank
is required to provide an original check
or a sufficient copy, the bank instead
may provide an electronic image of the
original check or sufficient copy if the

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§ 229.60

Variation by agreement.

Any provision of § 229.55 may be
varied by agreement of the banks
involved. No other provision of this
subpart may be varied by agreement by
any person or persons.
25. In appendix C, revise the title and
introductory paragraph and amend the
table of contents by adding the new
entries to read as follows:
Appendix C to Part 229—Model
Availability Policy Disclosures,
Clauses, and Notices; Model Substitute
Check Policy Disclosure and Notices
This appendix contains model availability
policy and substitute check policy
disclosures, clauses, and notices to facilitate
compliance with the disclosure and notice
requirements of Regulation CC (12 CFR part
229). Although use of these models is not
required, banks using them properly (with
the exception of models C–22 through C–25)
to make disclosures required by Regulation
CC are deemed to be in compliance.
Model Disclosures

*

*

C–5A

*

*

*

*

Substitute Check Policy Disclosure

*

*

*

*

*

*

Model Notices

*

*

*

C–22 Expedited Recredit Claim, Valid
Claim Refund Notice
C–23 Expedited Recredit Claim, Provisional
Refund Notice
C–24 Expedited Recredit Claim, Denial
Notice
C–25 Expedited Recredit Claim, Reversal
Notice

*

*
*
*
*
26. In appendix C, after model C–5 add
the following new model C–5A to read
as follows:
*
*
*
*
*

■

C–5A—Substitute Check Policy Disclosure

Substitute Checks and Your Rights
What Is a Substitute Check?
To make check processing faster, federal
law permits banks to replace original checks
with ‘‘substitute checks.’’ These checks are
similar in size to original checks with a
slightly reduced image of the front and back
of the original check. The front of a substitute

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Federal Register / Vol. 69, No. 149 / Wednesday, August 4, 2004 / Rules and Regulations

check states: ‘‘This is a legal copy of your
check. You can use it the same way you
would use the original check.’’ You may use
a substitute check as proof of payment just
like the original check.
Some or all of the checks that you receive
back from us may be substitute checks. This
notice describes rights you have when you
receive substitute checks from us. The rights
in this notice do not apply to original checks
or to electronic debits to your account.
However, you have rights under other law
with respect to those transactions.
What Are My Rights Regarding Substitute
Checks?
In certain cases, federal law provides a
special procedure that allows you to request
a refund for losses you suffer if a substitute
check is posted to your account (for example,
if you think that we withdrew the wrong
amount from your account or that we
withdrew money from your account more
than once for the same check). The losses you
may attempt to recover under this procedure
may include the amount that was withdrawn
from your account and fees that were charged
as a result of the withdrawal (for example,
bounced check fees).
The amount of your refund under this
procedure is limited to the amount of your
loss or the amount of the substitute check,
whichever is less. You also are entitled to
interest on the amount of your refund if your
account is an interest-bearing account. If your
loss exceeds the amount of the substitute
check, you may be able to recover additional
amounts under other law.
If you use this procedure, you may receive
up to (amount, not lower than $2,500) of your
refund (plus interest if your account earns
interest) within (number of days, not more
than 10) business days after we received your
claim and the remainder of your refund (plus
interest if your account earns interest) not
later than (number of days, not more than 45)
calendar days after we received your claim.
We may reverse the refund (including any
interest on the refund) if we later are able to
demonstrate that the substitute check was
correctly posted to your account.
How Do I Make a Claim for a Refund?
If you believe that you have suffered a loss
relating to a substitute check that you
received and that was posted to your
account, please contact us at (contact
information, for example phone number,
mailing address, e-mail address). You must
contact us within (number of days, not less
than 40) calendar days of the date that we
mailed (or otherwise delivered by a means to
which you agreed) the substitute check in
question or the account statement showing
that the substitute check was posted to your
account, whichever is later. We will extend
this time period if you were not able to make
a timely claim because of extraordinary
circumstances.
Your claim must include—
• A description of why you have suffered
a loss (for example, you think the amount
withdrawn was incorrect);
• An estimate of the amount of your loss;
• An explanation of why the substitute
check you received is insufficient to confirm
that you suffered a loss; and

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• A copy of the substitute check [and/or]
the following information to help us identify
the substitute check: (identifying
information, for example the check number,
the name of the person to whom you wrote
the check, the amount of the check).

*

*
*
*
*
27. In appendix C, after model C–21
add new models C–22 through C–25 to
read as follows:
*
*
*
*
*

■

C–2—Expedited Recredit Claim, Valid Claim
Refund Notice
Notice of Valid Claim and Refund
We have determined that your substitute
check claim is valid. We are refunding
(amount) [of which [(amount) represents
fees] [and] [(amount) represents accrued
interest]] to your account. You may withdraw
these funds as of (date). [This refund is the
amount in excess of the $2,500 [plus interest]
that we credited to your account on (date).]
C–23—Expedited Recredit Claim,
Provisional Refund Notice
Notice of Provisional Refund
In response to your substitute check claim,
we are refunding (amount) [of which
[(amount) represents fees] [and] [(amount)
represents accrued interest]] to your account,
while we complete our investigation of your
claim. You may withdraw these funds as of
(date). [Unless we determine that your claim
is not valid, we will credit the remaining
amount of your refund to your account no
later than the 45th calendar day after we
received your claim.]
If, based on our investigation, we
determine that your claim is not valid, we
will reverse the refund by withdrawing the
amount of the refund [plus interest that we
have paid you on that amount] from your
account. We will notify you within one day
of any such reversal.
C–24—Expedited Recredit Claim, Denial
Notice
Denial of Claim
Based on our review, we are denying your
substitute check claim. As the enclosed (type
of document, for example original check or
sufficient) shows, (describe reason for denial,
for example the check was properly posted,
the signature is authentic, there was no
warranty breach).
[We have also enclosed a copy of the other
information we used to make our decision.]
[Upon your request, we will send you a copy
of the other information that we used to make
our decision.]
C–25—Expedited Recredit Claim, Reversal
Notice
Reversal of Refund
In response to your substitute check claim,
we provided a refund of (amount) by
crediting your account on (date(s)). We now
have determined that your substitute check
claim was not valid. As the enclosed (type of
document, for example original check or
sufficient copy) shows, (describe reason for
reversal, for example the check was properly

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posted, the signature is authentic, there was
no warranty breach). As a result, we have
reversed the refund to your account [plus
interest that we have paid you on that
amount] by withdrawing (amount) from your
account on (date).
[We have also enclosed a copy of the other
information we used to make our decision.]
[Upon your request, we will send you a copy
of the information we used to make our
decision.]

28. In appendix D, revise the title and
text to read as follows:

■

Appendix D to Part 229—Indorsement,
Reconverting Bank Identification, and
Truncating Bank Identification
Standards
(1) The depositary bank shall indorse an
original check or substitute check according
to the following specifications:
(i) The indorsement shall contain—
(A) The bank’s nine-digit routing number,
set off by an arrow at each end of the number
and pointing toward the number, and, if the
depositary bank is a reconverting bank with
respect to the check, an asterisk outside the
arrow at each end of the routing number to
identify the bank as a reconverting bank;
(B) The indorsement date; and
(C) The bank’s name or location, if the
depositary bank applies the indorsement
physically.
(ii) The indorsement also may contain—
(A) A branch identification;
(B) A trace or sequence number;
(C) A telephone number for receipt of
notification of large-dollar returned checks;
and
(D) Other information, provided that the
inclusion of such information does not
interfere with the readability of the
indorsement.
(iii) The indorsement, if applied to an
existing paper check, shall be placed on the
back of the check so that the routing number
is wholly contained in the area 3.0 inches
from the leading edge of the check to 1.5
inches from the trailing edge of the check.31
(iv) When printing its depositary bank
indorsement (or a depositary bank
indorsement that previously was applied
electronically) onto a substitute check at the
time that the substitute check is created, a
reconverting bank shall place the
indorsement on the back of the check
between 1.88 and 2.74 inches from the
leading edge of the check. The reconverting
bank may omit the depositary bank’s name
and location from the indorsement.
(2) Each subsequent collecting bank or
returning bank indorser shall protect the
identifiability and legibility of the depositary
bank indorsement by indorsing an original
check or substitute check according to the
following specifications:
(i) The indorsement shall contain only—
(A) The bank’s nine-digit routing number
(without arrows) and, if the collecting bank
31 The leading edge is definded as the right side
of the check looking at it from the front. The trailing
edge is defined as the left side of the check looking
at it from the front. See American National
Standards Specifications for the Placement and
Location of MICR Printing, X9.13.

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Federal Register / Vol. 69, No. 149 / Wednesday, August 4, 2004 / Rules and Regulations
or returning bank is a reconverting bank with
respect to the check, an asterisk at each end
of the number to identify the bank as a
reconverting bank;
(B) The indorsement date, and
(C) An optional trace or sequence number.
(ii) The indorsement, if applied to an
existing paper check, shall be placed on the
back of the check from 0.0 inches to 3.0
inches from the leading edge of the check.
(iii) When printing its collecting bank or
returning bank indorsement (or a collecting
bank or returning bank indorsement that
previously was applied electronically) onto a
substitute check at the time that the
substitute check is created, a reconverting
bank shall place the indorsement on the back
of the check between 0.25 and 2.50 inches
from the trailing edge of the check.
(3) A reconverting bank shall comply with
the following specifications when creating a
substitute check:
(i) If it is a depositary bank, collecting
bank, or returning bank with respect to the
substitute check, the reconverting bank shall
place its own indorsement onto the back of
the check as specified in this appendix.
(ii) A reconverting bank that also is the
paying bank with respect to the substitute
check shall so identify itself by placing on
the back of the check, between 0.25 and 2.50
inches from the trailing edge of the check, its
nine-digit routing number (without arrows)
and an asterisk at each end of the number.
(iii) The reconverting bank shall place on
the front of the check, outside the image of
the original check, its nine-digit routing
number (without arrows) and an asterisk at
each end of the number, in accordance with
ANS X9.100–140.
(iv) The reconverting bank shall place on
the front of the check, outside the image of
the original check, the truncating bank’s
nine-digit routing number (without arrows)
and a bracket at each end of the number, in
accordance with ANS X9.100–140.
(4) Any indorsement, reconverting bank
identification, or truncating bank
identification placed on an original check or
substitute check shall be printed in black ink.

29. In appendix E, paragraph II.B.,
revise the first, second, third, and last
sentences of paragraph 1., revise
paragraph 3., and add a new paragraph
4., to read as follows:

■

II. * * *
B. 229.2(a) Account
1. The EFA Act defines account to mean
‘‘a demand deposit account or similar
transaction account at a depository
institution.’’ The regulation defines account,
for purposes other than subpart D, in terms
of the definition of ‘‘transaction account’’ in
the Board’s Regulation D (12 CFR part 204).
This definition of account, however,
excludes certain deposits, such as
nondocumentary obligations (see 12 CFR
204.2(a)(1)(vii)), that are covered under the
definition of ‘‘transaction account’’ in
Regulation D. * * * The Board believes that
it is appropriate to exclude these accounts
because of the reference to demand deposits
in the EFA Act, which suggests that the EFA

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Act is intended to apply only to accounts that
permit unlimited third party transfers.

*

*

*

*

*

3. Interbank deposits, including accounts
of offices of domestic banks or foreign banks
located outside the United States, and direct
and indirect accounts of the United States
Treasury (including Treasury General
Accounts and Treasury Tax and Loan
deposits) are exempt from subpart B and, in
connection therewith, subpart A. However,
interbank deposits are included as accounts
for purposes of subparts C and D and, in
connection therewith, subpart A.
4. The Check 21 Act defines account to
mean any deposit account at a bank.
Therefore, for purposes of subpart D and, in
connection therewith, subpart A, account
means any deposit, as that term is defined by
§ 204.2(a)(1)(i) of Regulation D, at a bank.
Many deposits that are not accounts for
purposes of the other subparts of Regulation
CC, such as savings deposits, are accounts for
purposes of subpart D.

47317

the account is used by the brokerage firm to
facilitate the clearing of its customers’
checks. Because for purposes of Regulation
CC the term account includes only deposit
accounts, a consumer’s revolving credit
relationship or other line of credit with a
bank is not a consumer account, even if the
consumer draws on such credit lines by
using a check. * * *

*

*
*
*
*
34. In appendix E, paragraph II.Q.1.,
revise the first sentence to read as
follows:

■

II. * * *
Q. * * *
1. Forward collection is defined to mean
the process by which a bank sends a check
to the paying bank for collection, including
sending the check to an intermediary
collecting bank for settlement, as
distinguished from the process by which the
check is returned unpaid. * * *

*
*
*
*
*
*
*
*
*
■ 35. In appendix E, revise paragraph
■ 30. In appendix E, paragraph II.F.,
II.S.1.b. and add a new paragraph
remove the phrase ‘‘subpart C’’ wherever II.S.1.c. to read as follows:
it appears and add the phrase ‘‘subparts
II. * * *
C and D’’ in its place and add a new
S. * * *
paragraph 4 to read as follows:
1. * * * b. The location of the depositary
*

II. * * *
F. * * *
4. For purposes of subpart D and, in
connection therewith, subpart A, the term
bank also includes the Treasury of the United
States and the United States Postal Service to
the extent that they act as paying banks
because the Check 21 Act includes these two
entities in the definition of the term bank to
the extent that they act as payors.

*

*
*
*
*
31. In appendix E, paragraph II.K.,
remove the phrase ‘‘subpart C’’ in
paragraph 8. and add the phrase
‘‘subparts C and D’’ in its place,
redesignate paragraph 9. as paragraph
10., and add a new paragraph 9. to read
as follows:
■

II. * * *
K. * * *
9. A substitute check as defined in
§ 229.2(aaa) is a check for purposes of
Regulation CC and the U.C.C., even if that
substitute check does not meet the
requirements for legal equivalence set forth
in § 229.51(a).

bank is determined by the physical location
of the branch or proprietary ATM at which
a check is deposited, regardless of whether
the deposit is made in person, by mail, or
otherwise. For example, if a branch of the
depositary bank located in one checkprocessing region sends a check that was
deposited at that branch to the depositary
bank’s central facility in another checkprocessing region, and the central facility is
in the same check-processing region as the
paying bank, the check is still considered
nonlocal. (See the commentary to the
definition of ‘‘paying bank.’’)
c. If a person deposits a check to an
account by mailing or otherwise sending the
check to a facility or office that is not a bank,
the check is considered local or nonlocal
depending on the location of the bank whose
indorsement appears on the check as the
depositary bank.

■

*
*
*
*
36. In appendix E, paragraph II.Z.,
revise the second and third sentences of
paragraph 1., remove the phrase
‘‘subpart C’’ in paragraph 3. and add the
phrase ‘‘subparts C and D’’ in its place,
and add a new paragraph 6. to read as
follows:

II. * * *
N. * * *
1. * * * A clearing account maintained at
a bank directly by a brokerage firm is not a
consumer account, even if the account is
used to pay checks drawn by consumers
using the funds in that account. The bank’s
relationship is with the brokerage firm, and

II. * * *
Z. * * *
1. * * * For purposes of all subparts of
Regulation CC, the term paying bank
includes the bank by which a check is
payable, the payable-at bank to which a
check is sent, or, if the check is payable by
a nonbank payor, the bank through which the
check is payable and to which it is sent for
payment or collection. For purposes of
subparts C and D, the term paying bank also
includes the payable-through bank and the
bank whose routing number appears on the
check, regardless of whether the check is

*

*
*
*
*
32. In appendix E, paragraph II.M.,
remove the number ‘‘46’’ in the second
sentence.
■ 33. In appendix E, paragraph II.N.1.,
add new sentences between the second
and third sentences to read as follows:

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*

■

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payable by a different bank, provided that the
check is sent for payment or collection to the
payable through bank or the bank whose
routing number appears on the check.

*

*

*

*

*

6. In accordance with the Check 21 Act, for
purposes of subpart D and, in connection
therewith, subpart A, paying bank includes
the Treasury of the United States or the
United States Postal Service with respect to
a check payable by that entity and sent to
that entity for payment or collection, even
though the Treasury and Postal Service are
not defined as banks for purposes of subparts
B and C. Because the Federal Reserve Banks
act as fiscal agents for the Treasury and the
U.S. Postal Service and in that capacity are
designated as presentment locations for
Treasury checks and U.S. Postal Service
money orders, a Treasury check or U.S.
Postal Service money order presented to a
Federal Reserve Bank is considered to be
presented to the Treasury or U.S. Postal
Service, respectively.

*

a particular payment transaction from a
substitute check or other paper or electronic
representation that is derived from an
original check or substitute check. There is
only one original check for any particular
payment transaction. However, multiple
substitute checks could be created to
represent that original check at various
points in the check collection and return
process.
XX. 229.2(xx) Paper or Electronic
Representation of a Substitute Check
1. Receipt of a paper or electronic
representation of a substitute check does not
trigger indemnity or expedited recredit
rights, although the recipient nonetheless
could have a warranty claim or a claim under
other check law with respect to that
document or the underlying payment
transaction. A paper or electronic
representation of a substitute check would
include a representation of a substitute check
that was drawn on an account, as well as a
representation of a substitute traveler’s
check, credit card check, or other item that
meets the substitute check definition. The
following examples illustrate the scope of the
definition.

*
*
*
*
37. In appendix E, paragraph II.BB.1.
remove the last two sentences and add
the following new sentence in their place
Examples.
to read as follows:

■

II. * * *
BB. * * *
1. * * * Qualified returned checks are
identified by placing a ‘‘2’’ in the case of an
original check (or a ‘‘5’’ in the case of a
substitute check) in position 44 of the
qualified return MICR line as a return
identifier in accordance with American
National Standard Specifications for
Placement and Location of MICR Printing,
X9.13 (hereinafter ‘‘ANS X9.13’’) for original
checks or American National Standard
Specifications for an Image Replacement
Document—IRD, X9.100–140 (hereinafter
‘‘ANS X9.100–140’’) for substitute checks.

*

*
*
*
*
38. In appendix E to part 229, add new
paragraphs II.QQ. through II.EEE. to read
as follows:

■

II. Section 229.2

Definitions

*

*

*

*

*

QQ. 229.2(qq) [Reserved]
RR. 229.2(rr) [Reserved]
SS. 229.2(ss) [Reserved]
TT. 229.2(tt) [Reserved]

YY. 229.2(yy) [Reserved]

UU. 229.2(uu) [Reserved]
VV. 229.2(vv) MICR Line
1. Information in the MICR line of a check
must be printed in accordance with ANS
X9.13 for original checks and ANS X9.100–
140 for substitute checks. These standards
could vary the requirements for printing the
MICR line, such as by indicating
circumstances under which the use of
magnetic ink is not required.
WW. 229.2(ww) Original Check
1. The definition of original check
distinguishes the first paper check signed or
otherwise authorized by the drawer to effect

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a. A bank receives electronic presentment
of a substitute check that has been converted
to electronic form and charges the customer’s
account for that electronic item. The periodic
account statement that the bank provides to
the customer includes information about the
electronically-presented substitute check in a
line-item list describing all the checks the
bank charged to the customer’s account
during the previous month. The electronic
file that the bank received for presentment
and charged to the customer’s account would
be an electronic representation of a substitute
check, and the line-item appearing on the
customer’s account statement would be a
paper representation of a substitute check.
b. A paying bank receives and settles for
a substitute check and then realizes that its
settlement was for the wrong amount. The
paying bank sends an adjustment request to
the presenting bank to correct the error. The
adjustment request is not a paper or
electronic representation of a substitute
check under the definition because it is not
being handled for collection or return as a
check. Rather, it is a separate request that is
related to a check. As a result, no substitute
check warranty, indemnity, or expedited
recredit rights attach to the adjustment.

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ZZ. 229.2(zz) Reconverting Bank
1. A substitute check is ‘‘created’’ when
and where a paper reproduction of an
original check that meets the requirements of
§ 229.2(aaa) is physically printed. A bank is
a reconverting bank if it creates a substitute
check directly or if another person by
agreement creates a substitute check on the
bank’s behalf. A bank also is a reconverting
bank if it is the first bank that receives a
substitute check created by a nonbank and
transfers, presents, or returns that substitute
check or, in lieu thereof, the first paper or
electronic representation of such substitute
check.

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Examples.
a. Bank A, by agreement, sends an
electronic check file for collection to Bank B.
Bank B chooses to use that file to print a
substitute check that meets the requirements
of § 229.2(aaa). Bank B is the reconverting
bank as of the time it prints the substitute
check.
b. Company A, which is not a bank, by
agreement receives check information
electronically from Bank A. Bank A becomes
the reconverting bank when Company A
prints a substitute check on behalf of Bank
A in accordance with that agreement.
c. A depositary bank’s customer, which is
a nonbank business, receives a check for
payment, truncates that original check, and
creates a substitute check to deposit with its
bank. The depositary bank receives that
substitute check from its customer and is the
first bank to handle the substitute check. The
depositary bank becomes the reconverting
bank as of the time that it transfers or
presents the substitute check (or in lieu
thereof the first paper or electronic
representation of the substitute check) for
forward collection.
d. A bank is the payable-through bank for
checks that are drawn on a nonbank payor,
which is the bank’s customer. When the
customer decides not to pay a check that is
payable through the bank, the customer
creates a substitute check for purposes of
return. The payable-through bank becomes
the reconverting bank when it returns the
substitute check (or in lieu thereof the first
paper or electronic representation of the
substitute check) to a returning bank or the
depositary bank.
e. A paying bank returns a substitute check
to the depositary bank, which in turn gives
that substitute check back to its nonbank
customer. That customer then redeposits the
substitute check for collection at a different
bank. Because the substitute check was
already transferred by a bank, the second
depositary bank does not become a
reconverting bank when it transfers or
presents that substitute check for collection.
2. In some cases there will be one or more
banks between the truncating bank and the
reconverting bank.
Example.
A depositary bank truncates the original
check and sends an electronic representation
of the original check for collection to an
intermediary bank. The intermediary bank
sends the electronic representation of the
original check to the presenting bank, which
creates a substitute check to present to the
paying bank. The presenting bank is the
reconverting bank.
3. A check could move from electronic
form to substitute check form several times
during the collection and return process. It
therefore is possible that there could be
multiple substitute checks, and thus multiple
reconverting banks, with respect to the same
underlying payment.
AAA. 229.2(aaa) Substitute Check
1. ‘‘A paper reproduction of an original
check’’ could include a reproduction created
directly from the original check or a
reproduction of the original check that is

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created from some other source that contains
an image of the original check, such as an
electronic representation of an original check
or substitute check, or a previous substitute
check.
2. Because a substitute check must be a
piece of paper, an electronic file or electronic
check image that has not yet been printed in
accordance with the substitute check
definition is not a substitute check.
3. Because a substitute check must be a
representation of a check, a paper
reproduction of something that is not a check
cannot be a substitute check. For example, a
savings bond or a check drawn on a non-U.S.
branch of a foreign bank cannot be
reconverted to a substitute check.
4. As described in § 229.51(b) and the
commentary thereto, a reconverting bank is
required to ensure that a substitute check
contains all indorsements applied by
previous parties that handled the check in
any form. Therefore, the image of the original
check that appears on the back of a substitute
check would include indorsements that were
physically applied to the original check
before an image of the original check was
captured. An indorsement that was applied
physically to the original check after an
image of the original check was captured
would be conveyed as an electronic
indorsement (see paragraph 3 of the
commentary to § 229.35(a)). The back of the
substitute check would contain a physical
representation of any indorsements that were
applied electronically to the check after an
image of the check was captured but before
creation of the substitute check.
Example.
Bank A, which is the depositary bank,
captures an image of an original check,
indorses it electronically and, by agreement,
transmits to Bank B an electronic image of
the check accompanied by the electronic
indorsement. Bank B then creates a substitute
check to send to Bank C. The back of the
substitute check created by Bank B must
contain a representation of the indorsement
previously applied electronically by Bank A
and Bank B’s own indorsement. (For more
information on indorsement requirements,
see § 229.35, appendix D, and the
commentary thereto.)
5. Some substitute checks will not be
created directly from the original check, but
rather will be created from a previous
substitute check. The back of a subsequent
substitute check will contain an image of the
full length of the back of the previous
substitute check. ANS X9.100–140 requires
preservation of the full length of the back of
the previous substitute check in order to
preserve previous indorsements and
reconverting bank identifications. By
contrast, the front of a subsequent substitute
check will not contain an image of the entire
previous substitute check. Rather, the image
field of the subsequent substitute check will
contain the image of the front of the original
check that appeared on the previous
substitute check at the time the previous
substitute check was converted to electronic
form. The portions of the front of the
subsequent substitute check other than the
image field will contain information applied

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by the subsequent reconverting bank, such as
its reconverting bank identification, the
MICR line, the legal equivalence legend, and
optional security information.
Examples.
a. The back of a subsequent substitute
check would contain the following
indorsements, all of which would be
preserved through the image of the back of
the previous substitute check: (1) The
indorsements that were applied physically to
the original check before an image of the
original check was captured; (2) a physical
representation of indorsements that were
applied electronically to the original check
after an image of the original check was
captured but before creation of the first
substitute check; and (3) indorsements that
were applied physically to the previous
substitute check. In addition, the
reconverting bank for the subsequent
substitute check must overlay onto the back
of that substitute check a physical
representation of any indorsements that were
applied electronically after the previous
substitute check was converted to electronic
form but before creation of the subsequent
substitute check.
b. Because information could have been
physically added to the image of the front of
the original check that appeared on the
previous substitute check, the original check
image that appears on the front of a
subsequent substitute check could contain
information in addition to that which
appeared on the original check at the time it
was truncated.
6. The MICR line applied to a substitute
check must contain information in all fields
of the MICR line that were encoded on the
original check at any time before an image of
the original check was captured. This
includes all the MICR-line information that
was preprinted on the original check, plus
any additional information that was added to
the MICR line before the image of the original
check was captured (for example, the amount
of the check). The information in each field
of the substitute check’s MICR line must be
the same information as in the corresponding
field of the MICR line of the original check,
except as provided by ANS X9.100–140
(unless the Board by rule or order determines
that a different standard applies). Industry
standards may not, however, vary the
requirement that a substitute check at the
time of its creation must bear a full-field
MICR line.
7. ANS X9.100–140, provides that a
substitute check must have a ‘‘4’’ in position
44 and that a qualified returned substitute
check must have a ‘‘4’’ in position 44 of the
forward-collection MICR line as well as a ‘‘5’’
in position 44 of the qualified return MICR
line. The ‘‘4’’ and ‘‘5’’ indicate that the
document is a substitute check so that the
size of the check image remains constant
throughout the collection and return process,
regardless of the number of substitute checks
created that represent the same original
check (see also §§ 229.30(a)(2) and
229.31(a)(2) and the commentary thereto
regarding requirements for qualified returned
substitute checks). An original check
generally has a blank position 44 for forward

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47319

collection. Because a reconverting bank must
encode position 44 of a substitute check’s
forward collection MICR line with a ‘‘4,’’ the
reconverting bank must vary any character
that appeared in position 44 of the forwardcollection MICR line of the original check. A
bank that misencodes or fails to encode
position 44 at the time it attempts to create
a substitute check has failed to create a
substitute check. A bank that receives a
properly-encoded substitute check may
further encode that item but does so subject
to the encoding warranties in Regulation CC
and the U.C.C.
8. A substitute check’s MICR line could
contain information in addition to the
information required at the time the
substitute check is created. For example, if
the amount field of the original check was
not encoded and the substitute check
therefore did not, when created, have an
encoded amount field, the MICR line of the
substitute check later could be amountencoded.
9. A bank may receive a substitute check
that contains a MICR-line variation but
nonetheless meets the MICR-line replication
requirements of § 229.2(aaa)(2) because that
variation is permitted by ANS X9.100–140. If
such a substitute check contains a MICR-line
error, a bank that receives it may, but is not
required to, repair that error. Such a repair
must be made in accordance with ANS
X9.100–140 for repairing a MICR line, which
generally allows a bank to correct an error by
applying a strip that may or may not contain
information in all fields encoded on the
check’s MICR line. A bank’s repair of a
MICR-line error on a substitute check is
subject to the encoding warranties in
Regulation CC and the U.C.C.
10. A substitute check must conform to all
the generally applicable industry standards
for substitute checks set forth in ANS
X9.100–140, which incorporates other
industry standards by reference. Thus,
multiple substitute check images contained
on the same page of an account statement are
not substitute checks.
BBB. 229.2(bbb) Sufficient Copy and Copy
1. A copy must be a paper reproduction of
a check. An electronic image therefore is not
a copy or a sufficient copy. However, if a
customer has agreed to receive such
information electronically, a bank that is
required to provide an original check or
sufficient copy may satisfy that requirement
by providing an electronic image in
accordance with § 229.58 and the
commentary thereto.
2. A bank under § 229.53(b)(3) may limit its
liability for an indemnity claim and under
§§ 229.54(e)(2) and 229.55(c)(2) may respond
to an expedited recredit claim by providing
the claimant with a copy of a check that
accurately represents all of the information
on the front and back of the original check
as of the time the original check was
truncated or that otherwise is sufficient to
determine the validity of the claim against
the bank.
Examples.
a. A copy of an original check that
accurately represents all the information on

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the front and back of the original check as of
the time of truncation would constitute a
sufficient copy if that copy resolved the
claim. For example, if resolution of the claim
required accurate payment and indorsement
information, an accurate copy of the front
and back of a legible original check
(including but not limited to a substitute
check) would be a sufficient copy.
b. A copy of the original check that does
not accurately represent all the information
on both the front and back of the original
check also could be a sufficient copy if such
copy contained all the information necessary
to determine the validity of the relevant
claim. For instance, if a consumer received
a substitute check that contained a blurry
image of a legible original check, the
consumer might seek an expedited recredit
because his or her account was charged for
$1,000, but he or she believed that the check
was written for only $100. If the amount that
appeared on the front of the original check
was legible, an accurate copy of only the
front of the original check that showed the
amount of the check would be sufficient to
determine whether or not the consumer’s
claim regarding the amount of the check was
valid.
CCC. 229.2(ccc) Transfer and Consideration
1. Under §§ 229.52 and 229.53, a bank is
responsible for the warranties and indemnity
when it transfers, presents, or returns a
substitute check (or a paper or electronic
representation thereof) for consideration.
Drawers and other nonbank persons that
receive checks from a bank are not
transferees that receive consideration as
those terms are defined in the U.C.C.
However, the Check 21 Act clearly
contemplates that such nonbank persons that
receive substitute checks (or representations
thereof) from a bank will receive the
warranties and indemnity from all previous
banks that handled the check. To ensure that
these parties are covered by the substitute
check warranties and indemnity in the
manner contemplated by the Check 21 Act,
§ 229.2(ccc) incorporates the U.C.C.
definitions of the term transfer and
consideration by reference and expands those
definitions to cover a broader range of
situations. Delivering a check to a nonbank
that is acting on behalf of a bank (such as a
third-party check processor or presentment
point) is a transfer of the check to that bank.
Examples.
a. A paying bank pays a substitute check
and then provides that paid substitute check
(or a representation thereof) to a drawer with
a periodic statement. Under the expanded
definitions, the paying bank thereby transfers
the substitute check (or representation
thereof) to the drawer for consideration and
makes the substitute check warranties
described in § 229.52. A drawer that suffers
a loss due to receipt of a substitute check
may have warranty, indemnity, and, if the
drawer is a consumer, expedited recredit
rights under the Check 21 Act and subpart D.
A drawer that suffers a loss due to receipt of
a paper or electronic representation of a
substitute check would receive the substitute
check warranties but would not have
indemnity or expedited recredit rights.

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b. The expanded definitions also operate
such that a paying bank that pays an original
check (or a representation thereof) and then
creates a substitute check to provide to the
drawer with a periodic statement transfers
the substitute check for consideration and
thereby provides the warranties and
indemnity.
c. The expanded definitions ensure that a
bank that receives a returned check in any
form and then provides a substitute check to
the depositor gives the substitute check
warranties and indemnity to the depositor.
d. The expanded definitions apply to
substitute checks representing original
checks that are not drawn on deposit
accounts, such as checks used to access a
credit card or a home equity line of credit.
DDD. 229.2(ddd) Truncate
1. Truncate means to remove the original
check from the forward collection or return
process and to send in lieu of the original
check either a substitute check or, by
agreement, information relating to the
original check. Truncation does not include
removal of a substitute check from the check
collection or return process.
EEE. 229.2(eee) Truncating Bank
1. A bank is a truncating bank if it
truncates an original check or if it is the first
bank to transfer, present, or return another
form of an original check that was truncated
by a person that is not a bank.
Example.
a. A bank’s customer that is a nonbank
business receives a check for payment and
deposits either a substitute check or an
electronic representation of the original
check with its depositary bank instead of the
original check. That depositary bank is the
truncating bank when it transfers, presents,
or returns the substitute check or electronic
representation in lieu of the original check.
That bank also would be the reconverting
bank if it were the first bank to transfer,
present, or return a substitute check that it
received from (or created from the
information given by) its nonbank customer
(see § 229.2(yy) and the commentary thereto).
2. A truncating bank does not make the
subpart D warranties and indemnity unless it
also is the reconverting bank. Therefore, a
bank that truncates the original check and
sends an electronic file to a collecting bank
does not provide subpart D protections to the
recipient of that electronic item. However, a
recipient of an electronic item may protect
itself against losses associated with that item
by agreement with the truncating bank.

*

*
*
*
*
■ 39. In appendix E, paragraph IV.D.6.e.
is amended by adding new sentences
between the second and third sentences
to read as follows:
IV. * * *
D. * * *
6. * * *
e. * * * Such notice need not be posted
at each teller window, but the notice must be
posted in a place where consumers seeking
to make deposits are likely to see it before
making their deposits. For example, the

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notice might be posted at the point where the
line forms for teller service in the lobby. The
notice is not required at any drive-through
teller windows nor is it required at night
depository locations, or at locations where
consumer deposits are not accepted. * * *

*

*
*
*
*
40. In appendix E, paragraph
VII.H.1.a., revise the third sentence and
add a new fifth sentence to read as
follows:

■

VII. * * *
H. * * *
1. * * *
a. * * * For a customer that is not a
consumer, a depositary bank satisfies the
written-notice requirement by sending an
electronic notice that displays the text and is
in a form that the customer may keep, if the
customer agrees to such means of notice.
* * * For a customer who is a consumer, a
depositary bank satisfies the written-notice
requirement by sending an electronic notice
in compliance with the requirements of the
Electronic Signatures in Global and National
Commerce Act (12 U.S.C. 7001 et seq.),
which include obtaining the consumer’s
affirmative consent to such means of notice.

*

*
*
*
*
41. In appendix E, paragraph IX.A.1.,
remove the third and fourth sentences
and add new sentences in their place to
read as follows:

■

IX. * * *
A. * * *
1. * * * A disclosure is in a form that the
customer may keep if, for example, it can be
downloaded or printed. For a customer that
is not a consumer, a depositary bank satisfies
the written-disclosure requirement by
sending an electronic disclosure that displays
the text and is in a form that the customer
may keep, if the customer agrees to such
means of disclosure. For a customer who is
a consumer, a depositary bank satisfies the
written-notice requirement by sending an
electronic notice in compliance with the
requirements of the Electronic Signatures in
Global and National Commerce Act (12
U.S.C. 7001 et seq.), which include obtaining
the consumer’s affirmative consent to such
means of notice.

*

*
*
*
*
42. In appendix E, paragraph IX.A.,
add a new paragraph 4. to read as
follows:

■

IX. * * *
A. * * *
4. A bank may, by agreement or at the
consumer’s request, provide any disclosure
or notice required by subpart B in a language
other than English, provided that the bank
makes a complete disclosure available in
English at the customer’s request.

43. In appendix E, add a new sentence
at the end of paragraph XVI.A.7. to read
as follows:

■

XVI. * * *
A. * * *

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7. * * * A check that is converted to a
qualified returned check must be encoded in
accordance with ANS X9.13 for original
checks or ANS X9.100–140 for substitute
checks.

*

*
*
*
*
44. In appendix E, revise paragraphs
XVI.C.1.a. and XVI.D.1. to read as
follows:

■

XVI. * * *
C. * * *
1. * * *
a. A paying bank may have a courier that
leaves after midnight (or after any other
applicable deadline) to deliver its forwardcollection checks. This paragraph removes
the constraint of the midnight deadline for
returned checks if the returned check reaches
the receiving bank on or before the receiving
bank’s next banking day following the
otherwise applicable deadline by the earlier
of the close of that banking day or a cutoff
hour of 2 p.m. or later set by the receiving
bank under U.C.C. 4–108. The extension also
applies if the check reaches the bank to
which it is sent later than the time described
in the previous sentence if highly
expeditious means of transportation are used.
For example, a West Coast paying bank may
use this further extension to ship a returned
check by air courier directly to an East Coast
returning bank even if the check arrives after
the returning bank’s cutoff hour. This
paragraph applies to the extension of all
midnight deadlines except Saturday
midnight deadlines (see paragraph XVI.C.1.b
of this appendix).

*

*

*

*

*

D. * * *
1. The reason for the return must be clearly
indicated. A check is identified as a returned
check if the front of that check indicates the
reason for return, even though it does not
specifically state that the check is a returned
check. A reason such as ‘‘Refer to Maker’’ is
permissible in appropriate cases. If the
returned check is a substitute check, the
reason for return must be placed within the
image of the original check that appears on
the front of the substitute check so that the
information is retained on any subsequent
substitute check. If the paying bank places
the returned check in a carrier envelope, the
carrier envelope should indicate that it is a
returned check but need not repeat the
reason for return stated on the check if it in
fact appears on the check.

*

*
*
*
*
45. In appendix E, add a new sentence
at the end of paragraph XVII.A.7.a. to
read as follows:

■

XVII. * * *
A. * * *
7. * * *
a. * * * A check that is converted to a
qualified returned check must be encoded in
accordance with ANS X9.13 for original
checks or ANS X9.100–140 for substitute
checks.

*

*
*
*
*
46. In appendix E, add a new
paragraph XIX.B.3. to read as follows:

■

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XIX. * * *
B. * * *
3. A bank must identify an item of
information if the bank is uncertain as to that
item’s accuracy. A bank may make this
identification by setting the item off with
question marks, asterisks, or other symbols
designated for this purpose by generally
applicable industry standards.

47321

electronic indorsements and their own
indorsements and identifications onto a
substitute check at the time that the
substitute check is created. If a subsequent
substitute check is created in the course of
collection or return, that substitute check
will contain, in its image of the back of the
previous substitute check, reproductions of
indorsements that were sprayed or overlaid
onto the previous item. For purposes of the
■ 47. In appendix E, paragraph XIX.D.1.,
indorsement standard set forth in appendix
add a new sentence between the next-to- D, a reproduction of a previously applied
last and last sentences and revise the last sprayed or overlaid indorsement contained
within an image of a check does not
sentence to read as follows:
constitute ‘‘an indorsement that previously
XIX. * * *
was applied electronically.’’ To
D. * * *
accommodate these two indorsement
1. * * * A bank that chooses to provide
scenarios, the appendix includes two
the notice required by § 229.33(d) in writing
indorsement location specifications: one
may send the notice by e-mail or facsimile if
standard applies to banks spraying
the bank sends the notice to the e-mail
indorsements onto existing paper original
address or facsimile number specified by the
checks and substitute checks, and another
customer for that purpose. The notice to the
applies to reconverting banks overlaying
customer required under this paragraph also
indorsements that previously were applied
may satisfy the notice requirement of
electronically and their own indorsements
§ 229.13(g) if the depositary bank invokes the onto substitute checks at the time the
reasonable-cause exception of § 229.13(e) due substitute checks are created.
to the receipt of a notice of nonpayment,
3. A bank might use check processing
provided the notice meets all the
equipment that captures an image of a check
requirements of § 229.13(g).
prior to spraying an indorsement onto that
item. If the bank truncates that item, it
*
*
*
*
*
should ensure that it also applies an
■ 48. In appendix E, paragraph XX.C.,
indorsement to the item electronically. A
add new sentences at the end of
reconverting bank satisfies its obligation to
paragraph 3. to read as follows:
preserve all previously applied indorsements
by overlaying a bank’s indorsement that
XX. * * *
previously was applied electronically onto a
C. * * *
substitute check that the reconverting bank
3. * * * Paragraph (c)(3) applies to all
creates.
MICR-line encoding on a substitute check.
4. The location of an indorsement applied
to an original paper check in accordance with
*
*
*
*
*
appendix D may shift if that check is
■ 49. In appendix E, paragraph XXI.A.1.,
truncated and later reconverted to a
remove the phrase ‘‘are legible’’ from the substitute check. If an indorsement applied
fourth sentence and add the phrase ‘‘can to the original check in accordance with
be interpreted by any person’’ in its
appendix D is overwritten by a subsequent
place.
indorsement applied to the substitute check
in accordance with appendix D, then one or
■ 50. In appendix E, paragraph XXI.A:,
both of those indorsements could be
■ A. Remove paragraphs 2. through 6.
rendered illegible. As explained in
and paragraph 8;
§ 229.38(d) and the commentary thereto, a
■ B. Redesignate paragraph 7. as
reconverting bank is liable for losses
paragraph 10. and redesignate
associated with indorsements that are
paragraphs 9. through 13. as paragraphs rendered illegible as a result of check
11. through 15., respectively;
substitution.
■ C. Add new paragraphs 2. through 9;
5. To ensure that indorsements can be
and
easily read and would remain legible after an
■ D. Revise redesignated paragraph 15.
image of a check is captured, the standard
by adding the phrase ‘‘collecting banks
requires all indorsements applied to original
and’’ between the phrases ‘‘standard for’’ checks and substitute checks to be printed in
black ink as of January 1, 2006.
and ‘‘returning banks’’ in the first
6. The standard requires the depositary
sentence and adding a new sentence at
bank’s indorsement to include (1) its ninethe end of the paragraph.
These additions and revisions read as digit routing number set off by an arrow at
each end of the routing number and, if the
follows:
depositary bank is a reconverting bank with
respect to the check, an asterisk outside the
XXI. * * *
arrow at each end of the routing number to
A. * * *
identify the bank as a reconverting bank; (2)
2. Banks generally apply indorsements to
the indorsement date; and (3) if the
a paper check in one of two ways: (1) banks
indorsement is applied physically, name or
print or ‘‘spray’’ indorsements onto a check
location information. The standard also
when the check is processed through the
banks’’ automated check sorters (regardless of permits but does not require the indorsement
to include other identifying information. The
whether the checks are original checks or
substitute checks), and (2) reconverting banks standard requires a collecting bank’s or
returning bank’s indorsement to include only
print or ‘‘overlay’’ previously applied

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(1) the bank’s nine digit routing number
(without arrows) and, if the collecting bank
or returning bank is a reconverting bank with
respect to the check, an asterisk at each end
of the number to identify the bank as a
reconverting bank, (2) the indorsement date,
and (3) an optional trace or sequence
number.
7. Depositary banks should not include
information that can be confused with
required information. For example, a ninedigit zip code could be confused with the
nine-digit routing number.
8. A depositary bank may want to include
an address in its indorsement in order to
limit the number of locations at which it
must receive returned checks. In instances
where this address is not consistent with the
routing number in the indorsement, the
depositary bank is required to receive
returned checks at a branch or head office
consistent with the routing number. Banks
should note, however, that § 229.32 requires
a depositary bank to receive returned checks
at the location(s) at which it receives
forward-collection checks.
9. In addition to indorsing a substitute
check in accordance with appendix D, a
reconverting bank must identify itself and the
truncating bank by applying its routing
number and the routing number of the
truncating bank to the front of the check in
accordance with appendix D and ANS
X9.100–140. Further, if the reconverting bank
is the paying bank, it also must identify itself
by applying its routing number to the back
of the check in accordance with appendix D.
In these instances, the reconverting bank and
truncating bank routing numbers are for
identification purposes only and are not
indorsements or acceptances.

*

*

*

*

*

15. * * * With respect to the identification
of a paying bank that is also a reconverting
bank, see the commentary to § 229.51(b)(2).

*

*
*
*
*
51. In appendix E, paragraph XXIII.A.,
remove the last sentence.
■ 52. In appendix E, paragraph XXIV.D.,
revise the last sentence of paragraph 1.,
redesignate paragraphs 2. and 3. as
paragraphs 3. and 4., respectively, and
add a new paragraph 2. to read as
follows:
■

XXIV. * * *
D. * * *
1. Responsibility for back of check. * * *
Accordingly, this provision places
responsibility on the paying bank, depositary
bank, or reconverting bank, as appropriate,
for keeping the back of the check clear for
bank indorsements during forward collection
and return.
2. ANS X9.100–140 provides that an image
of an original check must be reduced in size
when placed on the first substitute check
associated with that original check. (The
image thereafter would be constant in size on
any subsequent substitute check that might
be created.) Because of this size reduction,
the location of an indorsement, particularly
a depositary bank indorsement, applied to an
original paper check likely will change when
the first reconverting bank creates a

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substitute check that contains that
indorsement within the image of the original
paper check. If the indorsement was applied
to the original paper check in accordance
with appendix D’s location requirements for
indorsements applied to existing paper
checks, and if the size reduction of the image
causes the placement of the indorsement to
no longer be consistent with the appendix’s
requirements, then the reconverting bank
bears the liability for any loss that results
from the shift in the placement of the
indorsement. Such a loss could result either
because the original indorsement applied in
accordance with appendix D is rendered
illegible by a subsequent indorsement that
later is applied to the substitute check in
accordance with appendix D, or because the
subsequent bank cannot apply its
indorsement to the substitute check legibly in
accordance with appendix D as a result of the
shift in the previous indorsement.
Example.
In accordance with appendix D’s
specifications, a depositary bank sprays its
indorsement onto a business-sized original
check between 3.0 inches from the leading
edge of the check and 1.5 inches from the
trailing edge of the check. The check’s
conversion to electronic form and subsequent
reconversion to paper form causes the
location of the depositary bank indorsement,
now contained within the image of the
original check, to change such that it is less
than 3.0 inches from the leading edge of the
substitute check. In accordance with
appendix D’s specifications, a subsequent
collecting bank sprays its indorsement onto
the substitute check between the leading
edge of the check and 3.0 inches from the
leading edge of the check and the
indorsement happens to be on top of the
shifted depositary bank indorsement. If the
check is returned unpaid and the return is
not expeditious because of the illegibility of
the depositary bank indorsement, and the
depositary bank incurs a loss that it would
not have incurred had the return been
expeditious, the reconverting bank bears the
liability for that loss.

*

*
*
*
*
53. In appendix E, redesignate
commentary XXX as commentary
XXXVIII and add new commentaries
XXX through XXXVII to read as follows:
*
*
*
*
*

■

XXX. § 229.51 General provisions governing
substitute checks
A. § 229.51(a) Legal Equivalence
1. Section 229.51(a) states that a substitute
check for which a bank has provided the
substitute check warranties is the legal
equivalent of the original check for all
purposes and all persons if it meets the
accuracy and legend requirements. Where the
law (or a contract) requires production of the
original check, production of a legally
equivalent substitute check would satisfy
that requirement. A person that receives a
substitute check cannot be assessed costs
associated with the creation of the substitute
check, absent agreement to the contrary.

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Examples.
a. A presenting bank presents a substitute
check that meets the legal equivalence
requirements to a paying bank. The paying
bank cannot refuse presentment of the
substitute check on the basis that it is a
substitute check, because the substitute
check is the legal equivalent of the original
check.
b. A depositor’s account agreement with a
bank provides that the depositor is entitled
to receive original cancelled checks back
with his or her periodic account statement.
The bank may honor that agreement by
providing original checks, substitute checks,
or a combination thereof. However, a bank
may not honor such an agreement by
providing something other than an original
check or a substitute check.
c. A mortgage company argues that a
consumer missed a monthly mortgage
payment that the consumer believes she
made. A legally equivalent substitute check
concerning that mortgage payment could be
used in the same manner as the original
check to prove the payment.
2. A person other than a bank that creates
a substitute check could transfer, present, or
return that check only by agreement unless
and until a bank provided the substitute
check warranties.
3. To be the legal equivalent of the original
check, a substitute check must accurately
represent all the information on the front and
back of the check as of the time the original
check was truncated. An accurate
representation of information that was
illegible on the original check would satisfy
this requirement. The payment instructions
placed on the check by, or as authorized by,
the drawer, such as the amount of the check,
the payee, and the drawer’s signature, must
be accurately represented, because that
information is an essential element of a
negotiable instrument. Other information that
must be accurately represented includes (1)
the information identifying the drawer and
the paying bank that is preprinted on the
check, including the MICR line; and (2) other
information placed on the check prior to the
time an image of the check is captured, such
as any required identification written on the
front of the check and any indorsements
applied to the back of the check. A substitute
check need not capture other characteristics
of the check, such as watermarks,
microprinting, or other physical security
features that cannot survive the imaging
process or decorative images, in order to
meet the accuracy requirement. Conversely,
some security features that are latent on the
original check might become visible as a
result of the check imaging process. For
example, the original check might have a
faint representation of the word ‘‘void’’ that
will appear more clearly on a photocopied or
electronic image of the check. Provided the
inclusion of the clearer version of the word
on the image used to create a substitute check
did not obscure the required information
listed above, a substitute check that
contained such information could be the
legal equivalent of an original check under
§ 229.51(a). However, if a person suffered a
loss due to receipt of such a substitute check
instead of the original check, that person

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could have an indemnity claim under
§ 229.53 and, in the case of a consumer, an
expedited recredit claim under § 229.54.
4. To be the legal equivalent of the original
check, a substitute check must bear the legal
equivalence legend described in
§ 229.51(a)(2). A bank may not vary the
language of the legal equivalence legend and
must place the legend on the substitute check
as specified by generally applicable industry
standards for substitute checks contained in
ANS X9.100–140.
5. In some cases, the original check used
to create a substitute check could be forged
or otherwise fraudulent. A substitute check
created from a fraudulent original check
would have the same status under Regulation
CC and the U.C.C. as the original fraudulent
check. For example, a substitute check of a
fraudulent original check would not be
properly payable under U.C.C. 4–401 and
would be subject to the transfer and
presentment warranties in U.C.C. 4–207 and
4–208.
B. 229.51(b) Reconverting Bank Duties
1. As discussed in more detail in appendix
D and the commentary to § 229.35, a
reconverting bank must indorse (or, if it is a
paying bank with respect to the check,
identify itself on) the back of a substitute
check in a manner that preserves all
indorsements applied, whether physically or
electronically, by persons that previously
handled the check in any form for forward
collection or return. Indorsements applied
physically to the original check before an
image of the check was captured would be
preserved through the image of the back of
the original check that a substitute check
must contain. Indorsements applied
physically to the original check after an
image of the original check was captured
would be conveyed as electronic
indorsements (see paragraph 3 of the
commentary to § 229.35(a)). If indorsements
were applied electronically after an image of
the original check was captured or were
applied electronically after a previous
substitute check was converted to electronic
form, the reconverting bank must apply those
indorsements physically to the substitute
check. A reconverting bank is not responsible
for obtaining indorsements that persons that
previously handled the check should have
applied but did not apply.
2. A reconverting bank also must identify
itself as such on the front and back of the
substitute check and must preserve on the
back of the substitute check the
identifications of any previous reconverting
banks in accordance with appendix D. The
presence on the back of a substitute check of
indorsements that were applied by previous
reconverting banks and identified with
asterisks in accordance with appendix D
would satisfy the requirement that the
reconverting bank preserve the identification
of previous reconverting banks. As discussed
in more detail in the commentary to § 229.35,
the reconverting bank and truncating bank
routing numbers on the front of a substitute
check and, if the reconverting bank is the
paying bank, the reconverting bank’s routing
number on the back of a substitute check are
for identification only and are not
indorsements or acceptances.

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3. The reconverting bank must place the
routing number of the truncating bank
surrounded by brackets on the front of the
substitute check in accordance with
appendix D and ANS X9.100–140.
Example.
A bank’s customer, which is a nonbank
business, receives checks for payment and by
agreement deposits substitute checks instead
of the original checks with its depositary
bank. The depositary bank is the reconverting
bank with respect to the substitute checks
and the truncating bank with respect to the
original checks. In accordance with appendix
D and with ANS X9.100–140, the bank must
therefore be identified on the front of the
substitute checks as a reconverting bank and
as the truncating bank, and on the back of the
substitute checks as the depositary bank and
a reconverting bank.
C. 229.51(c) Applicable Law
1. A substitute check that meets the
requirements for legal equivalence set forth
in this section is subject to any provision of
federal or state law that applies to original
checks, except to the extent such provision
is inconsistent with the Check 21 Act or
subpart D. A legally equivalent substitute
check is subject to all laws that are not
preempted by the Check 21 Act in the same
manner and to the same extent as is an
original check. Thus, any person could
satisfy a law that requires production of an
original check by producing a substitute
check that is derived from the relevant
original check and that meets the legal
equivalence requirements of § 229.51(a).
2. A law is not inconsistent with the Check
21 Act or subpart D merely because it allows
for the recovery of a greater amount of
damages.
Example.
A drawer that suffers a loss with respect to
a substitute check that was improperly
charged to its account and for which the
drawer has an indemnity claim but not a
warranty claim would be limited under the
Check 21 Act to recovery of the amount of
the substitute check plus interest and
expenses. However, if the drawer also
suffered damages that were proximately
caused because the bank wrongfully
dishonored subsequently presented checks as
a result of the improper substitute check
charge, the drawer could recover those losses
under U.C.C. 4–402.
XXXI § 229.52

Substitute Check Warranties

A. 229.52(a) Warranty Content and Provision
1. The responsibility for providing the
substitute check warranties begins with the
reconverting bank. In the case of a substitute
check created by a bank, the reconverting
bank starts the flow of warranties when it
transfers, presents, or returns a substitute
check for which it receives consideration. A
bank that receives a substitute check created
by a nonbank starts the flow of warranties
when it transfers, presents, or returns for
consideration either the substitute check it
received or an electronic or paper
representation of that substitute check. To
ensure that warranty protections flow all the

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47323

way through to the ultimate recipient of a
substitute check or paper or electronic
representation thereof, any subsequent bank
that transfers, presents, or returns for
consideration either the substitute check or a
paper or electronic representation of the
substitute check is responsible to subsequent
transferees for the warranties. Any warranty
recipient could bring a claim for a breach of
a substitute check warranty if it received
either the actual substitute check or a paper
or electronic representation of a substitute
check.
2. The substitute check warranties and
indemnity are not given under §§ 229.52 and
229.53 by a bank that truncates the original
check and by agreement transfers the original
check electronically to a subsequent bank for
consideration. However, parties may, by
agreement, allocate liabilities associated with
the exchange of electronic check information.
Example.
A bank that receives check information
electronically and uses it to create substitute
checks is the reconverting bank and, when it
transfers, presents, or returns that substitute
check, becomes the first warrantor. However,
that bank may protect itself by including in
its agreement with the sending bank
provisions that specify the sending bank’s
warranties and responsibilities to the
receiving bank, particularly with respect to
the accuracy of the check image and check
data transmitted under the agreement.
3. A bank need not affirmatively make the
warranties because they attach automatically
when a bank transfers, presents, or returns
the substitute check (or a representation
thereof) for which it receives consideration.
Because a substitute check transferred,
presented, or returned for consideration is
warranted to be the legal equivalent of the
original check and thereby subject to existing
laws as if it were the original check, all
U.C.C. and other Regulation CC warranties
that apply to the original check also apply to
the substitute check.
4. The legal equivalence warranty by
definition must be linked to a particular
substitute check. When an original check is
truncated, the check may move from
electronic form to substitute check form and
then back again, such that there would be
multiple substitute checks associated with
one original check. When a check changes
form multiple times in the collection or
return process, the first reconverting bank
and subsequent banks that transfer, present,
or return the first substitute check (or a paper
or electronic representation of the first
substitute check) warrant the legal
equivalence of only the first substitute check.
If a bank receives an electronic
representation of a substitute check and uses
that representation to create a second
substitute check, the second reconverting
bank and subsequent transferees of the
second substitute check (or a representation
thereof) warrant the legal equivalence of both
the first and second substitute checks. A
reconverting bank would not be liable for a
warranty breach under § 229.52 if the legal
equivalence defect is the fault of a
subsequent bank that handled the substitute
check, either as a substitute check or in other
paper or electronic form.

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5. The warranty in § 229.52(a)(2), which
addresses multiple payment requests for the
same check, is not linked to a particular
substitute check but rather is given by each
bank handling the substitute check, an
electronic representation of a substitute
check, or a subsequent substitute check
created from an electronic representation of
a substitute check. All banks that transfer,
present, or return a substitute check (or a
paper or electronic representation thereof)
therefore provide the warranty regardless of
whether the ultimate demand for double
payment is based on the original check, the
substitute check, or some other electronic or
paper representation of the substitute or
original check, and regardless of the order in
which the duplicative payment requests
occur. This warranty is given by the banks
that transfer, present, or return a substitute
check even if the demand for duplicative
payment results from a fraudulent substitute
check about which the warranting bank had
no knowledge.
Example.
A nonbank depositor truncates a check and
in lieu thereof sends an electronic version of
that check to both Bank A and Bank B. Bank
A and Bank B each uses the check
information that it received electronically to
create a substitute check, which it presents
to Bank C for payment. Bank A and Bank B
each is a reconverting bank that made the
substitute check warranties when it
presented a substitute check to and received
payment from Bank C. Bank C could pursue
a warranty claim for the loss it suffered as a
result of the duplicative payment against
either Bank A or Bank B.
B. 229.52(b) Warranty Recipients
1. A reconverting bank makes the
warranties to the person to which it transfers,
presents, or returns the substitute check for
consideration and to any subsequent
recipient that receives either the substitute
check or a paper or electronic representation
derived from the substitute check. These
subsequent recipients could include a
subsequent collecting or returning bank, the
depositary bank, the drawer, the drawee, the
payee, the depositor, and any indorser. The
paying bank would be included as a warranty
recipient, for example because it would be
the drawee of a check or a transferee of a
check that is payable through it.
2. The warranties flow with the substitute
check to persons that receive a substitute
check or a paper or electronic representation
of a substitute check. The warranties do not
flow to a person that receives only the
original check or a representation of an
original check that was not derived from a
substitute check. However, a person that
initially handled only the original check
could become a warranty recipient if that
person later receives a returned substitute
check or a paper or electronic representation
of a substitute check that was derived from
that original check.
XXXII. § 229.53
Indemnity

Substitute Check

A. 229.53(a) Scope of Indemnity
1. Each bank that for consideration
transfers, presents, or returns a substitute

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check or a paper or electronic representation
of a substitute check is responsible for
providing the substitute check indemnity.
The indemnity covers losses due to any
subsequent recipient’s receipt of the
substitute check instead of the original check.
The indemnity therefore covers the loss
caused by receipt of the substitute check as
well as the loss that a bank incurs because
it pays an indemnity to another person. A
bank that pays an indemnity would in turn
have an indemnity claim regardless of
whether it received the substitute check or a
paper or electronic representation of the
substitute check The indemnity would not
apply to a person that handled only the
original check or a paper or electronic
version of the original check that was not
derived from a substitute check.
Examples.
a. A paying bank makes payment based on
a substitute check that was derived from a
fraudulent original cashier’s check. The
amount and other characteristics of the
original cashier’s check are such that, had the
original check been presented instead, the
paying bank would have inspected the
original check for security features. The
paying bank’s fraud detection procedures
were designed to detect the fraud in question
and allow the bank to return the fraudulent
check in a timely manner. However, the
security features that the bank would have
inspected were security features that did not
survive the imaging process (see the
commentary to § 229.51(a)). Under these
circumstances, the paying bank could assert
an indemnity claim against the bank that
presented the substitute check.
b. By contrast with the previous examples,
the indemnity would not apply if the
characteristics of the presented substitute
check were such that the bank’s security
policies and procedures would not have
detected the fraud even if the original had
been presented. For example, if the check
was under the threshold amount at which the
bank subjects an item to its fraud detection
procedures, the bank would not have
inspected the item for security features
regardless of the form of the item and
accordingly would have suffered a loss even
if it had received the original check.
c. A paying bank makes an erroneous
payment based on an electronic
representation of a substitute check because
the electronic cash letter accompanying the
electronic item included the wrong amount
to be charged. The paying bank would not
have an indemnity claim associated with that
payment because its loss did not result from
receipt of an actual substitute check instead
of the original check. However, the paying
bank could protect itself from such losses
through its agreement with the bank that sent
the check to it electronically and may have
rights under other law.
d. A drawer has agreed with its bank that
the drawer will not receive paid checks with
periodic account statements. The drawer
requested a copy of a paid check in order to
prove payment and received a photocopy of
a substitute check. The photocopy that the
bank provided in response to this request
was illegible, such that the drawer could not

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prove payment. Any loss that the drawer
suffered as a result of receiving the blurry
check image would not trigger an indemnity
claim because the loss was not caused by the
receipt of a substitute check. The drawer
may, however, still have a warranty claim if
he received a copy of a substitute check, and
may also have rights under the U.C.C.
B. 229.53(b) Indemnity Amount
1. If a recipient of a substitute check is
making an indemnity claim because a bank
has breached one of the substitute check
warranties, the recipient can recover any
losses proximately caused by that warranty
breach.
Examples.
a. A drawer discovers that its account has
been charged for two different substitute
checks that were provided to the drawer and
that were associated with the same original
check. As a result of this duplicative charge,
the paying bank dishonored several
subsequently-presented checks that it
otherwise would have paid and charged the
drawer returned check fees. The payees of
the returned checks also charged the drawer
returned check fees. The drawer would have
a warranty claim against any of the
warranting banks, including its bank, for
breach of the warranty described in
§ 229.52(a)(2). The drawer also could assert
an indemnity claim. Because there is only
one original check for any payment
transaction, if the collecting and presenting
bank had collected the original check instead
of using a substitute check the bank would
have been asked to make only one payment.
The drawer could assert its warranty and
indemnity claims against the paying bank,
because that is the bank with which the
drawer has a customer relationship and the
drawer has received an indemnity from that
bank. The drawer could recover from the
indemnifying bank the amount of the
erroneous charge, as well as the amount of
the returned check fees charged by both the
paying bank and the payees of the returned
checks. If the drawer’s account were an
interest-bearing account, the drawer also
could recover any interest lost on the
erroneously debited amount and the
erroneous returned check fees. The drawer
also could recover its expenditures for
representation in connection with the claim.
Finally, the drawer could recover any other
losses that were proximately caused by the
warranty breach.
b. In the example above, the paying bank
that received the duplicate substitute checks
also would have a warranty claim against the
previous transferor(s) of those substitute
checks and could seek an indemnity from
that bank (or either of those banks). The
indemnifying bank would be responsible for
compensating the paying bank for all the
losses proximately caused by the warranty
breach, including representation expenses
and other costs incurred by the paying bank
in settling the drawer’s claim.
2. If the recipient of the substitute check
does not have a substitute check warranty
claim with respect to the substitute check,
the amount of the loss the recipient may
recover under § 229.53 is limited to the

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amount of the substitute check, plus interest
and expenses. However, the indemnified
person might be entitled to additional
damages under some other provision of law.
Examples.
a. A drawer received a substitute check
that met all the legal equivalence
requirements and for which the drawer was
only charged once, but the drawer believed
that the underlying original check was a
forgery. If the drawer suffered a loss because
it could not prove the forgery based on the
substitute check, for example because
proving the forgery required analysis of pen
pressure that could be determined only from
the original check, the drawer would have an
indemnity claim. However, the drawer would
not have a substitute check warranty claim
because the substitute check was the legal
equivalent of the original check and no
person was asked to pay the substitute check
more than once. In that case, the amount of
the drawer’s indemnity under § 229.53 would
be limited to the amount of the substitute
check, plus interest and expenses. However,
the drawer could attempt to recover
additional losses, if any, under other law.
b. As described more fully in the
commentary to § 229.53(a) regarding the
scope of the indemnity, a paying bank could
have an indemnity claim if it paid a legally
equivalent substitute check that was created
from a fraudulent cashier’s check that the
paying bank’s fraud detection procedures
would have caught and that the bank would
have returned by its midnight deadline had
it received the original check. However, if the
substitute check was not subject to a
warranty claim (because it met the legal
equivalence requirements and there was only
one payment request) the paying bank’s
indemnity would be limited to the amount of
the substitute check plus interest and
expenses.
3. The amount of an indemnity would be
reduced in proportion to the amount of any
amount loss attributable to the indemnified
person’s negligence or bad faith. This
comparative negligence standard is intended
to allocate liability in the same manner as the
comparative negligence provision of
§ 229.38(c).
4. An indemnifying bank may limit the
losses for which it is responsible under
§ 229.53 by producing the original check or
a sufficient copy. However, production of the
original check or a sufficient copy does not
absolve the indemnifying bank from liability
claims relating to a warranty the bank has
provided under § 229.52 or any other law,
including but not limited to subpart C of this
part or the U.C.C.
C. 229.53(c) Subrogation of Rights
1. A bank that pays an indemnity claim is
subrogated to the rights of the person it
indemnified, to the extent of the indemnity
it provided, so that it may attempt to recover
that amount from another person based on an
indemnity, warranty, or other claim. The
person that the bank indemnified must
comply with reasonable requests from the
indemnifying bank for assistance with
respect to the subrogated claim.

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Example.
A paying bank indemnifies a drawer for a
substitute check that the drawer alleged was
a forgery that would have been detected had
the original check instead been presented.
The bank that provided the indemnity could
pursue its own indemnity claim against the
bank that presented the substitute check,
could attempt to recover from the forger, or
could pursue any claim that it might have
under other law. The bank also could request
from the drawer any information that the
drawer might possess regarding the possible
identity of the forger.
XXXIII. § 229.54
Consumers

Expedited Recredit for

A. 229.54(a) Circumstances Giving Rise to a
Claim
1. A consumer may make a claim for
expedited recredit under this section only for
a substitute check that he or she has received
and for which the bank charged his or her
deposit account. As a result, checks used to
access loans, such as credit card checks or
home equity line of credit checks, that are
reconverted to substitute checks would not
give rise to an expedited recredit claim,
unless such a check was returned unpaid and
the bank charged the consumer’s deposit
account for the amount of the returned check.
In addition, a consumer who received only
a statement that contained images of multiple
substitute checks per page would not be
entitled to make an expedited recredit claim,
although he or she could seek redress under
other provisions of law, such as § 229.52 or
U.C.C. 4–401. However, a consumer who
originally received only a statement
containing images of multiple substitute
checks per page but later received a
substitute check, such as in response to a
request for a copy of a check shown in the
statement, could bring a claim if the other
expedited recredit criteria were met.
Although a consumer must at some point
have received a substitute check to make an
expedited recredit claim, the consumer need
not be in possession of the substitute check
at the time he or she submits the claim.
2. A consumer must in good faith assert
that the bank improperly charged the
consumer’s account for the substitute check
or that the consumer has a warranty claim for
the substitute check (or both). The warranty
in question could be a substitute check
warranty described in § 229.52 or any other
warranty that a bank provides with respect to
a check under other law. A consumer could,
for example, have a warranty claim under
§ 229.34(b), which contains returned check
warranties that are made to the owner of the
check.
3. A consumer’s recovery under the
expedited recredit section is limited to the
amount of his or her loss, up to the amount
of the substitute check subject to the claim,
plus interest if the consumer’s account is an
interest-bearing account. The consumer’s loss
could include fees that resulted from the
allegedly incorrect charge, such as bounced
check fees that were imposed because the
improper charge caused the bank to dishonor
subsequently presented checks that it
otherwise would have honored. A consumer

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47325

who suffers a total loss greater than the
amount of the substitute check plus interest
could attempt to recover the remainder of
that loss by bringing warranty, indemnity, or
other claim under this subpart or other
applicable law.
Examples.
a. A consumer who received a substitute
check believed that he or she wrote the check
for $150, but the bank charged his or her
account for $1,500. The amount on the
substitute check the consumer received is
illegible. If the substitute check contained a
blurry image of what was a legible original
check, the consumer could have a claim for
a breach of the legal equivalence warranty in
addition to an improper charge claim.
Because the amount of the check cannot be
determined from the substitute check
provided to the consumer, the consumer, if
acting in good faith, could assert that the
production of the original check or a better
copy of the original check is necessary to
determine the validity of the claim. The
consumer in this case could attempt to
recover his or her losses by using the
expedited recredit procedure. The
consumer’s losses recoverable under § 229.54
could include the $1,350 he or she believed
was incorrectly charged plus any improperly
charged fees associated with that charge, up
to $150 (plus foregone interest on the amount
of the consumer’s loss if the account was an
interest-bearing account). The consumer
could recover any additional losses, if any,
under other law, such as U.C.C. 4–401 and
4–402.
b. A consumer received a substitute check
for which his or her account was charged and
believed that the original check from which
the substitute was derived was a forgery. The
forgery was good enough that analysis of the
original check was necessary to verify
whether the signature is that of the
consumer. Under those circumstances, the
consumer, if acting in good faith, could assert
that the charge was improper, that he or she
therefore had incurred a loss in the amount
of the check (plus foregone interest if the
account was an interest-bearing account), and
that he or she needed the original check to
determine the validity of the forgery claim.
By contrast, if the signature on the substitute
check obviously was forged (for example, if
the forger signed a name other than that of
the account holder) and there was no other
defect with the substitute check, the
consumer would not need the original check
or a sufficient copy to determine the fact of
the forgery and thus would not be able to
make an expedited recredit claim under this
section. However, the consumer would have
a claim under U.C.C. 4–401 if the item was
not properly payable.
B. 229.54(b) Procedures for Making Claims
1. The consumer must submit his or her
expedited recredit claim to the bank within
40 calendar days of the later of the day on
which the bank mailed or delivered, by a
means agreed to by the consumer, (1) the
periodic account statement containing
information concerning the transaction
giving rise to the claim, or (2) the substitute
check giving rise to the claim. The mailing

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or delivery of a substitute check could be in
connection with a regular account statement,
in response to a consumer’s specific request
for a copy of a check, or in connection with
the return of a substitute check to the payee.
2. Section 229.54(b) contemplates more
than one possible means of delivering an
account statement or a substitute check to the
consumer. The time period for making a
claim thus could be triggered by the mailed,
in-person, or electronic delivery of an
account statement or by the mailed or inperson delivery of a substitute check. Inperson delivery would include, for example,
making an account statement or substitute
check available at the bank for the
consumer’s retrieval under an arrangement
agreed to by the consumer. In the case of a
mailed statement or substitute check, the 40day period should be calculated from the
postmark on the envelope. In the case of inperson delivery, the 40-day period should be
calculated from the earlier of the calendar
day on which delivery occurred or the bank
first made the statement or substitute check
available for the consumer’s retrieval.
3. A bank must extend the consumer’s time
for submitting a claim for a reasonable period
if the consumer is prevented from submitting
his or her claim within 40 days because of
extenuating circumstances. Extenuating
circumstances could include, for example,
the extended travel or illness of the
consumer.
4. For purposes of determining the
timeliness of a consumer’s actions, a
consumer’s claim is considered received on
the banking day on which the consumer’s
bank receives a complete claim in person or
by telephone or on the banking day on which
the consumer’s bank receives a letter or email containing a complete claim. (But see
paragraphs 9–11 of this section for a
discussion of time periods related to oral
claims that the bank requires to be put in
writing.)
5. A consumer who makes an untimely
claim would not be entitled to recover his or
her losses using the expedited recredit
procedure. However, he or she still could
have rights under other law, such as a
warranty or indemnity claim under subpart
D, a claim for an improper charge to his or
her account under U.C.C. 4–401, or a claim
for wrongful dishonor under U.C.C. 4–402.
6. A consumer’s claim must include the
reason why the consumer believes that his or
her account was charged improperly or why
he or she has a warranty claim. A charge
could be improper, for example, if the bank
charged the consumer’s account for an
amount different than the consumer believes
he or she authorized or charged the consumer
more than once for the same check, or if the
check in question was a forgery or otherwise
fraudulent.
7. A consumer also must provide a reason
why production of the original check or a
sufficient copy is necessary to determine the
validity of the claim identified by the
consumer. For example, if the consumer
believed that the bank charged his or her
account for the wrong amount, the original
check might be necessary to prove this claim
if the amount of the substitute check were
illegible. Similarly, if the consumer believed

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that his or her signature had been forged, the
original check might be necessary to confirm
the forgery if, for example, pen pressure or
similar analysis were necessary to determine
the genuineness of the signature.
8. The information that the consumer is
required to provide under § 229.54(b)(2)(iv)
to facilitate the bank’s investigation of the
claim could include, for example, a copy of
the allegedly defective substitute check or
information related to that check, such as the
number, amount, and payee.
9. A bank may accept an expedited recredit
claim in any form but could in its discretion
require the consumer to submit the claim in
writing. A bank that requires a recredit claim
to be in writing must inform the consumer
of that requirement and provide a location to
which such a written claim should be sent.
If the consumer attempts to make a claim
orally, the bank must inform the consumer at
that time of the written notice requirement.
A bank that receives a timely oral claim and
then requires the consumer to submit the
claim in writing may require the consumer to
submit the written claim within 10 business
days of the bank’s receipt of the timely oral
claim. If the consumer’s oral claim was
timely and the consumer’s written claim was
received within the 10-day period for
submitting the claim in writing, the
consumer would satisfy the requirement of
§ 229.54(b)(1) to submit his or her claim
within 40 days, even if the bank received the
written claim after that 40-day period.
10. A bank may permit but may not require
a consumer to submit a written claim
electronically.
11. If a bank requires a consumer to submit
a claim in writing, the bank may compute
time periods for the bank’s action on the
claim from the date that the bank received
the written claim. Thus, if a consumer called
the bank to make an expedited recredit claim
and the bank required the consumer to
submit the claim in writing, the time at
which the bank must take action on the claim
would be determined based on the date on
which the bank received the written claim,
not the date on which the consumer made
the oral claim.
12. Regardless of whether the consumer’s
communication with the bank is oral or
written, a consumer complaint that does not
contain all the elements described in
§ 229.54(b) is not a claim for purposes of
§ 229.54. If the consumer attempts to submit
a claim but does not provide all the required
information, then the bank has a duty to
inform the consumer that the complaint does
not constitute a claim under § 229.54 and
identify what information is missing.
C. 229.54(c) Action on Claims
1. If the bank has not determined whether
or not the consumer’s claim is valid by the
end of the 10th business day after the
banking day on which the consumer
submitted the claim, the bank must by that
time recredit the consumer’s account for the
amount of the consumer’s loss, up to the
lesser of the amount of the substitute check
or $2,500, plus interest if the account is an
interest-bearing account. A bank must
provide the recredit pending investigation for
each substitute check for which the

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consumer submitted a claim, even if the
consumer submitted multiple substitute
check claims in the same communication.
2. A bank that provides a recredit to the
consumer, either provisionally or after
determining that the consumer’s claim is
valid, may reverse the amount of the recredit
if the bank later determines that the claim in
fact was not valid. A bank that reverses a
recredit also may reverse the amount of any
interest that it has paid on the previously
recredited amount. A bank’s time for
reversing a recredit may be limited by a
statute of limitations.
D. 229.54(d) Availability of Recredit
1. The availability of a recredit provided by
a bank under § 229.54(c) is governed solely
by § 229.54(d) and therefore is not subject to
the availability provisions of subpart B. A
bank generally must make a recredit available
for withdrawal no later than the start of the
business day after the banking day on which
the bank provided the recredit. However, a
bank may delay the availability of up to the
first $2,500 that it provisionally recredits to
a consumer account under § 229.54(c)(3)(i) if
(1) the account is a new account, (2) without
regard to the substitute check giving rise to
the recredit claim, the account has been
repeatedly overdrawn during the six month
period ending on the date the bank received
the claim, or (3) the bank has reasonable
cause to believe that the claim is fraudulent.
These first two exceptions are meant to
operate in the same manner as the
corresponding new account and repeated
overdraft exceptions in subpart B, as
described in § 229.13(a) and (d) and the
commentary thereto regarding application of
the exceptions. When a recredit amount for
which a bank delays availability contains an
interest component, that component also is
subject to the delay because it is part of the
amount recredited under § 229.54(c)(3)(i).
However, interest continues to accrue during
the hold period.
2. Section 229.54(d)(2) describes the
maximum period of time that a bank may
delay availability of a recredit provided
under § 229.54(c). The bank may delay
availability under one of the three listed
exceptions until the business day after the
banking day on which the bank determines
that the consumer’s claim is valid or the 45th
calendar day after the banking day on which
the bank received the consumer’s claim,
whichever is earlier. The only portion of the
recredit that is subject to delay under
§ 229.54(d)(2) is the amount that the bank
recredits under § 229.54(c)(3)(i) (including
the interest component, if any) pending its
investigation of a claim.
E. 229.54(e) Notices Relating to Consumer
Expedited Recredit Claims
1. A bank must notify a consumer of its
action regarding a recredit claim no later than
the business day after the banking day that
the bank makes a recredit, determines a claim
is not valid, or reverses a recredit, as
appropriate. As provided in § 229.58, a bank
may provide any notice required by this
section by U.S. mail or by any other means
through which the consumer has agreed to
receive account information.

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2. A bank that denies the consumer’s
recredit claim must demonstrate to the
consumer that the substitute check was
properly charged or that the warranty claim
was not valid, such as by explaining the
reason that the substitute check charge was
proper or the consumer’s warranty claim was
not valid. For example, if a consumer has
claimed that the bank charged its account for
an improper amount, the bank denying that
claim must explain why it determined that
the charged amount was proper.
3. A bank denying a recredit claim also
must provide the original check or a
sufficient copy, unless the bank is providing
the claim denial notice electronically and the
consumer has agreed to receive that type of
information electronically. In that case,
§ 229.58 allows the bank instead to provide
an image of the original check or an image
of the sufficient copy that the bank would
have sent to the consumer had the bank
provided the notice by mail.
4. A bank that relies on information or
documents in addition to the original check
or sufficient copy when denying a consumer
expedited recredit claim also must either
provide such information or documents to
the consumer or inform the consumer that he
or she may request copies of such
information or documents. This requirement
does not apply to a bank that relies only on
the original check or a sufficient copy to
make its determination.
5. Models C–22 through C–25 in appendix
C contain model language for each of three
notices described in § 229.54(e). A bank may,
but is not required to, use the language listed
in the appendix. The Check 21 Act does not
provide banks that use these models with a
safe harbor. However, the Board has
published these models to aid banks’ efforts
to comply with § 229.54(e).
F. 229.54(f) Recredit Does Not Abrogate
Other Liabilities
1. The amount that a consumer may
recover under § 229.54 is limited to the lesser
of the amount of his or her loss or the amount
of the substitute check, plus interest on that
amount if his or her account earns interest.
However, a consumer’s total loss associated
with the substitute check could exceed that
amount, and the consumer could be entitled
to additional damages under other law. For
example, if a consumer’s loss exceeded the
amount of the substitute check plus interest
and he or she had both a warranty and an
indemnity claim with respect to the
substitute check, he or she would be entitled
to additional damages under § 229.53 of this
subpart. Similarly, if a consumer was charged
bounced check fees as a result of an
improperly charged substitute check and
could not recover all of those fees because of
the § 229.54’s limitation on recovery, he or
she could attempt to recover additional
amounts under U.C.C. 4–402.
XXXIV. § 229.55 Expedited Recredit
Procedures for Banks
A. 229.55(a) Circumstances Giving Rise to a
Claim
1. This section allows a bank to make an
expedited recredit claim under two sets of
circumstances: first, because it is obligated to

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provide a recredit, either to the consumer or
to another bank that is obligated to provide
a recredit in connection with the consumer’s
claim; and second, because the bank detected
a problem with the substitute check that, if
uncaught, could have given rise to a
consumer claim.
2. The loss giving rise to an interbank
recredit claim could be the recredit that the
claimant bank provided directly to its
consumer customer under § 229.54 or a loss
incurred because the claimant bank was
required to indemnify another bank that
provided an expedited recredit to either a
consumer or a bank.
Examples.
a. A paying bank charged a consumer’s
account based on a substitute check that
contained a blurry image of a legible original
check, and the consumer whose account was
charged made an expedited recredit claim
against the paying bank because the
consumer suffered a loss and needed the
original check or a sufficient copy to
determine the validity of his or her claim.
The paying bank would have a warranty
claim against the presenting bank that
transferred the defective substitute check to
it and against any previous transferring
bank(s) that handled that substitute check or
another paper or electronic representation of
the check. The paying bank therefore would
meet each of the requirements necessary to
bring an interbank expedited recredit claim.
b. Continuing with the example in
paragraph a, if the presenting bank
determined that the paying bank’s claim was
valid and provided a recredit, the presenting
bank would have suffered a loss in the
amount of the recredit it provided and could,
in turn, make an expedited recredit claim
against the bank that transferred the defective
substitute check to it.
B. 229.55(b) Procedures for Making Claims
1. An interbank recredit claim under this
section must be brought within 120 calendar
days of the transaction giving rise to the
claim. For purposes of computing this
period, the transaction giving rise to the
claim is the claimant bank’s settlement for
the substitute check in question.
2. When estimating the amount of its loss,
§ 229.55(b)(2)(ii) states that the claimant bank
should include ‘‘interest if applicable.’’ The
quoted phrase refers to any interest that the
claimant bank or a bank that the claimant
bank indemnified paid to a consumer who
has an interest-bearing account in connection
with an expedited recredit under § 229.54.
3. The information that the claimant bank
is required to provide under § 229.55(b)(2)(iv)
to facilitate investigation of the claim could
include, for example, a copy of any written
claim that a consumer submitted under
§ 229.54 or any written record the bank may
have of a claim the consumer submitted
orally. The information also could include a
copy of the defective substitute check or
information relating to that check, such as
the number, amount, and payee of the check.
However, a claimant bank that provides a
copy of the substitute check must take
reasonable steps to ensure that the copy is
not mistaken for a legal equivalent of the

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original check or handled for forward
collection or return.
4. The indemnifying bank’s right to require
a claimant bank to submit a claim in writing
and the computation of time from the date of
the written submission parallel the
corresponding provision in the consumer
recredit section (§ 229.54(b)(3)). However, the
indemnifying bank also may require the
claimant bank to submit a copy of the written
or electronic claim submitted by the
consumer under that section, if any.
C. 229.55(c) Action on Claims
1. An indemnifying bank that responds to
an interbank expedited recredit claim by
providing the original check or a sufficient
copy of the original check need not
demonstrate why that claim or the
underlying consumer expedited recredit
claim is or is not valid.
XXXV. § 229.56

Liability

A. 229.56(a) Measure of Damages
1. In general, a person’s recovery under
this section is limited to the amount of the
loss up to the amount of the substitute check
that is the subject of the claim, plus interest
and expenses (including costs and reasonable
attorney’s fees and other expenses of
representation) related to that substitute
check. However, a person that is entitled to
an indemnity under § 229.53 because of a
breach of a substitute check warranty also
may recover under § 229.53 any losses
proximately caused by the warranty breach,
including interest, costs, wrongfully-charged
fees imposed as a result of the warranty
breach, reasonable attorney’s fees, and other
expenses of representation.
2. A reconverting bank also may be liable
under § 229.38 for damages associated with
the illegibility of indorsements applied to
substitute checks if that illegibility results
because the reduction of the original check
image and its placement on the substitute
check shifted a previously-applied
indorsement that, when applied, complied
with appendix D. For more detailed
discussion of this topic, see § 229.38 and the
accompanying commentary.
B. 229.56(b) Timeliness of Action
1. A bank’s delay beyond the time limits
prescribed or permitted by any provision of
subpart D is excused if the delay is caused
by certain circumstances beyond the bank’s
control. This parallels the standard of U.C.C.
4–109(b).
C. 229.56(c) Jurisdiction
1. The Check 21 Act confers subject matter
jurisdiction on courts of competent
jurisdiction and provides a time limit for
civil actions for violations of subpart D.
D. 229.56(d) Notice of Claims
1. This paragraph is designed to adopt the
notice of claim provisions of U.C.C. 4–207(d)
and 4–208(e), with an added provision that
a timely § 229.54 expedited recredit claim
satisfies the generally-applicable notice
requirement. The time limit described in this
paragraph applies only to notices of warranty
and indemnity claims. As provided in
§ 229.56(c), all actions under § 229.56 must

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be brought within one year of the date that
the cause of action accrues.
XXXVI. Consumer Awareness
A. 229.57(a) General Disclosure Requirement
and Content
1. A bank must provide the disclosure
required by § 229.57 under two
circumstances. First, each bank must provide
the disclosure to each of its consumer
customers who receives paid checks with his
or her account statement. This requirement
does not apply if the bank provides with the
account statement something other than paid
original checks, paid substitute checks, or a
combination thereof. For example, this
requirement would not apply if a bank
provided with the account statement only a
document that contained multiple check
images per page. Second, a bank also must
provide the disclosure when it (a) provides
a substitute check to a consumer in response
to that consumer’s request for a check or
check copy or (b) returns a substitute check
to a consumer depositor. A bank must
provide the disclosure each time it provides
a substitute check to a consumer on an
occasional basis, regardless of whether the
bank previously provided the disclosure to
that consumer.
2. A bank may, but is not required to, use
the model disclosure in appendix C–5A to
satisfy the disclosure content requirements of
this section. A bank that uses the model
language is deemed to comply with the
disclosure content requirement(s) for which
it uses the model language, provided the
information in the disclosure accurately
describes the bank’s policies and practices. A
bank also may include in its disclosure
additional information relating to substitute
checks that is not required by this section.
3. A bank may, by agreement or at the
consumer’s request, provide the disclosure
required by this section in a language other
than English, provided that the bank makes
a complete English notice available at the
consumer’s request.
B. 229.57(b) Distribution
1. A consumer may request a check or a
copy of a check on an occasional basis, such
as to prove that he or she made a particular
payment. A bank that responds to the
consumer’s request by providing a substitute
check must provide the required disclosure
at the time of the consumer’s request if
feasible. Otherwise, the bank must provide
the disclosure no later than the time at which
the bank provides a substitute check in
response to the consumer’s request. It would
not be feasible for a bank to provide notice
to the consumer at the time of the request if,
for example, the bank did not know at the
time of the request whether it would provide
a substitute check in response to that request,
regardless of the form of the consumer’s
request. It also would not be feasible for a
bank to provide notice at the time of the
request if the consumer’s request was mailed
to the bank or made by telephone, even if the
bank knew when it received the request that
it would provide a substitute check in
response. A bank’s provision to the consumer
of something other a substitute check, such
as a photocopy of a check or a statement

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containing images of multiple substitute
checks per page, does not trigger the notice
requirement.
2. A consumer who does not routinely
receive paid checks might receive a returned
substitute check. For example, a consumer
deposits an original check that is payable to
him or her into his or her deposit account.
The paying bank returns the check unpaid
and the depositary bank returns the check to
the depositor in the form of a substitute
check. A depositary bank that provides a
returned substitute check to a consumer
depositor must provide the substitute check
disclosure at that time.
XXXVII. Variation by Agreement
Section 229.60 provides that banks
involved in an interbank expedited recredit
claim under § 229.55 may vary the terms of
that section by agreement, but otherwise no
person may vary the terms of subpart D by
agreement. A bank’s decision to provide
more generous protections for consumers
than this subpart requires, such as by
providing consumers additional time to
submit expedited claims under § 229.54
under non-exigent circumstances, would not
be a variation prohibited by § 229.60.

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54. In appendix E, in newlyredesignated paragraph XXXVIII., revise
the heading and paragraph A.1. to read
as follows:
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XXXVIII. Appendix C—Model Availability
Policy Disclosures, Clauses, and Notices; and
Model Substitute Check Policy Disclosure
and Notices
A. Introduction
1. Appendix C contains model disclosure,
clauses, and notices that may be used by
banks to meet their disclosure and notice
responsibilities under the regulation. Banks
using the models (except models C–22
through C–25) properly will be deemed in
compliance with the regulation’s disclosure
requirements.

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55. In appendix E, in newlyredesignated paragraph XXXVIII.B.,
revise the heading, the first sentence of
paragraphs B.1.a. and the first sentence
of paragraph B.1.c. and add a new
paragraph B.7., to read as follows:

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XXXVIII. * * *
B. Model Availability Policy and Substitute
Check Policy Disclosures, Models C–1
through C–5A
1. Models C–1 through C–5A generally.
a. Models C–1 through C–5A are models
for the availability policy disclosures
described in § 229.16 and substitute check
policy disclosure described in § 229.57.
* * *

7. Model C–5A
A bank may use this form when it is
providing the disclosure to its consumers
required by § 229.57 explaining that a
substitute check is the legal equivalent of an
original check and the circumstances under
which the consumer may make a claim for
expedited recredit.

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56. In appendix E, in newlyredesignated paragraph XXXVIII.D.,
revise the heading, the first sentence of
paragraph D.1. and add new paragraphs
D.11. through D.15. to read as follows:

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XXXVIII. * * *
D. Model Notices, Models C–12 through C–25
1. Models C–12 through C–25 generally.
Models C–12 through C–25 provide models
of the various notices required by the
regulation. * * *

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11. Models C–22 through C–25 generally.
Models C–22 through C–25 provide models
for the various notices required when a
consumer who receives substitute checks
makes an expedited recredit claim under
§ 229.54 for a loss related to a substitute
check. The Check 21 Act does not provide
banks that use these models with a safe
harbor. However, the Board has published
these models to aid banks’ efforts to comply
with § 229.54(e).
12. Model C–22 Valid Claim Refund
Notice. A bank may use this model when
crediting the entire amount or the remaining
amount of a consumer’s expedited recredit
claim after determining that the consumer’s
claim is valid. This notice could be used
when the bank provides the consumer a full
recredit based on a valid claim determination
within ten days of the receipt of the
consumer’s claim or when the bank recredits
the remaining amount of a consumer’s
expedited recredit claim by the 45th calendar
day after receiving the consumer’s claim, as
required under § 229.54(e)(1).
13. Model C–23 Provisional Refund Notice.
A bank may use this model when providing
a full or partial expedited recredit to a
consumer pending further investigation of
the consumer’s claim, as required under
§ 229.54(e)(1).
14. Model C–24 Denial Notice. A bank may
use this model when denying a claim for an
expedited recredit under § 229.54(e)(2).
15. Model C–25 Reversal Notice. A bank
may use this model when reversing an
expedited recredit that was credited to a
consumer’s account under § 229.54(e)(3).

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57. In appendix E, remove the phrase
‘‘the Act’’ wherever it appears and add
the phrase ‘‘the EFA Act’’ in its place.

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c. Models C–1 through C–5A generally do
not reflect any optional provisions of the
regulation, or those that apply only to certain
banks. * * *

By order of the Board of Governors of the
Federal Reserve System, July 27, 2004.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04–17362 Filed 8–3–04; 8:45 am]

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