Full text of Press Releases of the Board of Governors of the Federal Reserve System : Final amendments to Regulation CC and its commentary to implement Check 21 Act : Attachment 1

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FEDERAL RESERVE SYSTEM
12 CFR Part 229
Regulation CC; Docket No. R-1176
Availability of Funds and Collection of Checks
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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 immediately, 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 Financia l 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 (202/4523554), 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
paying banks and the unwillingness of some paying banks to receive electronic

1

See, e.g., § 3-501(b) of the Uniform Commercial Code.

-2presentment. 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 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,
2

Some paying banks and bank customers prefer to receive checks in paper form for operational or other
reasons.
3
Pub. L. No. 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.

-3or 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 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

-4reconverting 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 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.
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
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.
6
But see footnote 5.
7
69 FR 1470 (Jan. 8, 2004).

-5Commerce 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 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.
Overview of Comments on the Proposed Rule
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 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.
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 institution-specific. 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.
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.

-6Several 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 exp ressed 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
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
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. 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.

-7that 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 (us ually 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.
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 full-sized 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
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.

-8respect 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 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 check-processing 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 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.

-9I. 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 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

- 10 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 agent s 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.
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

- 11 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 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
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.

- 12 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 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 docume nts,” such as
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).

- 13 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 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 me t 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 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

- 14 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,
MICR- line, 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 later-generation 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 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 reader-sorter 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

- 15 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 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
17

In response to the many concerns expressed about the Board’s proposed treatment of the MICR-line
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/20040525/R-1176/R­
1176_150_1.pdf.

- 16 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 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 MICR- line of the original check. The commentary to the final rule clarifies, howeve r,
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 substitute check definition has been created, banks
may apply MICR-encoded strips to that document as necessary to complete the collection
and return process.

- 17 10. Section 229.2(bbb) Sufficient Copy and Copy (corresponding to section
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 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

- 18 229.53, 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.
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 image s 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

- 19 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 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 physicallyapplied 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.
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.

- 20 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 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 indorsement s 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
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.

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.

- 21 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 equiva lence 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 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.

- 22 Some commenters expressed concern about the loss of security features during
the creation of a legally equivalent substitute check. Although the loss of some paperbased 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 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
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.

- 23 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 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 wo uld
be subject to the warrant y, 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 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

- 24 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 warrant s 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 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 captur ing process well. One commenter
suggested that the paying bank should bear the loss for breach of the legal equiva lence
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

- 25 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 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

- 26 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 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 attemp ted 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 provisions of the Check 21 Act, as implemented at §

- 27 229.56 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 Expedited Recredit for Consumers
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 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
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.
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).

- 28 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 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

- 29 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.
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.
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.

- 30 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
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 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.

- 31 3. Form of Claim and Time Period for Bank Action on Consumer Claims
The statute provides tha t 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 10day 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 provisio ns 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 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

- 32 ­
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 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 perio d 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
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.

- 33 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 ESign 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.
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

- 34 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 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.

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.

- 35 Several commenters expressed concern that the Board’s proposed rule included
the identity of the party to be 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 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.

- 36 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 additiona l 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 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.

- 37 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
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 conc erns 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.

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.

- 38 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 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 Variation by Agreement
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 General Disclosure Requirements
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

29

See 68 FR 68786, 68788, 68791, 68793, 68799 (all dated Dec. 10, 2003).

- 39 rules, and several commenters opposed inclusion of clear and conspicuous 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 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.

30

See 69 FR 35541 (June 25, 2004).

- 40 C. Other Comments Concerning Non-Check 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 E-Sign 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 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 wo uld 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.

- 41 III. Responses to Specific Requests for Comment
In addition to proposing Check 21-related 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 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 MICR-line 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 nonapplication of the Check 21 Act to non-consumer accounts. The Board has addressed this

- 42 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
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

- 43 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 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 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.

- 44 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
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

- 45 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 “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.

- 46 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 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.

- 47 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 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.

- 48 12 CFR Chapter II
List of Subjects in 12 CFR Part 229
Banks, Banking, Federal Reserve System, Reporting and recordkeeping
requirement s.
Authority and Issuance
For the reasons set forth in the preamble, the Board is amend ing 12 CFR part 229
to read as follows:
PART 229 AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS
(REGULATION CC)
1. The authority citation for part 229 is amended to read as follows:
Authority: 12 U.S.C. 4001-4010, 12 U.S.C. 5001-5018.
§ 229.1 [Amended]
2. In § 229.1, revise paragraph (a) and add a new paragraph (b)(4) to read as
follows:
(a) Authority and purpose. This part is issued by the Board of Governors of the
Federal Reserve System (Board) to implement the Expedited Funds Availability Act (12
U.S.C. 4001-4010 ) (the EFA Act) and the Check Clearing for the 21 st Century Act
(12 U.S.C. 5001-5018) (the Check 21 Act).
(b) Organization. * * *
(4) Subpart D of this part contains rules relating to substitute checks. These rules
address the creation and legal status of substitute checks; the substitute check warranties
and indemnity; expedited recredit procedures for resolving improper charges and
warranty claims associated with substitute checks provided to consumers; and the
disclosure and notices that banks must provide.
§ 229.2 [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:
* * * * *

- 49 -

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;
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).
The revisions and addition read as follows:
(a) Account. (1) Except as provided in paragraphs (a)(2) and (a)(3) of this
section, account means a deposit as defined in 12 CFR 204.2(a)(1)(i) that is a transaction
account as described in 12 CFR 204.2(e). * * *
(2) For purposes of subpart B of this part and, in connection therewith, this
subpart A, account does not include an account where the account holder is a bank, where
the account holder is an office of an institution described in paragraphs (e)(1) through
(e)(6) of this section or an office of a “foreign bank” as defined in section 1(b) of the
International Banking Act (12 U.S.C. 3101) that is located outside the United States, or
where the direct or indirect account holder is the Treasury of the United States.
(3) For purposes of subpart D of this part and, in connection therewith, this
subpart A, account means any deposit, as defined in 12 CFR 204.2(a)(1)(i), at a bank,
includ ing a demand deposit or other transaction account and a savings deposit or other
time deposit, as those terms are defined in 12 CFR 204.2.
* * * * *
5. In § 229.2(e), remove the phrase “subpart C” from the last, 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:
(e) * * *
Note: For purposes of subpart D of this part and, in connection therewith, this
subpart A, bank also includes the Treasury of the United States or the United States
Postal Service to the extent that the Treasury or the Postal Service acts as a paying bank.
* * * * *

- 50 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), insert the phrase “to a collecting bank for settlement or” between
the words “basis” and “to.”
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:
(z) * * *
(2) * * *
Note: For purposes of subpart D of this part and, in connection therewith, this
subpart A, paying bank also includes the Treasury of the United States or the United
States Postal Service for a check that is payable by that entity and that is sent to that
entity for payment or collection.
* * * * *
9. In § 229.2(ff), add a new sentence after the first sentence to read as follows:
(ff) * * * For purposes of subpart D of this part and, in connection therewith,
this subpart A, state also means Guam, American Samoa, the Trust Territory of the
Pacific Islands, the Northern Mariana Islands, and any other territory of the United States.
* * * * *
10. In § 229.2, revise paragraph (qq) to read as follows:
* * * * *
(qq) Claimant bank means a bank that submits a claim for a recredit for a
substitute check to an indemnifying bank under § 229.55.

- 51 11. In § 229.2, after paragraph (qq) add the following new paragraphs (rr)
through (eee), to read as follows:
* * * * *
(rr) Collecting bank means any bank handling a check for forward collection,
except the paying bank.
(ss) Consumer means a natural person who—
(1) With respect to a check handled for forward collection, draws the check on a
consumer account; or
(2) With respect to a check handled for return, deposits the check into or cashes
the check against a consumer account.

(tt) Customer means a person having an account with a bank.
(uu) Indemnifying bank means a bank that provides an indemnity under § 229.53
with respect to a substitute check.
(vv) Magnetic ink character recognition line and MICR line mean the numbers,
which may include the routing number, account number, check number, check amount,
and other information, that are printed near the bottom of a check in magnetic ink in
accordance with American National Standard Specifications for Placement and Location
of MICR Printing, X9.13 (hereinafter ANS X9.13) for an original check and American
National Standard Specifications for an Image Replacement Document – IRD, X9.100140 (hereina fter 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.
(xx) Paper or electronic representation of a substitute check means any copy of or
information related to a substitute check that a bank handles for forward collection or
return, charges to a customer’s account, or provides to a person as a record of a check
payment made by the person.
(yy) Person means a natural person, corporation, unincorporated company,
partnership, government unit or instrumentality, trust, or any other entity or organization.
(zz) Reconverting bank means—
(1) The bank that creates a substitute check; or

- 52 (2) With respect to a substitute check that was created by a person that is not a
bank, the first bank that transfers, presents, or returns that substitute check or, in lieu
thereof, the first paper or electronic representation of that substitute check.
(aaa) Substitute check means a paper reproduction of an original check that—
(1) Contains an image of the front and back of the original check;
(2) Bears a MICR line that, except as provided under ANS X9.100-140 (unless
the Board by rule or order determines that a different standard applies), contains all the
information appearing on the MICR line of the original check at the time that the original
check was issued and any additional information that was encoded on the original
check’s MICR line before an image of the original check was captured;
(3) Conforms in paper stock, dimension, and otherwise with ANS X9.100-140
(unless the Board by rule or order determines that a different standard applies); and
(4) Is suitable for automated processing in the same manner as the original check.
(bbb) Sufficient copy and copy. (1) A sufficient copy is a copy of an original
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 is otherwise sufficient to
determine whether or not a claim is valid.
(2) A copy of an original check means any paper reproduction of an original
check, including a paper printout of an electronic image of the original check, a
photocopy of the original check, or a substitute check.
(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

- 53 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;
§ 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.

- 54 § 229.20 [Amended]
15. In § 229.20, remove the phrase “the Act” wherever it appears and add the
phrase “the EFA Act” in its place.
§ 229.21 [Amended]
16. In § 229.21(g)(2), remove the phrase “the Act” and add the phrase “the EFA
Act” in its place.
§ 229.30 [Amended]
17. In § 229.30:
A. In the undesignated paragraph after paragraph (a)(2)(iii), remove the next-tolast sentence and add two new sentences in its place; and
B. Revise paragraphs (c)(1) and (d).
The revisions and addition read as follows
(a) * * *
(2) * * *
(iii) * * *
* * * A qualified returned check shall be encoded in magnetic ink with the
routing number of the depositary bank, the amount of the returned check, and 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. A qualified returned original check
shall be encoded in accordance with ANS X9.13, and a qualified returned substitute
check shall be encoded in accordance with ANS X9.100-140. * * *
* * * * *
(c) * * *
(1) 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, for all deadlines other than
those described in paragraph (c)(2) of this section; this deadline is extended further if a
paying bank uses a highly expeditious means of transportation, even if this means of

- 55 transportation would ordinarily result in delivery after the receiving bank's next cutoff
hour or bank ing day referred to above; or
* * *
(d) Identification of returned check. A paying bank returning a check shall
clearly indicate on the front of the check that it is a returned check and the 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
sentence and add the following sentences in its place:
(a) * * *
(2) * * *
(iii) * * *
* * * A qualified returned check shall be encoded in magnetic ink with the
routing number of the depositary bank, the amount of the returned check, and 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. A qualified returned original check shall
be encoded in accordance with ANS X9.13, and a qualified returned substitute check
shall be encoded in accordance with ANS X9.100-140. * * *
* * * * *
§ 229.33 [Amended]
19. In § 229.33(b):
A. In paragraph (b), remove the phrase “with question marks” from the last
sentence of the undesignated paragraph; and
B. In paragraph (d), add the phrase “or give” between the words “send” and
“notice.”
§ 229.34 [Amended]
20. In § 229.34(c), add a new sentence at the end of paragraph (3) to read as
follows:

- 56 (c) * * *
(3) * * * For purposes of this paragraph, the information encoded after issue on
the check or returned check includes any information placed in the MICR line of a
substitute check that represents that check or returned check.
* * * * *
§ 229.35 [Amended]
21. In § 229.35, revise paragraph (a) to read as follows:
(a) Indorsement standards. A bank (other than a paying bank) that handles a
check during forward collection or a returned check shall indorse the check in a manner
that permits a person to interpret the indorsement, in accordance with the indorsement
standard set forth in appendix D of this part.
* * * * *
§ 229.38 [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.

- 57 PART 229 – AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS
(REGULATION CC)
24. Add a new subpart D to read as follows:
Subpart D – Substitute Checks
Sec.
229.51
229.52
229.53
229.54
229.55
229.56
229.57
229.58
229.59
229.60

General provisions governing substitute checks.
Substitute check warranties.
Substitute check indemnity.
Expedited recredit for consumers.
Expedited recredit for banks.
Liability.
Consumer awareness.
Mode of delivery of information.
Relation to other law.
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 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

- 58 (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 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:

- 59 (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 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

- 60 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 Ex pedited 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 because of extenuating circumstances, the bank shall
extend the 40-calendar-day 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:

- 61 (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 cons umer 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 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

- 62 ­
(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
interest-bearing 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) Next-day 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 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—

- 63 (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 well- grounded 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
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

- 64 ­
(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;
(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.

- 65 (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 va lidity 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;
(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—

- 66 (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—
(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.

- 67 ­
(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 a
consumer under § 229.54 constitutes timely notice under this paragraph.
§ 229.57 Consumer awareness.
(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 sub stitute 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

- 68 ­
(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.
§ 229.58 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 recipient has agreed to receive that information
electronically.
§ 229.59 Relation to other law.
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.
§ 229.60 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.
* * * * *

- 69 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 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 ne w model C-5A to read as
follows:
* * * * *

- 70 C–5A––Substitute Check Policy Disclosure
Substitute Checks and Your Rights
[IMPORTANT INFORMATION
ABOUT YOUR CHECKING
ACCOUNT]
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 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.

- 71 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

•

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–22—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).]

- 72 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
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.]

- 73 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.
31

The leading edge is defined 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.

- 74 (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 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.

- 75 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 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 account s for purposes of subpart D.
* * * * *
30. In appendix E, paragraph II.F., remove the phrase “subpart C” wherever it
appears and add the phrase “subparts C and D” in its place and add a new paragraph 4 to
read as follows:
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

- 76 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).
* * * * *
32. In append ix 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:
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
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. * * *
* * * * *

- 77 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 II.S.1.b. and add a new paragraph II.S.1.c. to
read as follows:
II. * * *
S. * * *
1. * * *
b. The location of the depositary 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 check-processing region sends a check that was deposited
at that branch to the depositary bank's central facility in another check-processing 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. * * *
Z. * * *

- 78 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 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.
* * * * *
37. In appendix E, paragraph II.BB.1. remove the last two sentences and add the
following new sentence in their place 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.
* * * * *

- 79 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]
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 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.

- 80 Examples.
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.
YY. 229.2(yy) [Reserved]
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.
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

- 81 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
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,

- 82 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 sub stitute 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 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

- 83 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 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

- 84 not, when created, have an encoded amount field, the MICR line of the substitute check
later could be amount-encoded.
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
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

- 85 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.
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.

- 86 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.

* * *

- 87 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 notice might be posted at the point where
the line forms for teller service in the lobby. The notice is not required at any drivethrough 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

- 88 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.

* * *

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 forward-collection 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

- 89 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:
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

- 90 question marks, asterisks, or other symbols designated for this purpose by generally
applicable industry standards.
* * * * *
47. In appendix E, paragraph XIX.D.1., insert a new sentence between the nextto-last and last sentences and revise the last sentence to read as follows:
XIX. * * *
D.

* * *

1. * * * A bank that chooses to provide the notice required by § 229.33(d) in
writing may send the notice by e- mail or facsimile if the bank sends the notice to the
e-mail address or facsimile number specified by the customer for that purpose. The
notice to the customer required under this paragraph also may satisfy the notice
requirement of § 229.13(g) if the depositary bank invokes the reasonable-cause exception
of § 229.13(e) due to the receipt of a notice of nonpayment, provided the notice meets all
the requirements of section 229.13(g).
* * * * *
48. In appendix E, paragraph XX.C., add new sentences at the end of paragraph
3. to read as follows:
XX. * * *
C. * * *
3. * * * Paragraph (c)(3) applies to all MICR- line encoding on a substitute
check.
* * * * *
49. In appendix E, paragraph XXI.A.1., remove the phrase “are legible” from the
fourth sentence and add the phrase “can be interpreted by any person” in its place.
50. In appendix E, paragraph XXI.A:,
A. Remove paragraphs 2. through 6. and paragraph 8;
B. Redesignate paragraph 7. as paragraph 10. and redesignate paragraphs 9.
through 13. as paragraphs 11. through 15., respectively;
C. Add new paragraphs 2. through 9; and

- 91 D. Revise redesignated paragraph 15. by adding the phrase “collecting banks
and” between the phrases “standard for” and “returning banks” in the first sentence and
adding a new sentence at the end of the paragraph.
These additions and revisions read as follows:
XXI. * * *
A.

* * *

2. Banks generally apply indorsements to a paper check in one of two ways:
(1) banks print or “spray” indorsements onto a check when the check is processed
through the banks’ automated check sorters (regardless of whether the checks are original
checks or substitute checks), and (2) reconverting banks print or “overlay” previously
applied 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 indorsement
standard set forth in appendix D, a reproduction of a previously applied sprayed or
overlaid indorsement contained within an image of a check does not constitute “an
indorsement that previously was applied electronically.” To accommodate these two
indorsement scenarios, the appendix includes two indorsement location specifications:
one standard applies to banks spraying indorsements onto existing paper original checks
and substitute checks, and another applies to reconverting banks overlaying indorsements
that previously were applied electronically and their own indorsements onto substitute
checks at the time the substitute checks are created.
3. A bank might use check processing equipment that captures an image of a
check prior to spraying an indorsement onto that item. If the bank truncates that item, it
should ensure that it also applies an indorsement to the item electronically. A
reconverting bank satisfies its obligation to preserve all previously applied indorsements
by overlaying a bank’s indorsement that previously was applied electronically onto a
substitute check that the reconverting bank creates.
4. The location of an indorsement applied to an original paper check in
accordance with appendix D may shift if that check is truncated and later reconverted to a
substitute check. If an indorsement applied to the original check in accordance with
appendix D is overwritten by a subsequent indorsement applied to the substitute check in
accordance with appendix D, then one or both of those indorsement s could be rendered
illegible. As explained in § 229.38(d) and the commentary thereto, a reconverting bank
is liable for losses associated with indorsements that are rendered illegible as a result of
check substitution.

- 92 5. To ensure that indorsements can be easily read and would remain legible after
an image of a check is captured, the standard requires all indorsements applied to original
checks and substitute checks to be printed in black ink as of January 1, 2006.
6. The standard requires the depositary bank’s indorsement to include (1) its
nine-digit routing number set off by an arrow at each end of the routing 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 ;
(2) the indorsement date; and (3) if the indorsement is applied physically, name or
location information. The standard also permits but does not require the indorsement to
include other identifying information. The standard requires a collecting bank’s or
returning bank’s indorsement to include only (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 nine-digit 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 forwardcollection 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 section 229.51(b)(2).
* * * * *

- 93 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 wo uld 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 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

- 94 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.
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

- 95 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 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

- 96 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.
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).

- 97 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
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.

- 98 -

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.
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.

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

- 100 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
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

- 101 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 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.

- 102 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.
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 Expedited Recredit for Consumers
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

- 103 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 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 associa ted with that charge, up to $150 (plus
foregone interest on the amount of the consumer’s loss if the account was an interestbearing 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

- 104 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 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 in-person delivery of a substitute check. In-person
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 40-day period should
be calculated from the postmark on the envelope. In the case of in-person 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 e- mail 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 us ing 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

- 105 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 cons umer’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
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 sub mit 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

- 106 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 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.

- 107 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.
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).

- 108 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 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 cla im 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.

- 109 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 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

- 110 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 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.

- 111 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
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.
* * * * *

- 112 54. In appendix E, in newly-redesignated paragraph XXXVIII., revise paragraph
A.1. to read as follows:
* * * * *
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.
* * * * *
55. In appendix E, in newly-redesignated paragraph XXXVIII.B., revise 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:
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. * * *
* * * * *
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. * * *
* * * * *
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.
* * * * *

- 113 56. In appendix E, in newly-redesignated paragraph XXXVIII.D., revise the first
sentence of paragraph D.1. and add new paragraphs D.11. through D.15. to read as
follows:
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. * * *
* * * * *
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).
* * * * *

- 114 57. In appendix E, remove the phrase “the Act” wherever it appears and add the
phrase “the EFA Act” in its place.
By order of the Board of Governors of the Federal Reserve System, July 27, 2004.

Jennifer J. Johnson (signed)
________________________________________________
Jennifer J. Johnson
Secretary of the Board