[House Report 108-132]
[From the U.S. Government Publishing Office]



108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    108-132

======================================================================



 
                CHECK CLEARING FOR THE 21ST CENTURY ACT

                                _______
                                

  June 2, 2003.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

  Mr. Oxley, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 1474]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 1474) to facilitate check truncation by 
authorizing substitute checks, to foster innovation in the 
check collection system without mandating receipt of checks in 
electronic form, and to improve the overall efficiency of the 
Nation's payments system, and for other purposes, having 
considered the same, report favorably thereon with an amendment 
and recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
Amendment........................................................     2
Purpose and Summary..............................................    10
Background and Need for Legislation..............................    11
Hearings.........................................................    12
Committee Consideration..........................................    12
Committee Votes..................................................    12
Committee Oversight Findings.....................................    13
Performance Goals and Objectives.................................    13
New Budget Authority, Entitlement Authority, and Tax Expenditures    13
Committee Cost Estimate..........................................    13
Congressional Budget Office Cost Estimate........................    13
Federal Mandates Statement.......................................    14
Advisory Committee Statement.....................................    15
Constitutional Authority Statement...............................    15
Applicability to Legislative Branch..............................    15
Exchange of Committee Correspondence.............................    15
Section-by-Section Analysis......................................    16
Changes in Existing Law Made by the Bill, as Reported............    19

                               Amendment

  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE; FINDINGS; PURPOSES.

  (a) Short Title.--This Act may be cited as the ``Check Clearing for 
the 21st Century Act''.
  (b) Findings.--The Congress finds as follows:
          (1) In the Expedited Funds Availability Act, enacted on 
        August 10, 1987, the Congress directed the Board of Governors 
        of the Federal Reserve System to consider establishing 
        regulations requiring Federal reserve banks and depository 
        institutions to provide for check truncation, in order to 
        improve the check processing system.
          (2) In that same Act, the Congress--
                  (A) provided the Board of Governors of the Federal 
                Reserve System with full authority to regulate all 
                aspects of the payment system, including thereceipt, 
payment, collection, and clearing of checks, and related functions of 
the payment system pertaining to checks; and
                  (B) directed that the exercise of such authority by 
                the Board superseded any State law, including the 
                Uniform Commercial Code, as in effect in any State.
          (3) Check truncation is no less desirable today for both 
        financial service customers and the financial services 
        industry, to reduce costs, improve efficiency in check 
        collections, and expedite funds availability for customers than 
        it was over 15 years ago when Congress first directed the Board 
        to consider establishing such a process.
  (c) Purposes.--The purposes of this Act are as follows:
          (1) To facilitate check truncation by authorizing substitute 
        checks.
          (2) To foster innovation in the check collection system 
        without mandating receipt of checks in electronic form.
          (3) To improve the overall efficiency of the Nation's 
        payments system.

SEC. 2. DEFINITIONS.

  For purposes of this Act, the following definitions shall apply:
          (1) Account.--The term ``account'' means a deposit account at 
        a bank.
          (2) Bank.--The term ``bank'' means any person that is located 
        in a State and engaged in the business of banking and 
        includes--
                  (A) any depository institution (as defined in section 
                19(b)(1)(A) of the Federal Reserve Act);
                  (B) any Federal reserve bank;
                  (C) any Federal home loan bank; or
                  (D) to the extent it acts as a payor--
                          (i) the Treasury of the United States;
                          (ii) the United States Postal Service;
                          (iii) a State government; or
                          (iv) a unit of general local government (as 
                        defined in section 602(24) of the Expedited 
                        Funds Availability Act).
          (3) Banking terms.--
                  (A) Claimant bank.--The term ``claimant bank'' means 
                a bank that submits a claim for recredit under section 
                7 to an indemnifying bank.
                  (B) Collecting bank.--The term ``collecting bank'' 
                means any bank handling a check for collection except 
                the paying bank.
                  (C) Depositary bank.--The term ``depositary bank'' 
                means--
                          (i) the first bank to which a check is 
                        transferred, even if such bank is also the 
                        paying bank or the payee; or
                          (ii) a bank to which a check is transferred 
                        for deposit in an account at such bank, even if 
                        the check is physically received and indorsed 
                        first by another bank.
                  (D) Paying bank.--The term ``paying bank'' means--
                          (i) the bank by which a check is payable, 
                        unless the check is payable at or through 
                        another bank and is sent to the other bank for 
                        payment or collection; or
                          (ii) the bank at or through which a check is 
                        payable and to which the check is sent for 
                        payment or collection.
                  (E) Returning bank.--
                          (i) In general.--The term ``returning bank'' 
                        means a bank (other than the paying or 
                        depositary bank) handling a returned check or 
                        notice in lieu of return.
                          (ii) Treatment as collecting bank.--No 
                        provision of this Act shall be construed as 
                        affecting the treatment of a returning bank as 
                        a collecting bank for purposes of section 4-
                        202(b) of the Uniform Commercial Code.
          (4) Board.--The term ``Board'' means the Board of Governors 
        of the Federal Reserve System.
          (5) Business day.--The term ``business day'' has the same 
        meaning as in section 602(3) of the Expedited Funds 
        Availability Act.
          (6) Check.--The term ``check''--
                  (A) means a draft, payable on demand and drawn on or 
                payable through or at an office of a bank, whether or 
                not negotiable, that is handled for forward collection 
                or return, including a substitute check and a travelers 
                check; and
                  (B) does not include a noncash item or an item 
                payable in a medium other than United States dollars.
          (7) Consumer.--The term ``consumer'' means an individual 
        who--
                  (A) with respect to a check handled for forward 
                collection, draws the check on a consumer account; or
                  (B) with respect to a check handled for return, 
                deposits the check into, or cashes the check against, a 
                consumer account.
          (8) Consumer account.--The term ``consumer account'' has the 
        same meaning as in section 602(10) of the Expedited Funds 
        Availability Act.
          (9) Customer.--The term ``customer'' means a person having an 
        account with a bank.
          (10) Forward collection.--The term ``forward collection'' 
        means the transfer by a bank of a check to a collecting bank 
        for settlement or the paying bank for payment.
          (11) Indemnifying bank.--The term ``indemnifying bank'' means 
        a bank that is providing an indemnity under section 5 with 
        respect to a substitute check.
          (12) MICR line.--The terms ``MICR line'' and ``magnetic ink 
        character recognition line'' mean the numbers, which may 
        include the bank 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 generally 
        applicable industry standards.
          (13) Noncash item.--The term ``noncash item'' has the same 
        meaning as in section 602(14) of the Expedited Funds 
        Availability Act.
          (14) Person.--The term ``person'' means a natural person, 
        corporation, unincorporated company, partnership, government 
        unit or instrumentality, trust, or any other entity or 
        organization.
          (15) Reconverting bank.--The term ``reconverting bank'' 
        means--
                  (A) the bank that creates a substitute check; or
                  (B) if a substitute check is created by a person 
                other than a bank, the first bank that transfers or 
                presents such substitute check.
          (16) Substitute check.--The term ``substitute check'' means a 
        paper reproduction of the original check that--
                  (A) contains an image of the front and back of the 
                original check;
                  (B) 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;
                  (C) conforms, in paper stock, dimension, and 
                otherwise, with generally applicable industry standards 
                for substitute checks; and
                  (D) is suitable for automated processing in the same 
                manner as the original check.
          (17) State.--The term ``State'' has the same meaning as in 
        section 3(a)(3) of the Federal Deposit Insurance Act.
          (18) Truncate.--The term ``truncate'' means to remove an 
        original paper check from the check collection or return 
        process and send to a recipient, in lieu of such original paper 
        check, a substitute check or, by agreement, information 
        relating to the original check (including data taken from the 
        MICR line of the original check or an electronic image of the 
        original check), whether with or without subsequent delivery of 
        the original paper check.
          (19) Uniform commercial code.--The term ``Uniform Commercial 
        Code'' means the Uniform Commercial Code in effect in a State.
          (20) Other terms.--Unless the context requires otherwise, the 
        terms not defined in this section shall have the same meanings 
        as in the Uniform Commercial Code.

SEC. 3. GENERAL PROVISIONS GOVERNING SUBSTITUTE CHECKS.

  (a) No Agreement Required.--A person may deposit, present, or send 
for collection or return a substitute check without an agreement with 
the recipient, so long as a bank has made the warranties in section 4 
with respect to such substitute check.
  (b) Legal Equivalence.--A substitute check shall be the legal 
equivalent of the original check for all purposes, including any 
provision of any Federal or State law, and for all persons 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.''.
  (c) Endorsements.--A bank shall ensure that the substitute check for 
which the bank is the reconverting bank bears all endorsements applied 
by parties thatpreviously handled the check (whether in electronic form 
or in the form of the original paper check or a substitute check) for 
forward collection or return.
  (d) Identification of Reconverting Bank.--A bank shall identify 
itself as a reconverting bank on any substitute check for which the 
bank is a reconverting bank so as to preserve any previous reconverting 
bank identifications in conformance with generally applicable industry 
standards.
  (e) Applicable Law.--A substitute check that is the legal equivalent 
of the original check under subsection (b) shall be subject to any 
provision, including any provision relating to the protection of 
customers, of part 229 of title 12 of the Code of Federal Regulations, 
the Uniform Commercial Code, 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 this Act.

SEC. 4. SUBSTITUTE CHECK WARRANTIES.

  A bank that transfers, presents, or returns a substitute check and 
receives consideration for the check warrants, as a matter of law, to 
the transferee, any subsequent collecting or returning bank, the 
depositary bank, the drawee, the drawer, the payee, the depositor, and 
any endorser (regardless of whether the warrantee receives the 
substitute check or another paper or electronic form of the substitute 
check or original check) that--
          (1) the substitute check meets all the requirements for legal 
        equivalence under section 3(b); and
          (2) no depositary bank, drawee, drawer, or endorser will 
        receive presentment or return of the substitute check, the 
        original check, or a copy or other paper or electronic version 
        of the substitute check or original check such that the bank, 
        drawee, drawer, or endorser will be asked to make a payment 
        based on a check that the bank, drawee, drawer, or endorser has 
        already paid.

SEC. 5. INDEMNITY.

  (a) Indemnity.--A reconverting bank and each bank that subsequently 
transfers, presents, or returns a substitute check in any electronic or 
paper form, and receives consideration for such transfer, presentment, 
or return shall indemnify the transferee, any subsequent collecting or 
returning bank, the depositary bank, the drawee, the drawer, the payee, 
the depositor, and any endorser, up to the amount described in 
subsections (b) and (c), as applicable, to the extent of 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) Amount in event of breach of warranty.--The amount of the 
        indemnity under subsection (a) shall be the amount of any loss 
        (including costs and reasonable attorney's fees and other 
        expenses of representation) proximately caused by a breach of a 
        warranty provided under section 4.
          (2) Amount in absence of breach of warranty.--In the absence 
        of a breach of a warranty provided under section 4, the amount 
        of the indemnity under subsection (a) shall be the sum of--
                  (A) the amount of any 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).
  (c) Comparative Negligence.--If a loss described in subsection (a) 
results in whole or in part from the negligence or failure to act in 
good faith on the part of an indemnified party, then that party's 
indemnification under this section shall be reduced in proportion to 
the amount of negligence or bad faith attributable to that party.
  (d) Effect of Producing Original Check or Copy.--
          (1) In general.--If the indemnifying bank produces the 
        original check or a copy of the original check (including an 
        image or a substitute 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, the 
        indemnifying bank shall--
                  (A) be liable under this section only for losses 
                covered by the indemnity that are incurred up to the 
                time the original check or such copy is provided to the 
                indemnified party; and
                  (B) have a right to the return of any funds the bank 
                has paid under the indemnity in excess of those losses.
          (2) Coordination of indemnity with implied warranty.--The 
        production of the original check, a substitute check, or a copy 
        under paragraph (1) by an indemnifying bank shall not absolve 
        the bank from any liability on a warranty established under 
        this Act or any other provision of law.
  (e) Subrogation of Rights.--
          (1) In general.--Each indemnifying bank shall be subrogated 
        to the rights of any indemnified party to the extent of the 
        indemnity.
          (2) Recovery under warranty.--A bank that indemnifies a party 
        under this section may attempt to recover from another party 
        based on a warranty or other claim.
          (3) Duty of indemnified party.--Each indemnified party shall 
        have a duty to comply with all reasonable requests for 
        assistance from an indemnifying bank in connection with any 
        claim the indemnifying bank brings against a warrantor or other 
        party related to a check that forms the basis for the 
        indemnification.

SEC. 6. EXPEDITED RECREDIT FOR CONSUMERS.

  (a) Recredit Claims.--
          (1) In general.--A consumer may make a claim for expedited 
        recredit from the bank that holds the account of the consumer 
        with respect to a substitute check, if the consumer asserts in 
        good faith that--
                  (A) the bank charged the consumer's account for a 
                substitute check that was provided to the consumer;
                  (B) either--
                          (i) the check was not properly charged to the 
                        consumer's account; or
                          (ii) the consumer has a warranty claim with 
                        respect to such substitute check;
                  (C) the consumer suffered a resulting loss; and
                  (D) the production of the original check or a better 
                copy of the original check is necessary to determine 
                the validity of any claim described in subparagraph 
                (B).
          (2) 30-day period.--Any claim under paragraph (1) with 
        respect to a consumer account may be submitted by a consumer 
        before the end of the 30-day period beginning on the later of--
                  (A) the date on which the consumer receives the 
                periodic statement of account for such account which 
                contains information concerning the transaction giving 
                rise to the claim; or
                  (B) the date the substitute check is made available 
                to the consumer.
          (3) Extension under extenuating circumstances.--If the 
        consumer's ability to submit the claim within the 30-day period 
        under paragraph (2) is delayed due to extenuating 
        circumstances, including extended travel or the illness of the 
        consumer, the 30-day period shall be extended for a total not 
        to exceed 30 additional days.
  (b) Procedures for Claims.--
          (1) In general.--To make a claim for an expedited recredit 
        under subsection (a) with respect to a substitute check, the 
        consumer shall provide to the bank that holds the account of 
        such consumer--
                  (A) a description of the claim, including an 
                explanation of--
                          (i) why the substitute check was not properly 
                        charged to the consumer's account; or
                          (ii) the warranty claim with respect to such 
                        check;
                  (B) a statement that the consumer suffered a loss and 
                an estimate of the amount of the loss;
                  (C) the reason why production of the original check 
                or a better copy of the original check is necessary to 
                determine the validity of the charge to the consumer's 
                account or the warranty claim; and
                  (D) sufficient information to identify the substitute 
                check and to investigate the claim.
          (2) Claim in writing.--The bank holding the consumer account 
        that is the subject of a claim by the consumer under subsection 
        (a) may, in the discretion of the bank, require the consumer to 
        submit the information required under paragraph (1) in writing.
  (c) Recredit to Consumer.--
          (1) Conditions for recredit.--The bank shall recredit a 
        consumer account in accordance with paragraph (2) for the 
        amount of a substitute check that was charged against the 
        consumer account if--
                  (A) a consumer submits a claim to the bank with 
                respect to that substitute check that meets the 
                requirement of subsection (b); and
                  (B) the bank has not provided to the consumer the 
                original check, a substitute check, or a copy of the 
                original check and demonstrates that the substitute 
                check was properly charged to the consumer's account.
          (2) Timing of recredit.--
                  (A) In general.--The bank shall recredit the 
                consumer's account for the amount described in 
                paragraph (1) no later than the end of the business day 
                following the business day on which the bank determines 
                the consumer's claim is valid.
                  (B) Recredit pending investigation.--If the bank has 
                not yet determined that the consumer's claim is valid 
                before the end of the 10th business day after the 
                business day on which the consumer submitted the claim, 
                the bank shall recredit the consumer's account for--
                          (i) the lesser of the amount of the 
                        substitute check that was charged against the 
                        consumer account, or $2,500, together with 
                        interest if the account is an interest-bearing 
                        account, no later than the end of such 10th 
                        business day; and
                          (ii) the remaining amount of the substitute 
                        check that was charged against the consumer 
                        account, if any, together with interest if the 
                        account is an interest-bearing account, not 
                        later than the 45th calendar day following the 
                        business day on which the consumer submits the 
                        claim.
  (d) Availability of Recredit.--
          (1) Next business day availability.--Except as provided in 
        paragraph (2), a bank that provides a recredit to a consumer 
        account under subsection (c) shall make the recredited funds 
        available for withdrawal by the consumer by the start of the 
        next business day after the business day on which the bank 
        recredits the consumer's account under subsection (c).
          (2) Safeguard exceptions.--A bank may delay availability to a 
        consumer of a recredit provided under subsection (c)(2)(B)(i) 
        until the start of either the business day following the 
        business day on which the bank determines that the consumer's 
        claim is valid or the 45th calendar day following the business 
        day on which the consumer submits a claim for such recredit in 
        accordance with subsection (b), whichever is earlier, in any of 
        the following circumstances:
                  (A) New accounts.--The claim is made during the 30-
                day period beginning on the business day the consumer 
                account was established.
                  (B) Repeated overdrafts.--Without regard to the 
                charge that is the subject of the claim for which the 
                recredit was made--
                          (i) on 6 or more business days during the 6-
                        month period ending on the date on which the 
                        consumer submits 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
                          (ii) on 2 or more business days during such 
                        6-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.
                  (C) Prevention of fraud losses.--The bank has 
                reasonable cause to believe that the claim is 
                fraudulent, based on facts (other than the fact that 
                the check in question or the consumer is of a 
                particular class) that would cause a well-grounded 
                belief in the mind of a reasonable person that the 
                claim is fraudulent.
          (3) Overdraft fees.--No bank that, in accordance with 
        paragraph (2), delays the availability of a recredit under 
        subsection (c) to any consumer account may impose any overdraft 
        fees with respect to drafts drawn by the consumer on such 
        recredited amount before the end of the 5-day period beginning 
        on the date notice of the delay in the availability of such 
        amount is sent by the bank to the consumer.
  (e) Reversal of Recredit.--A bank may reverse a recredit to a 
consumer account if the bank--
          (1) determines that a substitute check for which the bank 
        recredited a consumer account under subsection (c) was in fact 
        properly charged to the consumer account; and
          (2) notifies the consumer in accordance with subsection 
        (f)(3).
  (f) Notice to Consumer.--
          (1) Notice if consumer claim not valid.--If a bank determines 
        that a substitute check subject to the consumer's claim was in 
        fact properly charged to the consumer's account, the bank shall 
        send to the consumer, no later than the business day following 
        the business day on which the bank makes a determination--
                  (A) the original check or a copy of the original 
                check (including an image or a substitute check) that--
                          (i) 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
                          (ii) is otherwise sufficient to determine 
                        whether or not the consumer's claim is valid; 
                        and
                  (B) an explanation of the basis for the determination 
                by the bank that the substitute check was properly 
                charged, including copies of any information or 
                documents on which the bank relied in making the 
                determination.
          (2) Notice of recredit.--If a bank recredits a consumer 
        account under subsection (c), the bank shall send to the 
        consumer, no later than the business day following the business 
        day on which the bank makes the recredit, a notice of--
                  (A) the amount of the recredit; and
                  (B) the date the recredited funds will be available 
                for withdrawal.
          (3) Notice of reversal of recredit.--In addition to the 
        notice required under paragraph (1), if a bank reverses a 
        recredited amount under subsection (e), the bank shall send to 
        the consumer, no later than the business day following the 
        business day on which the bank reverses the recredit, a notice 
        of--
                  (A) the amount of the reversal; and
                  (B) the date the recredit was reversed.
          (4) Mode of delivery.--A notice described in this subsection 
        shall be delivered by United States mail or by any other means 
        through which the consumer has agreed to receive account 
        information.
  (g) 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 law, such as a claim for wrongful dishonor under 
the Uniform Commercial Code, or from liability for additional damages 
under section 5 or 9.
  (h) Clarification Concerning Consumer Possession.--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.
  (i) Scope of Application.--This section shall only apply to customers 
who are consumers.

SEC. 7. EXPEDITED RECREDIT PROCEDURES FOR BANKS.

  (a) Recredit Claims.--
          (1) In general.--A bank may make a claim against an 
        indemnifying bank for expedited recredit for which that bank is 
        indemnified if--
                  (A) the claimant bank (or a bank that the claimant 
                bank has indemnified) has received a claim for 
                expedited recredit from a consumer under section 6 with 
                respect to a substitute check or would have been 
                subject to such a claim had the consumer's account been 
                charged;
                  (B) the claimant bank has suffered a resulting loss 
                or is obligated to recredit a consumer account under 
                section 6 with respect to such substitute check; and
                  (C) production of the original check, another 
                substitute check, or a better copy of the original 
                check is necessary to determine the validity of the 
                charge to the customer account or any warranty claim 
                connected with such substitute check.
          (2) 120-day period.--Any claim under paragraph (1) may be 
        submitted by the claimant bank to an indemnifying bank before 
        the end of the 120-day beginning on the date of the transaction 
        that gave rise to the claim.
  (b) Procedures for Claims.--
          (1) In general.--To make a claim under subsection (a) for an 
        expedited recredit relating to a substitute check, the claimant 
        bank shall send to the indemnifying bank--
                  (A) a description of--
                          (i) the claim, including an explanation of 
                        why the substitute check cannot be properly 
                        charged to the consumer account; or
                          (ii) the warranty claim;
                  (B) a statement that the claimant bank has suffered a 
                loss or is obligated to recredit the consumer's account 
                under section 6, together with an estimate of the 
                amount of the loss or recredit;
                  (C) the reason why production of the original check, 
                another substitute check, or a better copy of the 
                original check is necessary to determine the validity 
                of the charge to the consumer account or the warranty 
                claim; and
                  (D) information sufficient for the indemnifying bank 
                to identify the substitute check and to investigate the 
                claim.
          (2) Requirements relating to copies of substitute checks.--If 
        the information submitted by a claimant bank pursuant to 
        paragraph (1) in connection with a claim for an expedited 
        recredit includes a copy of any substitute check for which any 
        such claim is made, the claimant bank shall take reasonable 
        steps to ensure that any such copy cannot be--
                  (A) mistaken for the legal equivalent of the check 
                under section 3(b); or
                  (B) sent or handled by any bank, including the 
                indemnifying bank, as a forward collection or returned 
                check.
          (3) Claim in writing.--An indemnifying bank may, in the 
        bank's discretion, require the claimant bank to submit in 
        writing the information required by paragraph (1), including a 
        copy of the written claim, if any, that the consumer submitted 
        in accordance with section 6(b).
  (c) Recredit by Indemnifying Bank.--
          (1) Prompt action required.--No later than 10 business days 
        after the business day on which an indemnifying bank receives a 
        claim under subsection (a) from a claimant bank with respect to 
        a substitute check, the indemnifying bank shall--
                  (A) provide, to the claimant bank, the original check 
                (with respect to such substitute check) or a copy of 
                the original check (including an image or a substitute 
                check) that--
                          (i) 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
                          (ii) is otherwise sufficient to determine the 
                        bank's claim is not valid; and
                  (B) recredit the claimant bank for the amount of the 
                claim up to the amount of the substitute check, plus 
                interest if applicable; or
                  (C) provide information to the claimant bank as to 
                why the indemnifying bank is not obligated to comply 
                with subparagraph (A) or (B).
          (2) Recredit does not abrogate other liabilities.--Providing 
        a recredit under this subsection to a claimant bank with 
        respect to a substitute check shall not absolve the 
        indemnifying bank from liability for claims brought under any 
        other law or from additional damages under section 5 or 9 with 
        respect to such check.
          (3) Refund to indemnifying bank.--If a claimant bank 
        reverses, in accordance with section 6(e), a recredit 
        previously made to a consumer account under section 6(c), or 
        otherwise receives a credit or recredit with regard to such 
        substitute check, the claimant bank shall promptly refund to 
        any indemnifying bank any amount previously advanced by the 
        indemnifying bank in connection with such substitute check.
  (d) Production of Original Check or a Sufficient Copy Governed by 
Section 5(d).--If the indemnifying bank provides the claimant bank with 
the original check or a copy of the original check (including an image 
or a substitute check) under subsection (c)(1)(A), section 5(d) shall 
govern any right of the indemnifying bank to any repayment of any funds 
the indemnifying bank has recredited to the claimant bank pursuant to 
subsection (c).

SEC. 8. DELAYS IN AN EMERGENCY.

  Delay by a bank beyond the time limits prescribed or permitted by 
this Act 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 a bank and if the bank uses such 
diligence as the circumstances require.

SEC. 9. MEASURE OF DAMAGES.

  (a) Liability.--
          (1) In general.--Except as provided in section 5, any person 
        who, in connection with a substitute check, breaches any 
        warranty under this Act or fails to comply with any requirement 
        imposed by, or regulation prescribed pursuant to, this Act with 
        respect to any other person shall be liable to such person in 
        an amount equal to the sum of--
                  (A) the lesser of--
                          (i) the amount of the loss suffered by the 
                        other person as a result of the breach or 
                        failure; or
                          (ii) 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) Offset of recredits.--The amount of damages any person 
        receives under paragraph (1), if any, shall be reduced by the 
        amount, if any, that the claimant receives and retains as a 
        recredit under section 6 or 7.
  (b) Comparative Negligence.--If a person incurs damages that resulted 
in whole or in part from the negligence or failure of that person to 
act in good faith, then the amount of any liability due to that person 
under subsection (a) shall be reduced in proportion to the amount of 
negligence or bad faith attributable to that person.

SEC. 10. STATUTE OF LIMITATIONS AND NOTICE OF CLAIM.

  (a) Actions Under This Act.--
          (1) In general.--An action to enforce a claim under this Act 
        may be brought in any United States district court, or in any 
        other court of competent jurisdiction, before the end of the 1-
        year period beginning on the date the cause of action accrues.
          (2) Accrual.--A cause of action accrues as of the date the 
        injured party first learns, or by which such person reasonably 
        should have learned, of the facts and circumstances giving rise 
        to the cause of action.
  (b) Discharge of Claims.--Except as provided in subsection (c), 
unless a person gives notice of a claim to the indemnifying or 
warranting bank within 30 days after the person has reason to know of 
the claim and the identity of the indemnifying or warranting bank, the 
indemnifying or warranting bank is discharged to the extent of any loss 
caused by the delay in giving notice of the claim.
  (c) Notice of Claim by Consumer.--A timely claim by a consumer under 
section 6 for expedited recredit constitutes timely notice of a claim 
by the consumer for purposes of subsection (b).

SEC. 11. CONSUMER AWARENESS.

  (a) In General.--Each bank shall provide, in accordance with 
subsection (b), a brief notice about substitute checks that describes--
          (1) the process of check substitution and how the process may 
        be different than the check clearing process with which the 
        consumer may be familiar; and
          (2) a description of the consumer recredit rights established 
        under section 6 when a consumer believes in good faith that a 
        substitute check was not properly charged to the consumer's 
        account.
  (b) Distribution.--
          (1) Existing customers.--With respect to consumers that are 
        customers of a bank on the effective date of this Act, a bank 
        shall provide the notice described in subsection (a) to each 
        such consumer no later than the first regularly scheduled 
        communication with the consumer after the effective date of 
        this Act.
          (2) New account holders.--A bank shall provide the notice 
        described in subsection (a) to each consumer, other than 
        existing customers referred to in paragraph (1), at the time at 
        which the customer relationship is initiated.
          (3) Mode of delivery.--A bank may send the notices required 
        by this subsection by United States mail or by any other means 
        through which the consumer has agreed to receive account 
        information.
  (c) Model Language.--
          (1) In general.--No later than 1 year after the date of 
        enactment of this Act, the Board shall publish model forms and 
        clauses that a depository institution may use to describe each 
        of the elements required by subsection (a).
          (2) Safe harbor.--A bank shall be treated as being in 
        compliance with the requirements of subsection (a) if the 
        bank's substitute check notice uses a model form or clause 
        published by the Board and such model form or clause accurately 
        describes the bank's policies and practices. A bank may delete 
        any information in the model form or clause that is not 
        required by this Act or rearrange the format.
          (3) Use of model language not required.--This section shall 
        not be construed as requiring any bank to use a model form or 
        clause that the Board prepares under this subsection.

SEC. 12. EFFECT ON OTHER LAW.

   This Act shall supersede any provision of Federal or State law, 
including the Uniform Commercial Code, that is inconsistent with this 
Act, but only to the extent of the inconsistency.

SEC. 13. VARIATION BY AGREEMENT.

  (a) Section 7.--Any provision of section 7 may be varied by agreement 
of the banks involved.
  (b) No Other Provisions May Be Varied.--Except as provided in 
subsection (a), no provision of this Act may be varied by agreement of 
any person or persons.

SEC. 14. REGULATIONS.

  (a) In General.--The Board may, by regulation, clarify or otherwise 
implement the provisions of this Act or may modify the requirements 
imposed by this Act with respect to substitute checks to further the 
purposes of this Act, including reducing risk, accommodating 
technological or other developments, and alleviating undue compliance 
burdens.
  (b) Board Monitoring of Check Collection and Return Process; 
Adjustment of Time Periods.--
          (1) Monitoring of check collection and return process.--The 
        Board shall monitor the extent to which--
                  (A) original checks are converted to substitute 
                checks in the check collection and return process, and
                  (B) checks are collected and returned electronically 
                rather than in paper form.
          (2) Adjustment of time periods.--The Board shall exercise the 
        Board's authority under section 603(d)(1) of the Expedited 
        Funds Availability Act to reduce the time periods applicable 
        under subsections (b) and (e) of section 603 of such Act for 
        making funds available for withdrawal, when warranted.
  (c) Publication of Schedule by Board for Check Transportation 
Services.--Section 11A(b) of the Federal Reserve Act (12 U.S.C. 
248a(b)) is amended--
          (1) by striking ``and'' at the end of paragraph (7);
          (2) by redesignating paragraph (8) as paragraph (9); and
          (3) by inserting after paragraph (7) the following new 
        paragraph:
          ``(8) check transportation services; and''.

SEC. 15. EFFECTIVE DATE.

  This Act shall take effect at the end of the 18-month period 
beginning on the date of the enactment of this Act, except as otherwise 
specifically provided in this Act.

                          Purpose and Summary

    H.R. 1474, the Check Clearing for the 21st Century Act, or 
``Check-21,'' modernizes the U.S. payments system by making it 
easier for check images to be transported electronically 
between financial institutions for payment. The legislation 
provides for the creation of a new negotiable instrument, the 
substitute check, which will facilitate electronic presentment 
of checks while also ensuring that individuals or banks that do 
not wish to accept electronic images can receive a paper check.
    H.R. 1474 will facilitate the electronic transfer of images 
for presentment, obviating the need for physical transfer of 
the original check. The legislation authorizes banks to create 
substitute checks, which would be utilized in place of an 
original paper check that has been truncated when an individual 
or a bank does not agree to accept an electronic image. The 
legislation requires that a substitute check accurately 
represent all the information on the front and back of the 
original check as of the time it was truncated. Additionally, a 
substitute check must bear all the endorsements of the banks 
that handled the original check or the electronic image and 
must clearly indicate that it is a legal copy of the original.
    Under the bill, a bank that transfers, presents or returns 
a substitute check and receives payment, warrants to the 
depositor, or any subsequent collecting bank, that the 
substitute check is legally equivalent to the original and that 
no one will receive presentment on a check that has already 
been paid. This will help prevent double debiting by providing 
consumers with assurances that they will not be required to pay 
on a check more than once, and requiring banks to develop 
systems to limit double debits.
    Additionally, the legislation requires a bank to indemnify, 
or make whole, a consumer who suffers a loss due to the receipt 
of a substitute check instead of the original.
    H.R. 1474 also provides for a right of expedited recredit 
if a customer asserts that the electronic check or substitute 
check was improperly charged against their account. The 
legislation spells out specific procedures for banks to follow 
when evaluating and granting a recredit.

                  Background and Need for Legislation

    It is estimated that 42.5 billion checks are processed in 
the United States every year. While some are processed 
electronically, millions of paper checks are physically 
transported between banks every day for processing and 
presentment. This system relies on the steady flow of air and 
ground traffic in order to ensure that checks reach paying 
banks in a timely manner. The events of September 11, 2001, 
halted air traffic in the United States, and as a result 
hundreds of millions of checks did not move, stalling the U.S. 
payment system.
    Today electronic presentment often occurs through ``on us'' 
payments, where banks clear checks within their own 
organization. A bank may create electronic copies of checks and 
then send them from the recipient branch to the paying branch 
within the same financial institution. Additionally, banks 
owned by different parent institutions can agree to exchange 
checks electronically eliminating the need for physical 
presentment. The complexity of check truncation agreements, and 
the difficulty in achieving uniformity, has limited their 
widespread implementation.
    H.R. 1474 was introduced by Representatives Hart, Ford and 
Ferguson after consultation with the U.S. Federal Reserve 
(Fed), financial institutions, technology providers, and 
consumer groups.
    By encouraging electronic imaging, Check 21 will 
significantly reduce the cost of presentment of checks and will 
enable the payments system to operate more effectively. 
Expediting this process through electronic presentment will 
give payees access to their funds more quickly and float will 
be reduced. Further, by providing for the creation of 
substitute checks, H.R. 1474 enables institutions that do not 
have the desire or the technological capacity to move to an 
electronic check presentment system to continue to process 
payments uninterrupted.
    There are many consumer benefits which should result from 
the implementation of H.R. 1474. Under the current system banks 
are limited in their ability to place ATMs in remote locations 
because any checks deposited at these machines must be picked 
up and transported on a daily basis. Under Check 21 there is a 
reduced need for the physical transportation of checks, which 
will encourage banks to place ATMs that scan deposited checks 
and electronically transport them in geographically remote 
locations. With a greater number of checks imaged and posted on 
the web site of a bank, more customers will be able to review 
their accounts on anear ``real time'' basis, enhancing fraud 
prevention and consumer convenience.
    Finally, it is important to note that consumer protections 
relating to checks are spelled out in part 229 of title 12 of 
the Code of Federal Regulations and articles 3 and 4 of the 
Uniform Commercial Code (U.C.C.). Under H.R. 1474, these 
protections, and all other settled check law, will continue to 
apply substitute checks. The provision for the measure of 
damages in the bill mirrors part 229 of title 12 of the Code of 
Federal Regulations and the Uniform Commercial Code. 
Additionally, under the indemnity provisions, a person will be 
covered for the amount of any loss proximately caused by the 
breach of warranty. In the absence of a breach of warranty the 
indemnity will be the amount of the loss up to the substitute 
check and any interest and expenses.

                                Hearings

    The Subcommittee on Financial Institutions and Consumer 
Credit held a hearing on Tuesday, April 8, 2003 on H.R. 1474, 
the ``Check Clearing for the 21st Century Act''. The following 
witnesses testified: The Honorable Roger W. Ferguson, Vice-
Chairman, Board of Governors of the Federal Reserve System; Mr. 
C.R. Cloutier, President and CEO, MidSouth Bank, NA, on behalf 
of Independent Community Bankers of America and America's 
Community Bankers; Mr. Grant Cole, Senior Vice President and 
Senior Change Management Executive, Transaction Services, Bank 
of America, on behalf of American Bankers Association, Consumer 
Bankers Association, the Electronic Check Clearing House 
Organization, and the Financial Services Roundtable; Mr. Dale 
Dentlinger, Director, ETRADE Access, ETRADE Bank; Ms. Janell 
Mayo Duncan, Legislative and Regulatory Counsel, Consumers 
Union; Mr. Joseph Kniceley, Vice President, Payment Solutions, 
NCR Corporation; Ms. Celia C. Woodham, Director of Operations, 
Chartway FCU, on behalf of Credit Union National Association.

                        Committee Consideration

    On May 14, 2003, the Subcommittee on Financial Institutions 
and Consumer Credit met in open session and approved H.R. 1474 
for full Committee consideration, as amended, by a voice vote.
    On May 20, 2003, the Committee on Financial Services met in 
open session and ordered H.R. 1474 reported to the House, with 
an amendment, with a favorable recommendation by a voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. No 
record votes were taken in conjunction with the consideration 
of this legislation. A motion by Mr. Oxley to report the bill 
to the House with a favorable recommendation was agreed to by a 
voice vote.
    The following amendment was also considered by the 
Committee:

          An amendment by Mr. Watt, no. 1, clarifying the 
        application of current law, was agreed to by a voice 
        vote.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee made findings that are 
reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    The Federal Reserve and U.S. financial institutions will 
utilize H.R. 1474 to expedite the transportation of checks 
through the payments system and while ensuring that individuals 
and banks that do not have the technological capabilities to 
accept electronic images will be able to receive paper checks 
in the form of a substitute check.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of budget authority, entitlement authority, or 
tax expenditures or revenues contained in the cost estimate 
prepared by the Director of the Congressional Budget Office 
pursuant to section 402 of the Congressional Budget Act of 
1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                  Congressional Budget Office Estimate

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, May 30, 2003.
Hon. Michael G. Oxley,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1474, the Check 
Clearing for the 21st Century Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Mark Booth 
(for revenues) and Victoria Heid Hall (for the state and local 
government impact).
            Sincerely,
                                          Barry B. Anderson
                               (For Douglas Holtz-Eakin, Director).
    Enclosure.

H.R. 1474--Check Clearing for the 21st Century Act

    H.R. 1474 would alter the process of clearing checks. It 
would allow a depository institution that has a check presented 
to it to choose on its own to provide to the paying depository 
institution a paper copy of the check, called a ``substitute 
check,'' rather than the original check itself. The substitute 
check would be the legal equivalent of the original check. 
Under current law, the depository institution presented with 
the check must transmit the original check to the paying 
institution for settlement, unless the two institutions have 
entered into an agreement for transmission of a paper copy of 
the check or the electronic information from the check.
    CBO estimates that enacting H.R. 1474 would have a 
negligible effect on federal revenues through its effects on 
the Federal Reserve's income and expenses from its check 
processing operations. The Federal Reserve remits its net 
income to the Treasury, and those payments are classified as 
governmental receipts, or revenues, in the federal budget. Any 
additional income or costs to the Federal Reserve, therefore, 
can affect the federal budget. By reducing the transportation 
costs associated with clearing checks, the bill would reduce 
the costs that the Federal Reserve incurs in providing check 
processing services to depository institutions. It could change 
the Federal Reserve's costs of processing checks in other ways, 
as well. However, the Federal Reserve is required by law to 
charge the depository institutions for its check processing 
services. Based on information provided by the Board of 
Governors of the Federal Reserve System, CBO estimates that any 
reductions to the Federal Reserve's costs as a result of H.R. 
1474 would result in a nearly equal reduction in its income. As 
a result, CBO estimates that H.R. 1474 would have a negligible 
effect on the Federal Reserve's net income and, hence, on 
federal revenues.
    H.R. 1474 provides that the substitute check would be the 
legal equivalent of the original check under any provision of 
federal or state law. H.R. 1474 would thereby preempt state 
laws, including the Uniform Commercial Code, to the extent that 
such laws require an original check. Such a preemption of state 
law is a mandate under the Unfunded Mandates Reform Act (UMRA). 
CBO estimates that enacting this mandate would impose no costs 
on state, local, or tribal governments and that its costs, 
therefore, would not exceed the threshold established in UMRA 
($59 million in 2003, adjusted for inflation). The bill 
contains no new private-sector mandates as defined in UMRA.
    The CBO staff contacts for this estimate are Mark Booth 
(for federal revenues) and Victoria Heid Hall (for the state 
and local government impact). This estimate was approved by G. 
Thomas Woodward, Assistant Director for Tax Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional Authority of Congress to enact this legislation 
is provided by Article 1, section 8, clause 1 (relating to the 
defense and general welfare of the United States), and clause 3 
(relating to the power to regulate foreign and interstate 
commerce).

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

                  Exchange of Committee Correspondence

                          House of Representatives,
                                Committee on the Judiciary,
                                      Washington, DC, May 22, 2003.
Hon. Michael Oxley,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Chairman Oxley: In recognition of the desire to 
expedite floor consideration of H.R. 1474, the ``Check Clearing 
for the 21st Century Act,'' the Committee on the Judiciary 
hereby waives consideration of the bill. Certain provisions of 
the bill relating to the litigation of claims relating to check 
clearing fall within the Committee on the Judiciary's Rule X 
jurisdiction. However, given the need to expedite this 
legislation, I will not seek a sequential referral based on 
their inclusion.
    The Committee on the Judiciary takes this action with the 
understanding that the Committee's jurisdiction over these 
provisions is in no way diminished or altered. I would 
appreciate your including this letter in your committee report 
on H.R. 1474 and in the Congressional Record during 
consideration of H.R. 1474 on the House floor.
      Sincerely,
                     F. James Sensenbrenner, Jr., Chairman.
                                ------                                

                          House of Representatives,
                       Committee on the Financial Services,
                                      Washington, DC, May 22, 2003.
Hon. Michael F. James Sensenbrenner,
Chairman, Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Chairman Sensenbrenner: Thank you for your letter 
regarding your Committee's jurisdictional interest in H.R. 
1474, the Check Clearing for the 21st Century Act.
    I acknowledge your committee's jurisdictional interest in 
this legislation and appreciate your cooperation in moving the 
bill to the House floor expeditiously. I agree that your 
decision to forego further action on the bill will not 
prejudice the Committee on the Judiciary with respect to its 
jurisdictional prerogatives on this or similar legislation. I 
will include a copy of your letter and this response in the 
Committee's report on the bill and the Congressional Record 
when the legislation is considered by the House.
    Thank you again for your assistance.
      Sincerely,
                                Michael G. Oxley, Chairman.

             Section-by-Section Analysis of the Legislation


Section 1. Short Title; Findings; Purposes

    This section establishes the short title of the bill, the 
``Check Clearing for the 21st Century Act'', and provides the 
findings and purposes of the legislation.

Section 2. Definitions

    This section defines the terms used in the legislation 
including: ``substitute check,'' ``reconverting bank,'' 
``collecting bank,'' ``depositary bank,'' and ``truncate.''

Section 3. General Provisions Governing Substitute Checks

    This section allows a person to deposit, present or send 
for collection or return a substitute check without an 
agreement with the recipient. This section accords a substitute 
check legal equivalence with an original check if the 
substitute check: (1) accurately represents all of the 
information on the front and back of the original check at the 
time the original check was truncated; and (2) contains the 
following legend: ``This is a legal copy of your check. You can 
use it the same way you would use the original check.''
    Additionally this section mandates that a reconverting 
bank--defined as the bank that creates a substitute check, or, 
if a substitute check is created elsewhere, the first bank that 
transfers or presents the substitute--ensure that the 
substitute check bears all the endorsements applied by parties 
that previously handled the check and shall identify itself as 
the reconverting bank.
    Substitute checks will be subject to all laws which 
currently apply to checks including the U.C.C. and Regulation 
CC. A substitute check that satisfies all the requirements 
provided in section 3(b) will be treated as the legal 
equivalent of the original check. The substitute check, 
therefore, will be subject to any provision of existing check 
law, including any provision in existing law thatrelates to the 
protection of customers, as if the substitute check were the original 
check. The bill is not intended to result in fewer protections for 
customers who are provided their substitute checks than they currently 
have using paper checks.

Section 4. Substitute Check Warranties

    This section provides that a bank that transfers, presents 
or returns a substitute check and receives consideration for 
the check is deemed to have warranted that the substitute check 
meets all requirements for legal equivalence and that no entity 
will be asked to make a payment on a check already paid.
    The Committee intends that this language allow depositing 
customers of a bank to create substitute checks with the same 
legal protections for recipients under this legislation as if 
they had been converted by a financial institution at the point 
of first deposit. If a bank allows its depositing customer to 
create substitute checks, the bank is warrantor for the 
substitute checks created by its depositing customer. For 
example, if a grocery store creates a substitute check, the 
bill makes the grocery store's bank, and not the grocery store, 
responsible for the section 4 warranties. A bank may choose to 
pass along, by agreement with the depositor that creates the 
substitute check, any liability it may incur due to the 
depositor in this regard. The Committee believes that requiring 
a bank's credit to stand behind a substitute check will provide 
strong protections when paper checks are removed from the 
system at the point of sale or purchase before they are 
deposited at, or presented to a financial institution.

Section 5. Indemnity

    A transferee is indemnified up to either the amount of the 
loss proximately caused by a breach of the warranty provided in 
section 4 or, in the absence of such a breach, the amount of 
any loss up to the amount of the substitute check plus any 
interest or expenses.
    If a loss results in whole or in part from the negligence 
or failure to act in good faith on the part of the indemnified 
party, then that party's indemnification will be reduced by the 
amount attributable to the negligence or bad faith.
    If the original check or a copy of the original check 
(including an image or substitute check) is produced, then the 
indemnifying bank will be liable only for losses covered by the 
indemnity up to the time the original check, substitute check 
or sufficient copy is provided to the indemnified party, and 
has the right to any funds paid under the indemnity in excess 
of the losses.

Section 6. Expedited Recredit for Consumers

    This section provides that a consumer may make a claim for 
a recredit if he or she asserts that the bank charged the 
consumer's account improperly or the consumer has a warranty 
claim with respect to the substitute check. The consumer must 
show that he or she suffered a loss and that the production of 
the original or a better copy of the original is necessary to 
determine the validity of any claim.
    The consumer is required to make a claim for expedited 
recredit within 30 days of receiving their periodic statement 
or receiving the substitute check, whichever is later. Under 
extenuating circumstances, including extended travel or illness 
of the consumer, the consumer will have an additional 30 days 
to make the claim.
    A bank must recredit a consumer's account within one day of 
determining that the consumer's claim is valid. If the bank has 
not determined the validity of the claim within 10 business 
days, the bank must recredit the lesser of the amount charged, 
or $2,500 plus accrued interest, and any remaining amount must 
be recredited within 45 calendar days.
    A bank may institute safeguard exceptions and delay a 
recredit on claims made on new accounts, on accounts that have 
repeated overdrafts, when a bank has a reasonable cause to 
believe that the claim is fraudulent, or in emergency 
situations. A bank that delays the availability of or reverses 
a recredit must notify the customer promptly.
    Notices of invalid claims, recredit and reversal of 
recredit must be made to consumers no later than the day 
following the day on which the bank makes these determinations.
    Section 6(h) clarifies that a consumer who has an agreement 
to receive substitute checks as a matter of course may make a 
claim for an expedited recredit regardless of whether the 
consumer has retained, lost, did not receive, or otherwise is 
not currently in possession of the substitute check. It is not 
necessary for a consumer to be in possession of a substitute 
check to receive an expedited recredit.
    Many bank customers today have agreed to receive check 
image statements or other descriptive statements in lieu of 
receiving back their original checks. Customers participating 
in these check image or other check truncation programs would 
not receive a substitute check from their bank because the 
substitute check is only delivered to a consumer in 
``substitution'' of an original paper check. Accordingly, 
because no substitute check would be provided, the expedited 
recredit provisions would not apply to existing check image and 
truncation programs.

Section 7. Expedited Recredit Procedures for Banks

    Section 7 authorizes a bank to make a claim against an 
indemnifying bank for an expedited recredit if the claimant's 
customer has made a claim for recredit; the claimant bank has 
suffered a loss; and production of the original check, a 
substitute check or a better copy of the check is necessary to 
determine the validity of the charge. The claim must be made 
within 120 days of the transaction. This claim may be required 
to be in writing and must describe the claim, demonstrate a 
loss, and describe why production of the original check, or a 
better copy of the check, is necessary.
    The indemnifying bank has 10 business days to produce the 
original check, another substitute check, or a copy of the 
original check, recredit the amount to the claimant bank, or 
provide information as to why the indemnifying bank will not 
perform these services.
    A recredit does not abrogate other liabilities the 
indemnifying bank may incur.

Section 8. Delays In An Emergency

    This section provides that delays in compliance with the 
provisions of this legislation will be excused if they are 
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 a bank if the bank used such diligence as the 
circumstances require.

Section 9. Measure of Damages

    Except as provided in section 5, this section provides that 
any person who breaches a warranty or fails to comply with the 
Act or regulations promulgated pursuant to its provisions, will 
be liable for the lesser of the amount of the loss or the 
amount of the substitute check plus interest and expenses. A 
comparative negligence standard applies for the determination 
of damages.

Section 10. Statute of Limitations and Notice of Claim

    Section 10 provides that claims may be brought up to one 
year from the date the injured party first learns of, or should 
reasonably have learned of, the facts giving rise to the cause 
of action.

Section 11. Consumer Awareness

    Under this section, each bank is directed to provide a 
brief document to its current customers and new customers when 
the relationship is initiated describing the process of check 
substitution and the recredit rights. The Fed is required to 
publish model forms and clauses for banks to use when making 
these notices within 1 year of the date of enactment of this 
legislation. However, banks are not required to use the model 
forms.

Section 12. Effect on Other Law

    Section 12 provides that the provisions of this bill 
supersede any inconsistent Federal or State laws, but only to 
the extent of the inconsistency.

Section 13. Variation by Agreement

    This section provides that only provisions of section 7 may 
be varied by the banks involved.

Section 14. Regulations

    This section authorizes the Fed to promulgate regulations 
related to the operation of this legislation. This section 
further directs the Federal Reserve Board to monitor the check 
collection and return process and exercise its authority under 
the Expedited Funds Availability Act to reduce the time periods 
for making funds available for withdrawal, when warranted. This 
section amends the Federal Reserve Act to require the Fed to 
report on the fees associated with its check transportation 
services.
    Although Check 21 gives the Board authority to adopt 
implementing regulations, the Committee recognizes that the 
Secretary of the Treasury has broad and long-standing authority 
to establish and administer the rules that govern payments 
disbursed by Treasury, including Treasury checks. Check 21 does 
not affect the Secretary's authority to regulate Treasury 
checks, to the extent those regulations are not inconsistent 
with this legislation. The Treasury cannot adopt regulations, 
for example, that would condition the payment of a substitute 
Treasury check on the subsequent delivery of the original 
check.

Section 15. Effective Date

    Section 15 provides that the legislation will take effect 
18 months from the date of enactment.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                 SECTION 11A OF THE FEDERAL RESERVE ACT

                          pricing of services

  Sec. 11A. (a)  * * *
  (b) The services which shall be covered by the schedule of 
fees under subsection (a) are--
          (1)  * * *

           *       *       *       *       *       *       *

          (7) Federal Reserve float; [and]
          (8) check transportation services; and
          [(8)] (9) any new services which the Federal Reserve 
        System offers, including but not limited to payment 
        services to effectuate the electronic transfer of 
        funds.

           *       *       *       *       *       *       *


                                
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