[Federal Register Volume 69, Number 5 (Thursday, January 8, 2004)]
[Proposed Rules]
[Pages 1470-1501]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-300]



[[Page 1469]]

-----------------------------------------------------------------------

Part III





Federal Reserve System





-----------------------------------------------------------------------



12 CFR Part 229



Availability of Funds and Collection of Checks; Proposed Rule

  Federal Register / Vol. 69, No. 5 / Thursday, January 8, 2004 / 
Proposed Rules  

[[Page 1470]]


-----------------------------------------------------------------------

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: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Board of Governors is publishing for comment proposed 
amendments to Regulation CC that would add a new subpart D, with 
commentary, to implement the recently-enacted Check Clearing for the 
21st Century Act. These proposed amendments (1) would set forth the 
requirements of the Act that apply to banks, (2) provide a model 
disclosure and model notices relating to substitute checks, and (3) set 
forth indorsement requirements and truncating bank and reconverting 
bank identification requirements for substitute checks. The proposed 
amendments also would clarify some existing provisions of the rule and 
commentary.

DATES: Comments on the proposed rule must be received by March 12, 
2004.

ADDRESSES: Comments should refer to docket number R-1176 and should be 
addressed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of 
the Federal Reserve System. Comments may be mailed to 20th Street and 
Constitution Avenue, NW., Washington, DC 20551; faxed to the Office of 
the Secretary at 202/452-3819 or 202/452-3102; or mailed electronically 
to [email protected]. Because paper mail at the Board of 
Governors is subject to delay, please consider submitting your comments 
by fax or e-mail. Members of the public may inspect comments in 
accordance with the Board's Rules Regarding the Availability of 
Information (12 CFR part 261) in Room MP-500 of the Martin Building on 
weekdays between 9 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: Jack K. Walton, II, Assistant Director 
(202/452-2660), or Joseph P. Baressi, Senior Financial Services Analyst 
(202/452-3959), Division of Reserve Bank Operations and Payment 
Systems; or Stephanie Martin, Associate General Counsel (202/452-3198), 
or Adrianne G. Threatt, Counsel (202/452-3554), Legal Division; for 
users of Telecommunication Devices for the Deaf (TDD) only, contact 
202/263-4869.

SUPPLEMENTARY INFORMATION:

Background

I. The Need for and General Provisions of the Check 21 Act

    Under current law, a bank that presents a check for payment must 
present the original paper check unless the paying bank has agreed to 
accept presentment from the collecting bank 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 
truncate checks early in the collection process and engage in broad-
based electronic presentment, a collecting 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 
presentment.\2\ As a result of the difficulty in obtaining the 
agreements necessary to present checks electronically in all cases, 
banks have not been able to take full advantage of the efficiencies and 
potential cost savings of handling checks electronically.
---------------------------------------------------------------------------

    \1\ See, e.g., section 3-501(b) of the Uniform Commercial Code.
    \2\ Some paying banks and bank customers prefer to receive 
checks in paper form for operational or other reasons.
---------------------------------------------------------------------------

    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\ The Check 21 Act accomplishes this by authorizing the use 
of a new negotiable instrument called a substitute check. A substitute 
check is a paper reproduction of an original check that contains an 
image of the front and back of the original check and is suitable for 
automated processing in the same manner as the original check. A bank 
that for consideration transfers, presents, or returns a substitute 
check (or another 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 for which a bank has 
made these warranties is the legal equivalent of the original check for 
all purposes and all persons.
---------------------------------------------------------------------------

    \3\ Pub. L. 108-100, 117 Stat. 1177 (codified at 12 U.S.C. 5001-
5018). The Check 21 Act was enacted on October 28, 2003, and takes 
effect on October 28, 2004.
---------------------------------------------------------------------------

    Allowing a substitute check that is subject to the substitute check 
warranties to be the legal equivalent of an original check should 
facilitate the use of electronics in the check collection process. For 
example, a depositary bank in California that receives a check drawn on 
a bank in New York now must present the original paper check for 
payment absent an agreement to the contrary, even if the California 
bank has agreements to collect checks electronically with other banks 
in the collection chain for that check. 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 accept 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.
    The Check 21 Act does not require any bank to use electronic check 
processing, receive electronic presentment, or create substitute 
checks, nor would the Check 21 Act make electronic check images or 
electronic check information the legal equivalent of original checks. 
However, after the effective date of the Check 21 Act, any bank or 
other person that requires an original check must accept a legally 
equivalent substitute check in satisfaction of that requirement. The 
characteristics of a substitute check are such that a bank that 
receives 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, for the most part, banks would not be required to change their 
check processing equipment or practices because of the Check 21 Act, 
and there would be no need for a bank to sort original checks and 
substitute checks separately during the check collection process.\4\
---------------------------------------------------------------------------

    \4\ However, as described in more detail in the section-by-
section analysis, a bank must place a ``5'' in position 44 of the 
MICR line of a qualified returned substitute check, as opposed to a 
``2'' that is required in that position for a qualified returned 
original check.
---------------------------------------------------------------------------

    Certain provisions of the Check 21 Act will affect all banks, even 
those that do not choose to create substitute

[[Page 1471]]

checks. For example, a bank that simply received a substitute check 
created by another bank, or a paper or electronic representation of a 
substitute check, would make the substitute check warranties when it 
delivered that item for presentment, collection, or return or provided 
that item to its customer. Any bank that receives consideration for a 
substitute check, or a representation of a substitute check, that it 
transfers, presents, or returns also is responsible for indemnifying 
any person that suffers a loss due to the receipt of a substitute check 
instead of the original check. Moreover, a bank that provides a 
substitute check to a consumer might be required to provide an 
expedited recredit to the consumer if the consumer incurred a loss due 
to receipt of the substitute check rather than the original check. 
Finally, a bank must provide a disclosure that describes substitute 
checks and substitute check rights to consumers who receive paid checks 
with their periodic account statements and consumers who receive 
substitute checks on a case-by-case basis.
    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 caused the 
problem with the substitute check. In many cases this would be the 
first bank to transfer the substitute check (the reconverting bank).\5\ 
A bank that paid a warranty claim or provided an indemnity or expedited 
recredit for a substitute check that it received from another bank 
therefore 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 
responsible party.\6\
---------------------------------------------------------------------------

    \5\ 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 a paper or electronic representation of 
that substitute check.
    \6\ Banks may further allocate liability amongst themselves as 
part of their agreements to handle checks electronically. A 
reconverting bank therefore could, by agreement, pass back some or 
all of its loss associated with paying a warranty or indemnity to 
the bank that sent the check to it electronically.
---------------------------------------------------------------------------

    The Check 21 Act imposes additional duties on reconverting banks. A 
reconverting bank must identify itself as such on a substitute check 
and must preserve the indorsements of parties that previously handled 
the check in any form. The reconverting bank will be the first bank to 
provide the substitute check warranties and the first bank in the chain 
of indemnifying banks, and thus ultimately should bear any loss 
traceable to a problem that existed as of the time the substitute check 
was created.\7\
---------------------------------------------------------------------------

    \7\ But see footnote 6.
---------------------------------------------------------------------------

II. Overview of New Subpart D and Associated Amendments to Subpart A

    The proposed new subpart D would incorporate into Regulation CC the 
requirements of the Check 21 Act that affect banks that create or 
receive substitute checks or paper or electronic representations of 
substitute checks. Subpart D therefore 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, the interaction between subpart D and existing federal 
and state laws, and the consumer awareness disclosure and other notices 
regarding substitute checks.
    The proposed amendments to implement the Check 21 Act also affect 
some existing provisions of Regulation CC and its commentary. For 
example, the Board proposes to amend the authority and scope section, 
Sec.  229.1, to acknowledge the Check 21 Act as an authority source and 
to describe subpart D. The Board also proposes to supplement some 
existing defined terms in Sec.  229.2 for which the Check 21 Act has 
slightly different definitions and to define several new terms used in 
subpart D. The Board also proposes 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 Sec.  229.35 and appendix D to include indorsement and 
identification standards for substitute checks.

III. Other Amendments to Existing Provisions

    The Board also proposes revisions to several other provisions of 
Regulation CC and its commentary. These changes generally either 
respond to enquiries that Board staff has received or respond to 
changed circumstances affecting the relevant provision. For example, 
the Board proposes amending the commentary to clarify that a returned 
check notice need not be written, clarify the application of the 
Electronic Signatures in Global and National Commerce Act (the E-Sign 
Act) to consumer disclosures required by Regulation CC, and clarify the 
time by which a paying bank may extend the return or notice of 
nonpayment deadline.

Section-by-Section Analysis

    The section-by-section analysis discusses the proposed commentary 
to each section in the course of discussing the proposed regulatory 
text.

I. Amendments to Implement the Check 21 Act

A. Section 229.1 Authority and Scope

    The Board proposes to amend Sec.  229.1 to include the Check 21 Act 
as an additional source of authority and to describe briefly the scope 
of new subpart D with respect to substitute checks.

B. Section 229.2 Definitions

    The Board proposes two types of amendments to this section. First, 
the Board proposes to amend some existing defined terms to account for 
differences between those definitions and the definitions required by 
the Check 21 Act.\8\ Second, the Board proposes to define new terms 
used in subpart D.
---------------------------------------------------------------------------

    \8\ Some terms are defined identically in existing Regulation CC 
and the Check 21 Act, such that no amendments are necessary.
---------------------------------------------------------------------------

1. Amendments to Existing Definitions
    The Board proposes to reword the existing introductory sentence and 
move into that sentence the text of existing Sec.  229.2(qq), which 
provides that terms not defined in Sec.  229.2 have the meanings set 
forth in the U.C.C.
    a. Account. The Check 21 Act defines the term account to mean any 
deposit account at a bank and therefore is much broader than the 
existing definition in Sec.  229.2(a), which essentially is limited to 
accounts that permit frequent transfers and withdrawals. The Board 
therefore proposes to amend the account definition to state that the 
existing definition applies except for purposes of subpart D. The Board 
proposes a new paragraph defining the term account for purposes of 
subpart D and, in connection therewith, subpart A, to mean any deposit, 
as defined at Sec.  204.2(a)(1)(i) of Regulation D, at a bank. The 
Board also proposes to amend the commentary to the account definition 
to incorporate these changes and to highlight that many deposits that 
are not accounts for purposes of subparts B and C would be accounts for 
purposes of subpart D.
    b. Bank. The Check 21 Act defines bank to include all of the 
entities currently defined as banks by Sec.  229.2(e), plus the United 
States Treasury and the United States Postal Service to the

[[Page 1472]]

extent that those entities act as payors. The Board proposes to amend 
the existing definition and its commentary to incorporate the broader 
definition of bank for purposes of subpart D. For internal consistency, 
the Board proposes substituting the phrase ``paying bank'' where the 
Check 21 Act used the term ``payor.''
    c. Check. The Check 21 Act's definition of check is the same as the 
definition in existing Sec.  229.2(k) that applies to subpart C. The 
Board proposes to amend the subpart C definition of check and its 
commentary to apply to both subparts C and D. The proposed commentary 
to this definition states that a substitute check meeting the 
requirements of Sec.  229.2(zz) is a check for purposes of all 
provisions of Regulation CC.
    d. Forward collection. The term forward collection is defined in 
Sec.  229.2(q) to mean the process by which a bank sends a check on a 
cash basis to the paying bank for payment. The Check 21 Act's 
definition is substantively the same as the existing definition but 
includes a clause noting that sending a check to a collecting bank for 
settlement can be a component of forward collection. The Board proposes 
to amend the forward collection definition and commentary to include 
that clause.
    e. Paying bank. The Check 21 Act's definition of paying bank 
essentially parallels the definition in Sec.  229.2(z) but adds the 
U.S. Treasury and the U.S. Postal Service with respect to a check that 
is payable by one of those entities and is sent to that entity for 
collection. The Board therefore proposes to amend Sec.  229.2(z) and 
the commentary thereto to incorporate the broader definition of paying 
bank in subpart D.
    f. Qualified returned check. Although the definition of a qualified 
returned check in Sec.  229.2(bb) remains unchanged by the Check 21 
Act, the Board proposes to amend the commentary to that definition as 
it relates to the content of position 44 of the MICR line. Currently, 
the commentary notes that a qualified returned check should have a 
``2'' in position 44. The proposed amendment would retain that 
requirement for original checks but, in accordance with the generally 
applicable industry standard for substitute checks (American National 
Standard Specifications for Image Replacement Documents, X9.90 (ANS 
X9.90)), would require a ``5'' in position 44 if the qualified returned 
check is a substitute check.\9\ The ``5'' would ensure that the size of 
the image of the original check would remain constant on subsequent 
substitute checks.
---------------------------------------------------------------------------

    \9\ ANS X9.90 was in draft form on the date that the Board 
approved this proposed rule. The Board expects that ANS X9.90 will 
be final on or before October 28, 2004.
---------------------------------------------------------------------------

    g. State. The Check 21 Act defines state to include all the 
entities that are currently listed in Sec.  229.2(ff), plus Guam, 
American Samoa, the Trust Territory of the Pacific Islands, the 
Northern Mariana Islands, and any other territory of the United States. 
The Board therefore proposes to supplement the existing definition of 
state by including these additional entities as states for purposes of 
subpart D.
2. Proposed New Definitions
    a. Claimant Bank. The term claimant bank is used in section 8 of 
the Check 21 Act regarding expedited recredit claims by banks, although 
the statute does not define that term. The Board proposes to define the 
term claimant bank in Sec.  229.2(qq) to mean a bank that submits a 
claim for recredit under Sec.  229.55 of Regulation CC, which 
corresponds to section 8 of the statute.
    b. Collecting bank, consumer, customer, and indemnifying bank. The 
Board proposes to define the terms collecting bank, consumer, customer, 
and indemnifying bank at Sec.  229.2(rr), (ss), (tt), and (uu), 
respectively. The proposed definitions incorporate the Check 21 Act 
definitions with only minor grammatical variations from the statutory 
language.
    c. Magnetic ink character recognition (MICR) line. The Board 
proposes to incorporate the Check 21 Act's definition of magnetic ink 
character recognition (MICR) line in Sec.  229.2(vv). The proposed 
commentary would note that American National Standard Specifications 
for Placement and Location of MICR Printing, X9.13 (ANS X9.13) is the 
governing standard for MICR lines of original checks and substitute 
checks, and that ANS X9.90 has some additional requirements regarding 
the content of the MICR line of a substitute check.
    d. Original check. The Board proposes to define the term original 
check in Sec.  229.2(ww) as the first paper check that is issued with 
respect to a particular payment transaction. The proposed commentary to 
this new definition explains that the Board has defined this term in 
order to distinguish the original check from a substitute check and 
from other paper or electronic representations of a check.
    e. Person. The Board proposes to incorporate the Check 21 Act's 
definition of person in Sec.  229.2(xx).
    f. Reconverting bank. The Board proposes to define reconverting 
bank in Sec.  229.2(yy) to be (1) the bank that creates a substitute 
check or (2) with respect to a substitute check created by a person 
that is not a bank, the first bank that receives the substitute check 
and that transfers, presents, or returns the substitute check or, in 
lieu of that substitute check, the first paper or electronic 
representation of that substitute check. The proposed commentary to 
this definition provides further clarification as to when and where 
creation of a substitute check occurs and explains that a bank need not 
accept a substitute check that was created by a nonbank and that has 
not yet been handled by a bank, unless the bank agrees to do so. 
Moreover, the proposed commentary provides examples of when a bank 
would be a reconverting bank under the definition and notes that there 
could be multiple reconverting banks with respect to the same payment 
transaction if a check moves from electronic form to substitute check 
form multiple times throughout the collection and return process.
    g. Substitute check. The Board proposes to incorporate the Check 21 
Act's definition of substitute check in Sec.  229.2(zz).
    The scope of the Check 21 Act and subpart D is limited to 
substitute checks. To clarify the scope of the term and the subpart, 
the Board proposes extensive commentary on the definition of substitute 
check. The proposed commentary provides guidance on the meaning of a 
``paper reproduction of an original check'' and clarifies that, because 
a substitute check by definition must be a piece of paper, an 
electronic check file or electronic check image that has not been 
printed in accordance with the substitute check definition and 
generally applicable industry standards is not a substitute check. The 
commentary also explains what information is required or permitted as 
part of the original check images that are contained on a substitute 
check.
    The Board particularly requests comment on the proposed commentary 
to the substitute check definition that describes the various ways in 
which the MICR line of a substitute check can vary from the MICR line 
of the original check. First, the commentary notes that ANS X9.90 
requires the content of position 44 of the MICR line of a substitute 
check to vary from that of position 44 of the original check to ensure 
that the check image remains constant if more than one substitute check 
is created to represent the same original check.

[[Page 1473]]

    Second, the commentary acknowledges that the original check could 
have an encoding error in the amount field (including a failure to 
encode) and that a substitute check that reproduces that error would 
meet the definition of a substitute check. However, the commentary 
notes that a reconverting bank that creates a substitute check from an 
original check with a misencoded amount field or a bank that handles a 
substitute check that perpetuates the amount encoding error may repair 
the MICR line to facilitate the processing of the check without 
changing the item's status as a substitute check. This approach would 
be consistent with the current industry practice of allowing a bank to 
repair the MICR line of an original check when the bank detects an 
encoding error in the amount field.
    Third, the commentary notes that the MICR line of the original 
check could be accurate in every respect but that check imaging 
equipment could (1) fail to read a portion of the MICR line but note 
the presence of MICR information with an asterisk, (2) misread a digit 
in the MICR line, for example by reading an ``8'' as a ``3,'' or (3) 
intentionally read a space or a placeholder, such as a hyphen, to be a 
``0.'' These errors collectively are referred to as MICR-read errors. 
To ensure that the items a bank transfers in reliance on the Check 21 
Act and subpart D meet the definition of a substitute check, the 
commentary states that before a reconverting bank creates a substitute 
check it should correct all MICR-read errors.\10\ The proposed 
commentary would clarify that an item that perpetuated a MICR-read 
error would not be a substitute check as defined in Sec.  229.2(zz). 
However, as discussed in connection with Sec.  229.51(c) of the 
proposed rule and the proposed commentary to that section, the Board 
proposes that, when such a noncompliant item purports to be a 
substitute check, the substitute check warranties, indemnity, and 
recredit rights would apply to that item as if it were a substitute 
check, even though it would not be the legal equivalent of the original 
check. The Board proposes this approach in order to facilitate 
compliance with and prevent circumvention and evasion of the Check 21 
Act.
---------------------------------------------------------------------------

    \10\ American National Standards Specifications for Electronic 
Exchange of Check and Image Data, X9.37, (ANS X9.37), is being 
amended to address the identification and repair of MICR-read errors 
that are indicated with asterisks. The Board expects this amendment 
to be finalized prior to the effective date of the Check 21 Act.
---------------------------------------------------------------------------

    h. Sufficient copy and copy. The Board proposes that Sec.  
229.2(aaa) would define a sufficient copy to be a copy of an original 
check that accurately represents the information on the front and back 
of the original check as of the time of truncation or otherwise is 
sufficient to determine the validity of a claim. This concept first 
appears in section 6(d)(1) of the Check 21 Act regarding what a bank 
must produce to limit its liability for an indemnity claim. The concept 
also appears in the Check 21 Act (with minor variations) in sections 
7(c)(1)(B) and 8(c)(1)(A) regarding what a bank must produce to avoid 
making a recredit and in section 7(f)(1)(A) regarding the content of 
the bank's notice regarding denial of a consumer recredit claim. To 
streamline the regulation and make the various sufficient copy criteria 
parallel throughout the rule, the rule defines sufficient copy as it is 
defined in the indemnity section and uses that defined term in the 
portions of the rule that correspond to the statutory provisions listed 
above. The Board proposes to define a copy to be a paper reproduction 
of a check.\11\ The proposed commentary to these terms reiterates that 
an electronic check image that appears on a computer screen but has not 
yet been printed does not constitute a copy or a sufficient copy. The 
commentary also provides examples of what types of documents would 
constitute a sufficient copy.
---------------------------------------------------------------------------

    \11\ As explained in the analysis of Sec.  229.58, when a bank 
is required to produce an original check or a sufficient copy, the 
rule allows a bank to provide an electronic image of that item if 
the recipient has agreed to receive that information electronically.
---------------------------------------------------------------------------

    i. Transfer and consideration. The Board proposes to define 
transfer and consideration at Sec.  229.2(bbb) in a manner that 
supplements the U.C.C. definitions of those terms in order to make the 
warranty, indemnity, and legal equivalence provisions function as 
contemplated in the Check 21 Act.
    The Check 21 Act warranties, which are a precondition for the legal 
equivalence of a substitute check, and the indemnity, are given when a 
substitute check or representation thereof is transferred, presented, 
or returned for consideration. Under the existing U.C.C. definitions, a 
bank that pays a substitute check that it later provides to the drawer 
or a bank that pays a check presented electronically and then creates a 
substitute check to give to the drawer would not be transferring the 
check to the drawer under the U.C.C. and arguably would not receive 
consideration for the substitute check from the drawer. However, the 
Check 21 Act explicitly provides that a drawer receives the substitute 
check warranties if it receives a substitute check or a paper or 
electronic representation of a substitute check. The Check 21 Act also 
provides that a drawer who suffers a loss due to the receipt of a 
substitute check instead of the original check receives an indemnity. 
These provisions indicate that the substitute check received by the 
drawer in the examples provided above is intended to be the legal 
equivalent of the original check and subject to the warranties and 
indemnity.
    Therefore, for the limited purpose of making the warranty, 
indemnity, and legal equivalence sections work as intended, the 
proposed rule would expand the term transfer to include delivery of a 
substitute check (or a paper or electronic representation of a 
substitute check) by a bank to a person that is not a bank. The 
proposed rule also would expand the term consideration to include the 
bank's charging, having the right to charge, or otherwise receiving 
value for a substitute check (or a paper or electronic representation 
of the substitute check) that the bank transfers. However, the proposed 
rule would explicitly exclude from the definition of consideration the 
transfer of a substitute check solely in response to a claim related to 
that substitute check.\12\ The proposed commentary to the transfer and 
consideration definitions provides examples of the situations the 
expansion is designed to capture.
---------------------------------------------------------------------------

    \12\ A bank should be able to produce a substitute check that 
does not contain the legal equivalence legend as a ``sufficient 
copy'' in response to an indemnity or recredit claim. However, if 
this were considered a transfer for consideration, the bank would be 
making the substitute check warranties and thus could not in good 
faith provide a substitute check without a legend, because by doing 
so it automatically would have breached the legal equivalence legend 
component of the legal equivalence warranty.
---------------------------------------------------------------------------

    j. Truncate. The Board proposes to incorporate the Check 21 Act's 
definition of truncate in Sec.  229.2(ccc). The proposed commentary 
highlights that removal of a substitute check is not truncation because 
truncation refers only to original checks.
    k. Truncating bank. The Board proposes to define in Sec.  
229.2(ddd) the term truncating bank, which is not used in the Check 21 
Act but is used in Sec.  229.51 and appendix D of the proposed rule. 
The Board proposes to define truncating bank (in a manner that 
parallels the definition of reconverting bank) to be the bank that 
truncates the original check or, if a person other than a bank 
truncates the check, the first bank that transfers, presents, or 
returns the check in a form other than the original check. The proposed 
commentary to this section provides an

[[Page 1474]]

example of when a bank would be a truncating bank.

C. Section 229.30 Paying Bank's Responsibility for Return of Checks, 
and Section 229.31 Returning Bank's Responsibility for Return of Checks

    The Board proposes to revise existing sentences in Sec. Sec.  
229.30(a)(2)(iii) and 229.31(a)(2)(iii) relating to the proper MICR-
line encoding of a qualified returned check. These amendments would 
specify that a qualified returned substitute check must contain a ``5'' 
in position 44 of the MICR line, whereas a qualified returned original 
check must contain a ``2'' in that position. As discussed above with 
respect to the definition of a qualified returned check and the 
definition of substitute check, a substitute check must contain a 
different number to ensure that the image of the original check remains 
a constant size. The Board proposes to move the specific references to 
ANS X9.13 from the regulation text to the commentary of these two 
paragraphs and specify that this standard applies to original checks. 
The commentary to each paragraph also would specify that ANS X9.90 is 
the standard that applies to substitute checks.

D. Indorsement Standards: Sections 229.35(a) and 229.38(d) and Appendix 
D

    In the current processing environment, banks generally print or 
``spray'' indorsements on original checks when the checks are processed 
through the banks' automated check sorters. A substitute check will 
contain previous indorsements physically applied to the original check 
by preserving the image of the back of the original check. In addition, 
the reconverting bank will print, or ``overlay,'' on the back of the 
substitute check any previous indorsements that were applied to the 
original check electronically and the reconverting bank's own 
indorsement. Banks handling checks downstream from reconverting banks 
generally will process a mix of original checks and substitute checks 
through their sorters and spray indorsements on both.
    ANS X9.90 presumes that banks that receive paper checks, including 
substitute checks, will continue to spray indorsements on those checks 
in the same locations that they do today. ANS X9.90 also presumes that 
indorsements physically applied to a check before it is reconverted 
will be preserved through the accurate image of the back of the check 
that a substitute check must contain. However, the locations that ANS 
X9.90 specifies for previously applied electronic indorsements that a 
reconverting bank physically overlays on substitute checks and for the 
reconverting bank's own indorsement differ from the indorsement 
locations specified in current appendix D. In particular, the current 
appendix requires the depositary bank indorsement to be placed on the 
back of the check between 3 inches from the leading edge and 1.5 inches 
from the trailing edge, whereas ANS X9.90 requires a depositary bank's 
previously applied electronic indorsement to be overlaid by the 
reconverting bank on the back of a substitute check between 1.95 and 
2.55 inches from the leading edge.\13\ The current appendix requires a 
subsequent collecting bank indorsement to be placed on the back of the 
check between the leading edge and 3.0 inches from the leading edge, 
whereas ANS X9.90 requires a subsequent collecting bank's previously 
applied electronic indorsement to be overlaid by the reconverting bank 
on the back of a substitute check very close to the trailing edge.
---------------------------------------------------------------------------

    \13\ When looking at a check from the front, the leading edge is 
the right edge of the check and the trailing edge is the left edge 
of the check.
---------------------------------------------------------------------------

    The Board believes that, in light of technical constraints, 
existing check sorting equipment will not be able to modify in real 
time the location of the indorsements that the equipment sprays onto a 
check based on whether the check is an original check or a substitute 
check. The Board therefore proposes that the appendix's current 
location specifications would apply to indorsements printed on original 
checks and indorsements printed on existing substitute checks. Banks 
that do not create substitute checks generally would comply with the 
amended appendix D requirements by indorsing original checks and 
existing substitute checks exactly as they indorse original checks 
today. However, the Board proposes to amend appendix D to include new 
indorsement locations with which a reconverting bank must comply when 
it creates a substitute check. These locations would conform to ANS 
X9.90's location specifications for indorsements applied to a 
substitute check by a reconverting bank.
    The Board also notes that ANS X9.90 provides that an image of an 
original check will be reduced in size when placed on a substitute 
check. Images of business-sized checks will be reduced to about 65 
percent of their original size and images of personal-sized checks will 
be reduced to about 80 percent of their original size. Because of this 
size reduction, the location of an indorsement, particularly a 
depositary bank indorsement, sprayed on an original paper check likely 
will change when a reconverting bank creates a substitute check that 
contains that indorsement within the image of the original paper check. 
The Check 21 Act places ultimate liability on the reconverting bank for 
certain losses related to substitute checks. The Board believes that 
the reconverting bank also should bear the liability under Sec.  
229.38(d)(1) (which allocates liability for losses due to illegible 
indorsements) for any loss that results due to the shift in the 
placement of the indorsement. The Board proposes to amend that section 
and its commentary to explain this reconverting bank liability.
    Appendix D currently requires depositary bank indorsements to be 
printed in dark purple or black ink and requires all other indorsements 
to be printed in an ink color other than purple. The Board does not 
believe that the use of differing ink colors significantly aids 
returning banks' ability to identify the depositary bank indorsement. 
However, the Board does believe that it is important for all 
indorsements to be printed in dark ink so that they can be easily read 
and imaged. The Board further believes that all indorsements that a 
reconverting bank prints onto a substitute check at the time that the 
substitute check is created will be printed in a single ink color, 
likely black. The Board therefore proposes to require all indorsements, 
including the depositary bank indorsement, to be printed in black ink.
    Current appendix D requires a depositary bank to include its name 
and location in its indorsement. However, ANS X9.37 does not include 
this data in an electronic depositary bank indorsement record, and as a 
result this data will not be included when a reconverting bank overlays 
a depositary bank indorsement onto a substitute check. Nevertheless, a 
depositary bank that sprays its indorsement onto a check may wish to 
include this information in its indorsement to limit the number of 
locations at which it must accept returned checks. The Board therefore 
proposes to permit but not require the inclusion of the depositary 
bank's name and location in its indorsement.
    Appendix D currently does not contain any content requirements for 
returning bank indorsements and implicitly permits the indorsements to 
be placed on the front of the check. Under ANS X9.90, however, a 
returning bank that also is a reconverting bank with respect to a 
substitute check must be identified as such on the back of the check. 
The Board therefore proposes to

[[Page 1475]]

amend appendix D to require returning bank indorsers to comply with the 
same indorsement requirements as collecting banks. Specifically, the 
Board proposes to require that a subsequent collecting bank or 
returning bank indorsement be applied to the back of a check and 
include only (1) the bank's nine-digit routing number, and, if the 
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. The Board requests comment on what benefits, if 
any, there would be in providing returning banks with the flexibility 
to indorse on the front of checks and to include additional information 
in their indorsements.
    The Board notes that Regulation CC does not require paying banks to 
indorse checks. To facilitate compliance with section 4 of the Check 21 
Act, however, a paying bank that also is a reconverting bank with 
respect to a substitute check should be identified as such on the check 
in a manner that a subsequent reconverting bank can preserve.\14\ The 
Board therefore proposes to amend appendix D to require a paying bank 
that is also a reconverting bank with respect to a substitute check to 
identify itself as such by placing on the back of the check its nine-
digit routing number (without arrows) and an asterisk at each end of 
the number. This identification would not constitute an indorsement.
---------------------------------------------------------------------------

    \14\ If the paying bank were a reconverting bank and did not 
identify itself as such on the back of the check, then the only 
place the paying bank would be identified as a reconverting bank 
would be the routing number of the paying bank, surrounded by 
asterisks, on the front of the check (according to ANS X9.90). If 
the substitute check were subsequently converted to electronic form 
and reconverted to paper, the identification of the paying bank as a 
reconverting bank on the front of the check would be lost, because 
its routing number would be replaced with the identification of the 
subsequent reconverting bank. This would place the subsequent 
reconverting bank in violation of the Check 21 Act's requirement 
``to preserve any previous reconverting bank identifications'' (see 
section 4(d) of the Check 21 Act).
---------------------------------------------------------------------------

    Finally, for purposes of clarity, the Board proposes other 
technical amendments to appendix D.
    The Board requests comment on all aspects of the proposed 
indorsement and identification standards discussed above.

E. Section 229.51 General Provisions Governing Substitute Checks

1. Legal Equivalence and Agreement
    Section 4(b) of the Check 21 Act provides that a substitute check 
is the legal equivalent of the original check for all purposes and all 
persons if the check contains an accurate image of the front and back 
of the original check and bears a specified ``legal equivalence'' 
legend. Although section 4(b) does not mention warranties as a 
precondition of legal equivalence, section 4(a) provides that any 
person may deposit, present, collect, or return a substitute check 
without the agreement of the recipient so long as a bank has made the 
substitute check warranties with respect to that check. Section 4(a) 
clearly intends that persons are required to accept a substitute check 
without agreement only if a bank has provided the substitute check 
warranties. The Board therefore believes that section 4(a) in effect 
requires a bank warranty as another prerequisite of legal equivalence. 
Section 229.51(a) of the proposed rule would make this requirement 
explicit by providing 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.
    The proposed commentary to Sec.  229.51(a) reiterates that a 
substitute check created by a person other than a bank can be 
transferred only by agreement unless and until a bank makes the 
substitute check warranties with respect to that check. The proposed 
commentary clarifies that a substitute check created by a person who is 
not a bank therefore cannot be the legal equivalent of the original 
check absent a bank's agreement to make the substitute check 
warranties. The commentary also provides clarification about what 
information on the check must be accurately represented as a 
prerequisite for legal equivalence. Finally, the commentary to Sec.  
229.52(b)(2) states that the legal equivalence legend must use the 
language specified in that section.
2. Reconverting Bank Duties
    Proposed Sec.  229.51(b)(1)-(2) contains the reconverting bank 
duties described in sections 4(c) and 4(d) of the Check 21 Act 
regarding indorsements and identifications. In addition, Sec.  
229.51(b)(3) requires a reconverting bank to identify the bank that 
truncated the original check. The Board proposes to impose this 
requirement by regulation because ANS X9.90 requires identification of 
the truncating bank and because it is likely that banks in the 
collection and return chain would want to identify the truncating bank 
if there were a problem with a substitute check because the truncating 
bank would be in the best position to provide the original check or 
additional information about the original check. The proposed 
regulation requires the reconverting bank and truncating bank 
identifications to be applied in accordance with generally applicable 
industry standards and with appendix D of Regulation CC.
    The proposed commentary to Sec.  229.51 provides that, although a 
reconverting bank is responsible for preserving all previously-applied 
indorsements, it is not responsible for obtaining indorsements that 
should have been applied but were not. The proposed commentary also 
notes that some previously applied indorsements will be preserved 
because they will be shown on a substitute check's image of the back of 
the original check, whereas the reconverting bank must physically apply 
to the back of the substitute check any previous indorsements that were 
applied electronically. The proposed commentary also notes that, under 
appendix D, the reconverting bank indorsement and identification are 
set off with asterisks and the truncating bank identification is set 
off with brackets. The proposed commentary also makes clear that 
preservation of a previous reconverting bank's indorsement (or 
identification, if the reconverting is the paying bank) set off by 
asterisks on the back of the check also satisfies the requirement of 
preserving the previous reconverting bank's identification.
3. Legal Status of an Item That Purports To Be a Substitute Check But 
Is Not
    As described in the discussion above concerning the definition of a 
substitute check, a reproduction of an original check that does not 
have the same MICR line as the original check would not be a substitute 
check. However, the Board believes that a bank that transfers such an 
item as if that item were a substitute check should not be allowed to 
evade the requirements of the Check 21 Act and subpart D simply because 
the item it created failed to meet the substitute check definition.\15\ 
To protect recipients of such items and to provide incentives for 
reconverting banks to ensure that they only transfer items that comply 
with subpart D, the proposed rule provides that the recipient of an 
item that purports to be but is not a substitute check has warranty and 
indemnity rights, and, where applicable, recredit and consumer 
awareness disclosure rights under subpart D as though the item were a 
substitute check. The Board requests comment on whether an item

[[Page 1476]]

that fails to meet any of the other the substitute check requirements 
in Sec.  229.2(zz) also should be treated as though it were a 
substitute check for those limited purposes.
---------------------------------------------------------------------------

    \15\ An item could purport to be a substitute check, for 
example, if it contained the legal equivalence legend or if a person 
provided the item when applicable law required production of the 
original check.
---------------------------------------------------------------------------

4. Applicable Law
    Proposed Sec.  229.52(c) incorporates the Check 21 Act's provision 
stating that a substitute check that meets the legal equivalence 
requirements is subject to any existing federal or state law as though 
it were the original check, to the extent that such provision is not 
inconsistent with the Check 21 Act. The proposed commentary to this 
section clarifies that a law is not inconsistent with the Check 21 Act 
merely because it allows for the recovery of additional damages.

F. Section 229.52 Substitute Check Warranties

    Proposed Sec.  229.52 of the rule implements section 5 of the Check 
21 Act, which contains new warranties relating to substitute checks. 
For purposes of clarity, the proposed rule is organized differently 
than the Check 21 Act.
1. Content and Provision of the Substitute Check Warranties
    Proposed Sec.  229.52(a) sets forth the content of the substitute 
check warranties and identifies the banks that provide, and the events 
that trigger provision of, those warranties. The warranties are (1) 
that the substitute check meets the requirements for legal equivalence 
(i.e., that the substitute check accurately represents the information 
on the front and back of the original check and bears the legal 
equivalence legend) and (2) that no depositary bank, drawee, drawer, or 
indorser will be asked to make payment based on a check that it already 
has paid.
    In describing the second warranty, the Check 21 Act provides that 
none of the named parties will receive ``presentment or return'' of an 
item such that it will be asked to make a duplicative payment. However, 
one such recipient, the drawer, typically would not receive presentment 
or return of a check but rather would have its account charged for the 
check. The proposed rule therefore states that the named parties will 
not receive presentment or return of, or otherwise be charged for, a 
duplicative item.
    The Check 21 Act states that each of the two warranties is made 
when a bank transfers, presents, or returns a ``substitute check'' for 
consideration. However, the list of warranty recipients, which includes 
persons that received some other paper or electronic form of the 
substitute check, indicates that banks continue to provide the 
warranties even if they transfer and receive consideration for 
something that is not, but that was derived from, a substitute check. 
Section 229.52(a) of the proposed rule therefore provides specifically 
that a bank makes the warranties when it transfers, presents, or 
returns for consideration the substitute check or any paper or 
electronic representation of a substitute check.
    The Board notes that the Check 21 Act and the proposed rule state 
that the warranty against duplicative presentment or return applies 
such that the depositary bank, drawee, drawer, or indorser will not 
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 that person ``will be asked to make 
a payment based on a check'' it already has paid. This language could 
be read to exclude a situation where a second charge results from an 
ACH debit that was created using information from an original check or 
substitute check.\16\ However, such an ACH debit arguably could be 
considered ``an electronic version'' of a substitute check or original 
check to which the duplicative payment warranty would apply. The Board 
specifically requests comment on whether using information from a check 
to create an ACH debit entry should be a payment request covered by 
this warranty.
---------------------------------------------------------------------------

    \16\ Such ``check conversions'' are covered under the Board's 
Regulation E and rules of the National ACH Association as electronic 
fund transfers rather than check transactions and are not, to the 
Board's knowledge, treated as check transactions for any other 
purpose.
---------------------------------------------------------------------------

    The proposed commentary to Sec.  229.52(a) clarifies that the 
reconverting bank is the first bank to provide the substitute check 
warranties. That discussion also notes that, when a bank is a 
reconverting bank because it by agreement receives a substitute check 
that a nonbank created, the reconverting bank starts the warranty chain 
for that substitute check even if the reconverting bank transfers an 
electronic representation of that substitute check instead of the 
actual substitute check that it received. The proposed commentary also 
clarifies that a bank that by agreement transfers an electronic version 
of an original check prior to the creation of the first substitute 
check does not make the substitute check warranties, but that parties 
to the agreement can allocate amongst themselves liabilities associated 
with the substitute check warranties. Moreover, the proposed commentary 
discusses the mechanics of each of the two warranties, including how 
they apply when multiple substitute checks are created with respect to 
the same payment transaction.
2. Warranty Recipients
    Section 5 of the Check 21 Act provides that warranties are provided 
to ``the transferee, any subsequent collecting or returning 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) * * * '' Although Sec.  229.52(b) of the proposed rule lists all 
these persons as warrantees, it does so in a slightly different manner 
than the statute. The warranties are intended to flow forward to all 
persons, including the paying bank, that received a substitute check or 
any paper or electronic representation of a substitute check, but not 
backward to persons that handled only the original check or some 
representation of the original check that was not derived from a 
substitute check. The rule therefore states that the warranties are 
provided to the recipient and any subsequent recipient, including all 
of the parties specifically listed in the statute, regardless of 
whether the recipient received the substitute check or another paper or 
electronic representation of the substitute check. The proposed 
commentary to Sec.  229.52(b) provides additional discussion about the 
flow of the warranties.

G. Section 229.53 Substitute Check Indemnity

1. Scope of Indemnity
    Section 6 of the Check 21 Act specifies the scope and amount of the 
substitute check indemnity, and the proposed rule incorporates this 
section largely unchanged. The proposed rule states that 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. As with the proposed rule's language regarding 
the scope of the warranties, discussed in detail in the analysis of 
Sec.  229.52, the proposed

[[Page 1477]]

language regarding the scope of the substitute check indemnity 
clarifies that the indemnity flows to subsequent, not prior, parties 
that receive a substitute check or a representation of a substitute 
check.
    The proposed commentary regarding the scope of the indemnity 
highlights that the indemnity applies only if the first indemnified 
party incurred a loss due to receipt of the substitute check instead of 
the original check. However, a bank that paid an indemnity (other than 
the first reconverting bank) would in turn be eligible to make an 
indemnity claim even if that bank only received a representation of a 
substitute check. Thus, the indemnity covers losses suffered directly 
due to the receipt of a substitute check instead of the original check 
and losses incurred by providing an indemnity to another person. The 
proposed commentary provides several examples to illustrate the scope 
of the indemnity.
2. Indemnity Amount
    The proposed rule incorporates the statutory language regarding the 
indemnity amount with minor clarifications. The rule provides that the 
amount of the indemnity is (1) the amount of any loss (including 
interest, costs, reasonable attorney's fees, and other expenses of 
representation) caused by the breach of a substitute check warranty, or 
(2) in the absence of a breach of a substitute check warranty, the 
amount of the loss, up to the amount of the substitute check, plus 
interest and expenses (including costs and reasonable attorney's fees 
and other expenses of representation). The proposed rule supplements 
the statutory language by specifically stating that interest would be 
included in the damages proximately caused by a breach of a substitute 
check warranty.
    The proposed rule also incorporates statutory provisions regarding 
reduction of the indemnity amount. Section 229.53(b)(2) of the proposed 
rule states that the indemnity amount described in the preceding 
paragraph will be reduced in proportion to the amount of negligence or 
bad faith of the party making the indemnity claim, but that nothing in 
that comparative negligence section reduces any person's rights under 
the U.C.C. or other applicable law. Section 229.53(b)(3) of the 
proposed rule provides that an indemnifying bank will be liable only 
for losses incurred up to the time that it produces the original check 
or a sufficient copy of the original check, although production of that 
item does not absolve the indemnifying bank from liability for 
breaching a substitute check warranty or a warranty established under 
any other law.
    The proposed commentary to Sec.  229.53(b) provides examples that 
illustrate the amount of the indemnity under various sets of facts.
3. Subrogation of Rights
    Section 229.53(c) of the proposed rule incorporates section 6(e) of 
the statute by providing that an indemnifying bank shall be subrogated 
to the rights of the party it indemnified to the extent of the 
indemnity provided and may attempt to recover from another party based 
on a warranty or other claim. This section also provides that the 
indemnified party has a duty to comply with reasonable requests for 
assistance made by the indemnifying bank with respect to such a claim. 
The proposed commentary provides an example of what would constitute a 
reasonable request for assistance.

H. Section 229.54 Expedited Recredit for Consumers

    Section 7 of the statute sets forth the circumstances giving rise 
to a consumer expedited recredit claim, the time period and procedures 
for making such a claim, the conditions for a recredit, the timing and 
availability of a recredit, a bank's ability to reverse a recredit on a 
later determination that the consumer's claim was not valid, and the 
notices a bank must provide in connection with recredit claims. Section 
229.54 of the proposed rule implements all of these provisions but 
reorganizes them for purposes of clarity. The Board also proposes to 
supplement the statutory text in certain respects in order to 
explicitly acknowledge certain actions that are implicit in the text of 
the statute.
1. Circumstances Giving Rise to a Claim
    Section 229.54(a) of the proposed rule provides that a consumer may 
make an expedited recredit claim under that 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 the 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 of the original check is necessary to determine whether 
or not the substitute check in fact was improperly charged or whether 
the consumer's warranty claim is valid. This section implements 
sections 7(a)(1) and 7(h) of the Check 21 Act with some organizational 
changes.
    The proposed commentary on the circumstances giving rise to a claim 
provides additional detail concerning when a consumer would and would 
not meet the criteria for bringing an expedited recredit claim under 
Sec.  229.54. For example, the commentary clarifies that a consumer who 
receives only an image statement that contains an image of a substitute 
check cannot make a claim because he or she has not actually received a 
substitute check, although such a consumer would have redress for an 
improper charge associated with the substitute check under the U.C.C. 
and might have a claim for breach of a substitute check warranty. The 
commentary also notes that the warranty giving rise to a Sec.  229.54 
claim could be a substitute check warranty or any other warranty 
provided to the consumer in connection with the substitute check. The 
commentary further notes that recovery under Sec.  229.54 is limited to 
the amount of the substitute check, plus interest if the consumer has 
an interest-bearing account, although a consumer may be able to recover 
additional amounts under other law, including Sec. Sec.  229.52 and 
229.53 of the proposed rule.
2. Procedures for Making Claims
    a. Timing of Claim. The Check 21 Act states that a consumer's 
expedited recredit claim is due before the end of the 40-day period 
beginning on the later of the date that the bank mailed or delivered to 
the consumer the periodic account statement that contains information 
about the transaction giving rise to the claim or the date on which the 
bank made the substitute check available to the consumer. Section 
229.54(b)(1)(i) of the proposed rule implements this provision. The 
proposed rule clarifies that the 40-day time period refers to calendar 
days and that a bank makes a substitute check ``available'' by mailing 
or delivering it to the consumer.
    The statute provides that the bank must extend the consumer's time 
for making a claim by a reasonable period of time if the consumer 
cannot meet the 40-day deadline due to extenuating circumstances, such 
as his or her extended travel or illness. Section 229.54(b)(1)(ii) of 
the proposed rule includes the general provision regarding the time 
extension but moves to the commentary the specific examples of what 
constitutes an extenuating circumstance. This parallels the

[[Page 1478]]

approach the Board took when implementing the Electronic Fund Transfer 
Act (see 15 U.S.C. 1693(g) and 12 CFR 205.6(b)(4)).
    b. Content of Claim. Section 229.54(b)(2) of the proposed rule 
states that the consumer's claim must include (1) 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; (2) a 
statement that the consumer suffered a loss and an estimate of the 
amount of that loss; (3) the reason why production of the original 
check or a sufficient copy of the original check 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 (4) sufficient 
information to allow the bank to identify the substitute check and 
investigate the claim. The proposed rule uses the defined term 
``sufficient copy,'' as opposed to the Check 21 Act's ``better copy,'' 
of the original check. As defined, a sufficient copy by its nature 
would be a better copy.
    The proposed commentary to Sec.  229.54(b)(2) discusses in more 
detail the reasons why a charge to the consumer's account could be 
improper and why the original check or a sufficient copy would be 
necessary to determine the validity of the consumer's recredit claim. 
The proposed commentary also discusses what types of information a 
consumer should provide to facilitate the bank's investigation of a 
claim.
    c. Form and Submission of Claim. Section 229.54(b)(3) of the 
proposed rule incorporates the statutory provisions regarding the 
bank's ability to require a consumer to submit an expedited recredit 
claim in writing and the bank's ability to accept a written submission 
electronically. The proposed commentary to Sec.  229.54(b)(3) clarifies 
that a bank that requires a claim to be in writing must inform the 
claimant of that requirement and also indicates that a communication, 
whether oral or written, that does not contain all the required 
information does not constitute a ``claim'' under Sec.  229.54.
    Although the statute states that a bank may permit an electronic 
submission ``if the consumer has agreed to communicate with the bank in 
that manner,'' the proposed rule omits the quoted language. The Board 
believes that a consumer's act of submitting a claim electronically 
indicates the consumer's agreement to communicate electronically, such 
that the statute's agreement language is unnecessary. However, the 
proposed commentary notes that a bank cannot require a consumer to 
submit a written claim electronically.
    The proposed rule also clarifies that a bank that requires the 
consumer's claim to be in writing must compute the time period for 
acting on the claim from the date that the consumer submitted the 
written claim, even if the consumer previously provided some 
information relating to the claim in another form.\17\ In addition, the 
statute measures time from the ``business day'' (defined as any day, 
other than a Saturday, Sunday, or legal holiday) on which the bank 
received a claim. However, the Board proposes to incorporate the term 
``banking day,'' as it has for other parts of Regulation CC. Banking 
day means ``that part of any business day on which an office of a bank 
is open to the public for carrying on substantially all of its banking 
functions.'' The Board believes that ``banking day'' is an appropriate 
term when referring to the time at which a bank must begin measuring 
the time period for action. The Board requests comment on both of these 
adjustments relating to time period calculations.
---------------------------------------------------------------------------

    \17\ The commentary to this provision clarifies that a bank that 
requires expedited recredit claims to be in writing must inform the 
consumer.
---------------------------------------------------------------------------

3. Action on Claims
    Section 7(c)(1) of the Check 21 Act requires a bank that receives a 
complete and timely claim for which all the prerequisites are met to 
recredit the consumer's account for the amount of the substitute check, 
plus interest if the consumer's account is an interest bearing account, 
unless the bank has provided the original check or a sufficient copy to 
the consumer and demonstrated to the consumer that the substitute check 
was properly charged to his or her account. Section 7(c)(2) of the 
Check 21 Act requires the bank to provide the recredit no later than 
the end of the business day following the business day on which the 
bank determined that the consumer's claim was valid or, if the bank has 
not yet determined the validity of the claim, before the end of the 
10th business day after the business day on which the consumer 
recredited the claim. Section 7(c)(2) limits the amount that the bank 
is required to provide on the 10th day to the amount of the loss, up to 
the lesser of the amount of the substitute check or $2,500, plus 
interest, and requires the bank to provide the additional amount of the 
substitute check, if any, on the 45th calendar day following the 
business day on which the consumer submitted the claim. Section 7(e) of 
the Check 21 Act provides that a bank may reverse a recredit if it 
determines that the substitute check in question was properly charged 
to the consumer account and if it notifies the consumer.
    The proposed rule incorporates each of the Check 21 Act's 
substantive requirements regarding action on a consumer's expedited 
recredit claim but reorganizes those requirements in a way that the 
Board believes is more straightforward. The Board requests comment on 
whether or not its proposed reorganization of the statutory provisions 
regarding action on claims is an improvement over the statutory 
organization and encourages commenters to provide specific 
organizational suggestions.
    Section 229.54(c)(1) of the proposed rule provides that one of the 
bank's options for responding to a recredit claim is affirmatively to 
determine a consumer's claim to be valid. Although the statute does not 
list this possible response explicitly, the bank's ability to respond 
to a claim by determining that the claim is valid is implicit in the 
``timing of the recredit'' section of the statute (section 7(c)(2)(A)), 
which requires the bank to provide a recredit the day after it 
determines that the consumer's claim is valid.
    The statute provides that if a bank determines that the consumer's 
claim is not valid, the bank must provide the consumer with the 
original check or a copy of the original check sufficient to determine 
the validity of the claim and must demonstrate why the substitute check 
was properly charged to the consumer account. Because the statute 
provides that a warranty claim may be the basis of a consumer's 
expedited recredit claim, Sec.  229.54(c)(2), by reference to Sec.  
229.54(e)(2), of the proposed rule requires the bank either to 
demonstrate that a charge was proper or to explain why the warranty 
claim is not valid, as appropriate in light of the consumer's claim.
    Section 7(c) of the statute states that a bank must recredit the 
amount of the substitute check, plus interest if the account is an 
interest-bearing account. However, recrediting the full amount of the 
check could create overcompensation in some cases, such as where the 
consumer's allegation is that the bank charged the substitute check for 
the wrong amount. Section 229.54(c) of the proposed rule therefore 
provides that a bank must recredit the amount of the loss, up to the 
amount of the substitute check plus interest.
    If, after providing a recredit, a bank later determines that the 
consumer's claim is not valid, Sec.  229.54(c)(4) of the

[[Page 1479]]

proposed rule would allow the bank to reverse both the amount it 
previously recredited plus any interest that it has paid on that 
amount. The statute does not explicitly address the reversal of 
interest when reversing a recredit, and the Board specifically requests 
comment on whether the proposed approach is appropriate.
    The proposed commentary to Sec.  229.54(c) clarifies that a bank 
that receives claims for multiple substitute checks in the same 
communication must provide the expedited recredit for each such check 
by the 10th day after submission, unless the bank by that date has 
determined whether or not the claims are valid. The commentary also 
clarifies that a bank may, when appropriate, reverse any amount that it 
previously recredited, regardless of whether such amount originally was 
provided after a determination that a claim was valid or pending the 
bank's investigation of the claim. The Board requests comment on 
whether additional commentary to Sec.  229.54 would be useful and, if 
so, what specific points should be covered.
4. Availability of Recredit
    Section 7(d) of the statute provides that a bank can delay the 
availability of a recredit if the account is a new account or has been 
repeatedly overdrawn in the last six months, or if the bank has 
reasonable cause to suspect fraud. The proposed rule incorporates the 
statutory language with minor clarifications. The statute states that 
the new account exception applies if ``the claim is made'' within 30 
days of establishment of the account, whereas the proposed rule 
provides that the exception applies if ``the consumer submits the 
claim'' within 30 days. This change clarifies when a claim ``is made'' 
in a manner that is consistent with the other time period calculations 
in the statute and proposed rule. The rule also reorganizes the 
language in the exception for prevention of fraud losses to parallel 
the existing exception for reasonable cause to doubt collectibility in 
Sec.  229.13.
    The proposed commentary to Sec.  229.54(d) clarifies that the 
availability of recredits provided under Sec.  229.54(c) is governed 
solely by Sec.  229.54(d) and thus is not subject to subpart B. The 
commentary also clarifies that the periods in Sec.  229.54(d) are the 
maximum periods that the bank may delay availability. In addition, the 
commentary clarifies that the bank may delay availability of a recredit 
under Sec.  229.54(d) only with respect to the amount of the substitute 
check that the bank recredits under Sec.  229.54(c)(3)(i) pending 
investigation of the consumer's claim.
5. Notices Relating to Consumer Expedited Recredit Claims
    Section 229.54(e) of the proposed rule describes the notices 
required by the statute when a bank provides or reverses a recredit or 
denies a consumer's recredit claim. The proposed rule provides that a 
bank that recredits a consumer account must, no later than the business 
day after the banking day on which the bank provides the recredit, 
notify the consumer of the amount of the recredit and the date on which 
the recredited funds will be available for withdrawal.
    The proposed rule requires a bank that determines that a consumer's 
claim is not valid to notify the consumer no later than the business 
day after the banking day on which the bank makes its determination. 
The proposed rule provides that an invalid claim notice must include an 
explanation of the basis for the bank's determination that the 
substitute check was properly charged or the consumer's warranty claim 
is not valid, plus the original check or a sufficient copy of the 
original check. The statute requires a bank that denies a consumer's 
expedited recredit claim to notify the consumer that he or she may 
request the information or documents on which the bank relied in making 
its determination. However, the proposed rule allows a bank that relies 
on information or documents in addition to the original check or 
sufficient copy to provide such information or documents with the 
notice or to indicate that the consumer may obtain them on request.
    The proposed rule provides that a bank that reverses an amount it 
previously credited to a consumer account must notify the consumer no 
later than the business day after the banking day on which the bank 
made the reversal. This notice must include the information required 
for an invalid claim notice, plus the amount of the reversal, including 
both the amount of the recredit and the amount of paid interest, if 
any, being reversed, and the date on which the bank made the reversal.
    The proposed commentary to Sec.  229.54(e) clarifies that a bank 
may provide a required notice by U.S. mail or by any other means 
through which the consumer has agreed to receive account information. 
The commentary highlights that, if a bank is required to provide an 
original check or sufficient copy as part of the notice, a bank that 
provides a notice electronically satisfies that requirement by 
providing an electronic image of the original check or sufficient copy, 
if the consumer has agreed to receive that information electronically.
    As discussed in the analysis of appendix C, the Board proposes 
model language for each of the notices required by Sec.  229.54(e).

I. Section 229.55 Expedited Recredit for Banks

    Section 8 of the Check 21 Act provides that a bank may make a claim 
against an indemnifying bank if (1) the claimant bank or a bank that 
the claimant bank has indemnified has received a claim for expedited 
recredit from a consumer or 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 a consumer expedited recredit 
with respect to such substitute check or otherwise has suffered a 
resulting loss; and (3) the production of the original check or a 
sufficient copy of the original check 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. The content 
requirements for an interbank expedited recredit claim essentially 
parallel those for a consumer expedited recredit claim but also state 
that a bank that provides a copy of a substitute check with its claim 
must take steps to ensure that such copy is not mistaken for a legally 
equivalent substitute check or handled for forward collection or 
return. An indemnifying bank may require the claim to be in writing and 
may permit the claimant bank to submit it electronically.
    A claimant bank must bring its claim under section 8 of the Check 
21 Act within 120 days of the transaction that gave rise to the claim, 
and the indemnifying bank must respond within 10 business days of 
receiving the claim by providing (1) a recredit, (2) the original check 
or a sufficient copy, (3) or information to the claimant bank as to why 
the indemnifying bank is not obligated to do (1) or (2). If the 
claimant bank later receives or reverses a recredit or otherwise 
receives compensation for the substitute check for which the 
indemnifying bank previously provided a recredit, then the claimant 
bank must reimburse the indemnifying bank. An indemnifying bank that 
provides an original check or sufficient copy also may be entitled to a 
refund under Sec.  229.53 if it has provided a recredit that exceeds 
the losses the claimant bank sustained up to the day that the 
indemnifying bank provided the original check or sufficient copy.

[[Page 1480]]

    The proposed rule implements section 8 of the statute with some 
minor organizational and clarifying changes. The rule clarifies that 
bank action on a claim is required by ``the end of'' the 10th business 
day after the relevant banking day, consistent with the parallel 
consumer recredit provision. Moreover, the proposed rule clarifies 
that, when an indemnifying bank requires a claim to be in writing, the 
10-day period commences with the receipt of the written claim.
    The proposed rule also clarifies both paragraphs of the Check 21 
Act regarding the indemnifying bank's right to a refund. Section 
7(c)(3) of the statute states that the ``claimant bank must refund * * 
* any amount previously advanced by the indemnifying bank.'' Without 
further elaboration, this provision could be read to mean that a 
claimant bank must give to the indemnifying bank more than the claimant 
bank recovered.\18\ The rule makes clear that a claimant bank that 
receives other compensation for the substitute check does not have to 
refund to the indemnifying bank more than the claimant bank previously 
recovered from the indemnifying bank. In addition, section 8(d) of the 
statute provides that an indemnifying bank that produces the original 
check or a sufficient copy has the right to a refund under the 
indemnity section. Section 229.55(e)(2) of the proposed rule clarifies 
the statutory language by describing the amount to be refunded under 
that provision.
---------------------------------------------------------------------------

    \18\ For example, if the claimant bank received a recredit for 
$150 and then received a subsequent recovery for $100, the refund to 
the indemnifying bank should be the amount of the recovery ($100) 
rather than the entire amount previously advanced ($150).
---------------------------------------------------------------------------

    The proposed commentary to Sec.  229.55 elaborates on the rule text 
in several respects. The commentary highlights that a bank could have a 
recredit claim either because it is obligated to provide a recredit to 
a consumer or another bank or because it has suffered a loss as result 
of catching a substitute check problem that, if uncaught, could have 
given rise to a consumer expedited recredit claim. The commentary 
provides examples about the types of losses that could give rise to 
consumer claim and the circumstances under which a bank could bring a 
valid claim. The commentary also provides additional information 
relating to the procedures for making claims.

J. Section 229.56 Liability

    The Check 21 Act provides for delays in an emergency in section 9, 
the measure of damages in section 10, and the statute of limitations 
and notice of claims in section 11. Section 229.56 of the proposed rule 
incorporates each of those sections with minor technical changes in a 
manner that parallels existing subpart C liability provisions in Sec.  
229.38.
    Section 229.56 (a) of the proposed rule provides that the amount of 
damages recoverable for a breach of a substitute check warranty or 
failure to comply with any provision of subpart D generally is limited 
to the amount of the loss or the substitute check, whichever is less, 
plus interest and expenses relating to the substitute check. This 
section contains exceptions, however, noting that a person could 
recover more than the generally applicable amount by bringing an 
indemnity claim or could recover less than the generally applicable 
amount if the person's negligence or bad faith contributed to the loss 
or if the person obtained a recredit under Sec.  229.54 or Sec.  
229.55.
    Section 229.56(b) of the proposed rule states that delay by a bank 
beyond the time periods described in subpart D is excused if such delay 
is attributable to one of the causes specified in that paragraph.
    Section 229.56(c) of the proposed rule specifies the courts in 
which a person may bring an action to enforce subpart D and provides 
that such an action must be brought within one year after the cause of 
action accrues. The statute provides that a cause of action accrues as 
of the date the injured party first learns or reasonably should have 
learned of the facts and circumstances giving rise to the cause of 
action. The proposed rule clarifies that one of the facts and 
circumstances included in the concept of accrual is the identity of the 
bank against which the action is to be brought. This clarification is 
intended to make the date from which the statute of limitations is 
measured correspond to the date from which timely notice of a claim is 
measured.
    Section 229.56(d) generally provides that, unless a person gives 
notice of a Sec.  229.56 claim 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 indemnifying or warranting bank, the 
warranting or indemnifying bank is discharged from liability in an 
action to enforce a claim under subpart D to the extent of any loss 
caused by the delay in giving notice of the claim. However, this 
paragraph also states that a timely recredit claim by a consumer under 
Sec.  229.54 constitutes timely notice under this paragraph.
    The proposed commentary to Sec.  229.54 briefly elaborates on each 
of the four paragraphs of that section in a manner that corresponds to 
the commentary for Sec.  229.38.

K. Section 229.57 Consumer Awareness

    This section of the proposed rule implements section 12 of the 
Check 21 Act, which requires a bank to provide a consumer awareness 
disclosure regarding substitute checks and substitute check rights to 
each consumer ``who receives original checks or substitute checks.'' 
The Board believes that the quoted language, when read with the 
statutory provisions governing distribution of notices, indicates that 
section 12 disclosures are intended only for (1) consumers who 
routinely receive paid checks with their account statements and (2) 
other consumers who receive substitute checks only on a case-by-case 
basis. The proposed rule reflects this interpretation.
    The proposed rule specifically notes that, unless the bank already 
has provided the disclosure, a case-by-case disclosure is required when 
(1) a consumer receives a substitute check in response to his or her 
specific request for an original check or a copy of a check or (2) a 
check deposited by a consumer is returned unpaid to the consumer's 
account in the form of a substitute check. The Check 21 Act requires 
that when a bank provides a substitute check to a consumer in response 
to the consumer's request for a check, the bank must provide the 
consumer disclosure at the time of the request. This requirement may be 
impractical, however, as the bank may not know at the time of the 
request whether it will provide the original check, a substitute check, 
or some other copy of the check. Requiring the bank to provide the 
disclosure at the time of the request could prove unnecessarily 
burdensome to the bank and confusing to the consumer, because the 
consumer would receive a disclosure describing rights that may not 
apply to the item the consumer ultimately receives. The Board therefore 
has proposed two alternative rule provisions regarding when a bank must 
provide the disclosure to a consumer who requests a copy of a check. 
One alternative tracks the statute and requires a bank to provide the 
disclosure at the time of the request, but the other alternative 
requires provision of the disclosure at the time the bank provides the 
substitute check to the consumer. The Board specifically requests 
comment on which of these alternatives is preferable.
    The proposed commentary to Sec.  229.57 indicates that a bank may 
use the model substitute check disclosure in appendix

[[Page 1481]]

C and will be deemed to comply with the disclosure content 
requirement(s) for which it uses the model disclosure. The commentary 
also provides examples of when a bank must distribute the required 
disclosure.

L. Section 229.58 Mode of Delivery

    The Check 21 Act discusses in several places the form in which a 
bank must provide required information. The proposed rule, by contrast, 
has a separate section regarding mode of delivery that applies to the 
entire subpart. Section 229.58 provides that a bank may provide any 
information required by subpart D by U.S. mail or by any other means 
through which the recipient has agreed to receive account information. 
This section also specifically allows a bank that is required to 
provide an original check or a sufficient copy to provide an electronic 
version of the relevant paper document if the recipient has agreed to 
receive that information electronically. This latter provision 
addresses the potential inconsistency between section 7(f)(2) as 
interpreted at Sec.  229.54(e)(2), which requires a bank denying a 
consumer's recredit claim to provide the original check or a sufficient 
copy (each of which is by definition a piece of paper), with section 
7(f)(4), which permits a bank to provide the notices (which presumably 
means all components of the notice) electronically.

M. Section 229.59 Relation to Other Law

    This section of the proposed rule implements section 13 of the 
Check 21 Act by stating that the Check 21 Act and subpart D supersede 
any provision of federal or state law, including the U.C.C., that is 
inconsistent with the Check 21 Act or subpart D, but only to the extent 
of the inconsistency.

N. Section 229.60 Variation by Agreement

    Section 229.60 of the proposed rule implements section 14 of the 
Check 21 Act by providing that any provision of Sec.  229.55 (expedited 
recredit for banks) may be varied by agreement of the banks involved, 
but that no other provision of subpart D may be varied by agreement by 
any person or persons.

O. Appendix C--Model Forms

    Section 12(c) of the Check 21 Act requires the Board to publish 
model forms that banks can use to satisfy the content requirements of 
the consumer awareness disclosure required by that section. Section 
229.57 of the proposed rule lists those content requirements. The 
statute provides that a bank that uses the model form published by the 
Board to comply with Sec.  229.57 shall be treated as complying with 
that section if the form accurately describes the bank's policies and 
practices.
    The Board proposes to include the required model disclosure as 
model C-5A in appendix C. The proposed model disclosure explains in 
very simple terms what a substitute check is, when the consumer 
expedited recredit right applies, and what a consumer must do to 
exercise that right. The Board requests comment on whether the proposed 
model disclosure is clear, accurate, and concise.
    Although not required by statute to do so, the Board also proposes 
to publish in appendix C models for the notices a bank must provide in 
response to a consumer's expedited recredit claim under section 7(f) of 
the Check 21 Act and Sec.  229.54(e) of the proposed rule. Although 
there is no statutory safe harbor that applies to the proposed model 
notices under Sec.  229.54(e), the Board nevertheless believes that 
these model notices may be helpful to banks in complying with the 
regulation. In light of the absence of a statutory safe harbor, the 
Board specifically requests comment on whether providing model language 
for the Sec.  229.54(e) notices is useful.
    The Board proposes technical amendments to the introductory 
paragraph and table of contents of appendix C to reflect the inclusion 
of the new disclosure and notices. The Board also proposes to amend the 
commentary to appendix C to clarify the appropriate use of the new 
models.

II. Other Amendments to Regulation CC

    The Board also is proposing at this time several amendments to 
existing Regulation CC and its commentary that are unrelated to the 
Check 21 Act. The Board requests comment on each of these proposed 
revisions and also welcomes comments about any other areas of the 
existing rule and commentary that should be clarified.

A. Section 229.2 Definitions

    The Board proposes to amend the commentary to the definition of 
local paying bank (Sec.  229.2(s)) to provide additional detail 
regarding how to determine whether deposits mailed to a central check 
processing facility are local or nonlocal.

B. Section 229.10 Next-Day Availability

    The Board proposes adding a sentence to the commentary to Sec.  
229.10(c) to clarify that a special deposit slip notice need not be 
posted at each teller window, although it must be posted in a place 
where consumers are likely to see it before making a deposit.

C. Section 229.13 Exceptions

    The Board proposes to amend the commentary to Sec.  229.13(g) 
regarding notices of exception holds to clarify that a bank providing 
such a notice electronically to a consumer must comply with the 
requirements of the Electronic Signatures in Global and National 
Commerce Act (the E-Sign Act).

D. Section 229.15 General Disclosure Requirements

    The Board proposes to amend the commentary to Sec.  229.15(a) 
regarding the general form of notices required by subpart B to clarify 
that a bank providing a notice electronically to a consumer must comply 
with the requirements of the E-Sign Act. The Board also proposes to 
explain in more detail in the commentary how a notice can be ``clear 
and conspicuous,'' as required in existing Sec.  229.15(a), and under 
what circumstances a bank may provide a required notice in a language 
other than English.

E. Section 229.30 Paying Bank's Responsibility for Return of Checks

    The Board proposes amending Sec.  229.30(c)(1) regarding the 
extension for the deadline of a return or notice of nonpayment under 
the U.C.C. or Regulation J. The current paragraph allows extensions 
when a paying bank uses a means of delivery that ordinarily would 
result in receipt by the receiving bank's next banking day. At least 
one court has interpreted the current provision to permit an extension 
of the midnight deadline even when the check was received by a 
returning bank at a time that was too late for the returning bank to 
process the check that day (see Oak Brook Bank v. Northern Trust, 2001 
U.S. App. LEXIS 15065 (7th Cir., 2001)). The proposed rule therefore 
would more specifically describe the applicable time of receipt to be 
the bank's cutoff hour for the next processing cycle (if sent to a 
returning bank) or next banking day (if sent to a depositary bank). 
This parallels the existing language in Sec.  229.30(c)(2). The Board 
proposes corresponding changes to the commentary to this section.

F. Section 229.33 Notice of Nonpayment

    The Board proposes deleting the phrase ``with question marks'' at 
the end of Sec.  229.33(b). Instead, the Board proposes to note in the 
commentary to

[[Page 1482]]

that section that a bank must identify an item of information if the 
bank is uncertain as to that item's accuracy by setting the item off 
with question marks, asterisks, or other symbols designated for this 
purpose by generally applicable industry standards. This change is 
meant to describe the actual industry practice more closely.
    The Board also proposes amending the text of Sec.  229.33(d) to 
state that a bank must ``send or give'' the consumer notice regarding 
receipt of a returned check or notice or nonpayment. This is meant to 
clarify that such a notice need not be in writing. The Board also 
proposes to add additional detail to the commentary to Sec.  220.33(d) 
to describe the means by which a bank may provide the required notice.
    The Board also requests comment on whether there are circumstances 
under which it would be appropriate to reduce the time frame for 
providing a notice of nonpayment.

G. Section 229.37 Variation by Agreement

    The Board proposes to delete an obsolete reference from the last 
sentence of paragraph XXIII.A of the commentary to this section.

III. Specific Requests for Comment

    In addition to the specific requests for comment discussed in the 
section-by-section analysis, the Board requests comment on the 
following issues.

A. Treatment of Generally Applicable Industry Standards

    As discussed at various points in the section-by-section analysis, 
when the Check 21 Act or existing Regulation CC refers to generally 
applicable industry standards, the Board proposes including only a 
general reference to generally applicable industry standards in the 
rule text. However, if only one industry standard applies, the proposed 
commentary would identify that standard. If the Board determines to use 
this approach in the final rule, it could account for changes in 
industry standards simply by amending the commentary and would not need 
to change the underlying regulatory requirement that banks comply with 
industry standards. The Board requests comment generally on the 
desirability of this approach and specifically on whether commenters 
would prefer that the Board identify specific industry standards within 
the text of the rule.

B. Relation of the Check 21 Act to Other Law

    The proposed commentary at various points attempts to clarify the 
interaction between the rights and remedies conferred by the Check 21 
Act and those conferred by other law, particularly the U.C.C. The Board 
specifically requests comment on whether the proposed commentary is 
adequate with respect to the interaction between the Check 21 Act and 
existing law or whether commenters believe that additional discussion 
and examples are needed. If the latter, the Board requests that 
commenters be as specific as possible in describing which provisions of 
the Check 21 Act need clarification with respect to which provisions of 
existing law, and in identifying examples that should be added to the 
commentary.

C. Remotely-Created Demand Drafts

    In 2002, the National Conference of Commissioners on Uniform State 
Laws and the American Law Institute approved revisions to Articles 3 
and 4 of the U.C.C. regarding remotely-created consumer items. The 
U.C.C. revisions define a remotely-created consumer item to mean ``an 
item drawn on a consumer account, which is not created by the payor 
bank and does not bear a handwritten signature purporting to be the 
signature of the drawer.'' The U.C.C. revisions would require a person 
who transfers a remotely-created consumer item to warrant that the 
person on whose account the item is drawn authorized the issuance of 
the item in the amount for which the item is drawn.
    The U.C.C. revisions are based on similar provisions enacted by 
certain individual states designed to address check fraud. (Some state 
laws and check clearinghouse rules refer to these items as ``demand 
drafts.'') As noted in the U.C.C. drafter's commentary, the revisions 
implement a limited rejection of Price v. Neal, 97 Eng. Rep. 871 (K.B. 
1762), so that in certain circumstances (those involving remotely-
created consumer checks) the paying bank can use a warranty claim to 
absolve itself of responsibility for honoring an unauthorized item. The 
revisions rest on the premise that monitoring by depositary banks can 
control this type of fraud more effectively than any practices readily 
available to paying banks.
    The U.C.C. revisions have been adopted in at least one state and 
introduced in at least three others. The Board requests comment on 
whether it would be appropriate to incorporate the U.C.C. revisions 
into Regulation CC.

D. Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the Board to use 
plain language in all its proposed and final rules. The Board requests 
comment on whether it could make the proposed regulatory language 
clearer and, if so, how.

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 proposed 
rule under the authority delegated to the Board by the Office of 
Management and Budget (OMB). The proposed rule contains requirements 
subject to the PRA.
    The collection of information that is proposed by this rulemaking 
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 financial 
institutions. The respondents that are regulated by the Board are state 
member banks and branches and agencies of foreign banks. Consumers who 
choose to make claims in accordance with Sec.  229.54 of the proposed 
rule also would be respondents. The Board is estimating paperwork 
burden only for these three types of respondents; other federal banking 
agencies are required to estimate paperwork burden for the depository 
institutions for which they have administrative enforcement authority.
    The proposed rulemaking contains several notice requirements and a 
disclosure requirement in relation to the Check 21 Act. The first 
notice, described in Sec.  229.54(b)(2), is the information a consumer 
would provide when making an expedited recredit claim. The Federal 
Reserve estimates that each of the 949 state member banks and 295 
branches and agencies will receive, on average, 25 of these claims per 
year. It is also estimated that it will take consumers, on average, 15 
minutes to complete and send this claim. Thus, the Federal Reserve 
estimates that the combined annual burden for consumers submitting 
expedited recredit claims is 7,775 hours.
    The second notice, described in Sec.  229.54(e), is required when a 
bank validates the consumer's claim, denies a consumer's recredit 
claim, or reverses a consumer's recredit claim. The Federal Reserve 
estimates that each of the 949 state member banks and 295 branches and 
agencies will send, on average, 35 of these notices per year. It is 
also estimated that it will take the institutions, on average, 15 
minutes to prepare and distribute each notice. Thus, the estimated 
total annual burden for these three bank notices is 10,885 hours.
    The third notice, described in Sec.  229.55(b)(2), is required for 
a bank making a claim against an indemnifying

[[Page 1483]]

bank for a substitute check. The Federal Reserve estimates that each of 
the 949 state member banks and 295 branches and agencies will submit, 
on average, 15 of these claims per year. It is also estimated that it 
will take institutions, on average, 15 minutes to complete and send 
each notice. Thus, the estimated total annual burden for this notice is 
4,665 hours.
    Finally, Sec.  229.57 describes the disclosure requirement that 
state member banks or branches and agencies of foreign banks must 
provide to promote consumer awareness about substitute checks. Banks 
are required to provide a consumer awareness disclosure to consumers 
who receive paid checks with their periodic statements and consumers 
who request or otherwise receive paid checks on a case-by-case basis. A 
model disclosure is provided in appendix C-5A. The Federal Reserve 
estimates that each of the 949 state member banks and 295 branches and 
agencies will, on average, have 500 disclosures per year and that, on 
average, it will take 5 minutes to prepare and distribute the 
disclosure. Thus, the estimated total annual burden for this disclosure 
is 51,833 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. An OMB control number 
will be obtained. The Federal Reserve specifically requests comment on 
these burden estimates as described above.
    Comments are also invited on: a. whether the proposed collection of 
information is necessary for the proper performance of the Federal 
Reserve's functions; including whether the information has practical 
utility; b. the accuracy of the Federal Reserve's estimate of the 
burden of the proposed information collection, including the cost of 
compliance; c. ways to enhance the quality, utility, and clarity of the 
information to be collected; and d. ways to minimize the burden of 
information collection on respondents, including through the use of 
automated collection techniques or other forms of information 
technology. Comments on the collections of information should be sent 
to Secretary, Board of Governors of the Federal Reserve System, 
Washington, DC 20551, with copies of such comments to be sent to the 
Office of Management and Budget, Paperwork Reduction Project (7100-to 
be obtained), Washington, DC 20503.

Regulatory Flexibility Act

    The Board is proposing the foregoing amendments to implement the 
Check 21 Act and to provide clarification on existing regulatory 
provisions. The Check 21 Act requires the Board to publish model forms 
and clauses that banks may use to satisfy that statute's consumer 
awareness requirement. The Board also proposes to incorporate all 
provisions of the Check 21 Act that affect banks into existing 
Regulation CC, so that all federal provisions administered by the Board 
with respect to check collection will be described in one place.
    The Check 21 Act and the proposed new subpart D that would 
implement it apply to all banks regardless of their size. The statute 
and proposed rule authorize, but do not require, banks to provide a new 
negotiable instrument called a substitute check when an original check 
is required. However, no bank is required to create substitute checks, 
and the impact on the check processing practices of banks that only 
receive and do not create substitute checks should be minimal. The 
proposed rule does, however, require all banks to provide a consumer 
awareness notice to consumers who receive substitute checks and to 
provide a notice to a consumer who, on a case-by-case basis, seeks a 
recredit for a substitute check that has caused the consumer to incur a 
loss. These disclosure and notice requirements are statutory.
    The Board is not aware of any other federal rules that duplicate, 
overlap, or conflict with the proposed rule. The Board notes that the 
proposed rule is consistent with other parts of Regulation CC and the 
Board's Regulation J (12 CFR part 210) that apply to checks because 
those provisions would apply to properly-prepared substitute checks in 
the same manner that they apply to original checks.
    The Board specifically requests comment on the impact of the 
proposed rule on small banks.

12 CFR Chapter II

List of Subjects in 12 CFR Part 229

    Banks, Banking, Federal Reserve System, Reporting and recordkeeping 
requirements.

Authority and Issuance

    For the reasons set forth in the preamble, the Board is proposing 
to amend 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 et seq., 12 U.S.C. 5001-5018.

    2. In Sec.  229.1, revise paragraph (a) and add a new paragraph 
(b)(4) to read as follows:


Sec.  229.1  Authority and purpose; organization.

    (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, as amended (12 U.S.C. 4001 et seq.) 
(the EFA Act) and the Check Clearing for the 21st 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; and the disclosure and notices that 
banks must provide to consumers who receive substitute checks and who 
make expedited recredit claims.
    3. In Sec.  229.2, revise the introductory sentence to read as 
follows:


Sec.  229.2  Definitions.

    As used in this part, and unless the context requires otherwise, 
the following terms have the meanings set forth in this section, and 
the terms not defined in this section have the meanings set forth in 
the Uniform Commercial Code:
* * * * *
    4. In Sec.  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 for purposes of subpart D of this part, 
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

[[Page 1484]]

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. Account includes 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 Sec.  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.

* * * * *
    6. In Sec.  229.2(k), remove the phrase ``subpart C'' from the last 
sentence of the undesignated paragraph and add the phrase ``subparts C 
and D'' in its place.
    7. In Sec.  229.2(q), insert the phrase ``to a collecting bank for 
settlement or'' between the words ``basis'' and ``to.''
    8. In Sec.  229.2(z), 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:
    (z) * * *

    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 Sec.  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 Sec.  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 Sec.  229.55.
    11. In Sec.  229.2, after paragraph (qq) add the following new 
paragraphs (rr) through (ddd), 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 Sec.  229.53 with respect to a substitute check.
    (vv) Magnetic ink character recognition line and MICR 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.
    (ww) Original check means the first paper check issued with respect 
to a particular payment transaction.
    (xx) Person means a natural person, corporation, unincorporated 
company, partnership, government unit or instrumentality, trust, or any 
other entity or organization.
    (yy) Reconverting bank means--
    (1) The bank that creates a substitute check; or
    (2) With respect to a substitute check that was created by a person 
that is not a bank, the first bank that receives the substitute check 
and transfers, presents, or returns that substitute check or, in lieu 
thereof, the first paper or electronic representation of that 
substitute check.
    (zz) 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 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;
    (3) Conforms in paper stock, dimension, and otherwise with 
generally applicable industry standards for substitute checks; and
    (4) Is suitable for automated processing in the same manner as the 
original check.
    (aaa) A sufficient copy of an original check is a copy of an 
original check that accurately represents all of the information on the 
front and back of that check as of the time it was truncated or that 
otherwise is sufficient to determine the validity of the relevant 
claim. 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.
    (bbb) Transfer and consideration. For purposes of subpart D, the 
terms transfer and consideration have the meanings set forth in the 
Uniform Commercial Code and in addition--
    (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)(i) Except as provided in paragraph (bbb)(2)(ii) of this 
section, 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 check.
    (ii) A bank does not receive consideration when it transfers a 
substitute check or a paper or electronic representation of a 
substitute check solely in response to a person's warranty, indemnity, 
expedited recredit, or other claim with respect to the substitute 
check.
    (ccc) Truncate means to remove an original check from the forward 
collection or return process and send to a recipient, in lieu of such 
original check, a substitute check or, by agreement, information 
relating to the original check (including data taken from the MICR line 
of the original check or an electronic image of the original check), 
whether with or without the subsequent delivery of the original check.
    (ddd) 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, information 
relating to the original

[[Page 1485]]

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.


Sec.  229.3  [Amended]

    12. In Sec.  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.


Sec.  229.20  [Amended]

    13. In Sec.  229.20, remove the phrase ``the Act'' wherever it 
appears and add the phrase ``the EFA Act'' in its place.


Sec.  229.21  [Amended]

    14. In Sec.  229.21(g)(2), remove the phrase ``the Act'' and add 
the phrase ``the EFA Act'' in its place.


Sec.  229.30  [Amended]

    15. In Sec.  229.30(a)(2)(iii), remove the next-to-last sentence 
and add the following sentence in its place:
    (a) * * *
    (2) * * *
    (iii) * * * A qualified returned check must be encoded in magnetic 
ink with the routing number of the depositary bank, the amount of the 
returned check, and a ``2'' or, in the case of a substitute check, a 
``5'', in position 44 of the MICR line as a return identifier in 
accordance with generally applicable industry standards. * * *
* * * * *
    16. In Sec.  229.30, revise paragraph (c)(1), to read as follows:
    (c)* * *
    (1) On or before the receiving bank's cutoff hour for the next 
processing cycle (if sent to a returning bank) or on or before the 
receiving bank's next banking day (if sent to the depositary bank) 
following the otherwise applicable deadline, 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 transportation would ordinarily 
result in delivery after the receiving bank's next cutoff hour or 
banking day referred to above; or
* * * * *


Sec.  229.31  [Amended]

    17. In Sec.  229.31(a)(2)(iii), remove the second-to-last sentence 
and add the following sentence in its place:
    (a) * * *
    (2) * * *
    (iii) * * * A qualified returned check must be encoded in magnetic 
ink with the routing number of the depositary bank, the amount of the 
returned check, and a ``2'' or, in the case of a substitute check, a 
``5'', in position 44 of the MICR line as a return identifier in 
accordance with generally applicable industry standards. * * *
* * * * *


Sec.  229.33  [Amended]

    18. In Sec.  229.33(b), remove the phrase ``with question marks'' 
from the last sentence of the undesignated paragraph.
    19. In Sec.  229.33(d), add the phrase ``or give'' between the 
words ``send'' and ``notice.''


Sec.  229.35  [Amended]

    20. In Sec.  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 enables a subsequent collecting 
bank, paying bank, or returning bank to interpret the indorsement, in 
accordance with the indorsement standard set forth in appendix D of 
this part.
* * * * *


Sec.  229.38  [Amended]

    21. In Sec.  229.38(d)(1), add a new sentence between the next-to-
last and last sentences and revise the last 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 by it adversely affects the ability of a 
bank to indorse the check legibly in accordance with Sec.  229.35. 
Responsibility under this paragraph shall be treated as negligence of 
the paying bank, depositary bank, or reconverting bank for purposes of 
paragraph (c) of this section.
* * * * *
    22. In Sec.  229.38(f), remove the phrase ``the Act'' and add the 
phrase ``the EFA Act'' in its place.

PART 229--AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS 
(REGULATION CC)

    23. Add a new subpart D to read as follows:

Subpart D--Substitute Checks

Sec.
229.51 General provisions governing substitute checks.
229.52 Substitute check warranties.
229.53 Substitute check indemnity.
229.54 Expedited recredit for consumers.
229.55 Expedited recredit procedures for banks.
229.56 Liability.
229.57 Consumer awareness.
229.58 Mode of delivery of information required by this subpart.
229.59 Relation to other law.
229.60 Variation by agreement.

    Authority: 12 U.S.C. 5001-5018.

Subpart D--Substitute Checks


Sec.  229.51  General provisions governing substitute checks.

    (a) Legal equivalence. A substitute check for which a bank has 
provided the warranties described in Sec.  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 
generally applicable industry standards for substitute checks and 
appendix D of this part; and
    (3) Identifies the bank that truncated the original check in 
accordance with generally applicable industry standards for substitute 
checks and appendix D of this part.
    (c) Purported substitute checks. If a bank transfers, presents, or 
returns, and receives consideration for, an item that meets all the 
requirements of a substitute check except for the MICR line requirement 
in section 229.2(zz)(2), that item is a substitute check for purposes 
of Sec. Sec.  229.52 through 229.57 of this subpart.
    (d) 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.

[[Page 1486]]

Sec.  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 Sec.  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) 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 the 
substitute check.


Sec.  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:
    (i) If the loss resulted from a breach of a substitute check 
warranty provided under Sec.  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 Sec.  229.52, the amount of the indemnity shall 
be the sum of--
    (A) The amount of any resulting 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 
party'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 party.
    (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 of 
the original check--(i) If an indemnifying bank produces the original 
check or a sufficient copy of the original check, 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 party; 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 Sec.  229.52 or other applicable law.
    (c) Subrogation of rights--(1) In general. An indemnifying bank 
shall be subrogated to the rights of the party that it indemnifies to 
the extent of the indemnity it has provided and may attempt to recover 
from another party based on a warranty or other claim.
    (2) Duty of indemnified party for subrogated claims. 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.  229.54  Expedited recredit for consumers.

    (a) Circumstances giving rise to a claim. A consumer may make a 
claim under this section for a recredit with respect to a substitute 
check if the consumer asserts in good faith that--
    (1) The bank holding the consumer's account charged that account 
for a substitute check that was provided to the consumer (although the 
consumer need not be in possession of the 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 of the 
original check 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 must 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 must submit his or her claim 
to the bank 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 must extend the 40-calendar-day period by an 
additional reasonable amount of time.
    (2) Content of claim. The consumer's claim must include the 
following information:
    (i) 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;
    (ii) A statement that the consumer suffered a loss and an estimate 
of the amount of that loss;
    (iii) The reason why production of the original check or a 
sufficient copy of the original check 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
    (iv) Sufficient information to allow the bank to identify the 
substitute check and investigate the claim.

[[Page 1487]]

    (3) Form and submission of claim; computation of time. The bank 
holding the account that is the subject of the consumer's claim may, in 
its discretion, require the consumer to submit the information required 
by this section in writing. A bank that requires a written submission 
may permit the consumer to submit the written claim electronically. A 
bank that requires the consumer to submit a written claim shall compute 
any time period in this subpart that begins with the submission of the 
claim from the date on which the consumer submitted the written claim.
    (c) Action on claims. A bank that receives a claim that meets the 
requirements of paragraph (b) of this section must act as follows:
    (1) Valid consumer claim. If the bank determines that the 
consumer's claim is valid, the bank must--
    (i) Recredit the consumer's account for the amount of the 
consumer's loss, up to the amount of the substitute check, plus 
interest if the account is an interest-bearing account, no later than 
the end of the business day after the banking day on which the bank 
makes that determination; and
    (ii) Send to the consumer the notice required by paragraph (e)(1) 
of this section.
    (2) Invalid consumer claim. If a bank determines that the 
consumer's claim is not valid, the bank must 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 
consumer submitted the claim, the bank must--
    (i) 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, 
by the end of that day and 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 consumer submitted 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 at any time may reverse a recredit 
that it has made to a consumer account under paragraph (c)(1) or (c)(3) 
of this section, plus interest the bank has paid, if any, on that 
amount, if the bank--
    (i) Determines that a substitute check for which the bank 
recredited the consumer account in fact was properly charged to that 
account or that the consumer's warranty 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 consumer 
submitted the claim if--
    (i) The consumer submits the claim during the 30-calendar-day 
period beginning on the banking day on which the consumer account was 
established;
    (ii) Without regard to the charge that gave rise to the recredit 
claim--
    (A) On six or more business days during the six-month period ending 
on the calendar day on which the consumer submitted the claim, the 
balance in the consumer account was negative or would have become 
negative if checks or other charges to the account had been paid; or
    (B) On two or more business days during such six-month period, the 
balance in the consumer account was negative or would have become 
negative in the amount of $5,000 or more if checks or other charges to 
the account had been paid; or
    (iii) The bank has reasonable cause to believe that the claim is 
fraudulent, based on facts that would cause a 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 must notify 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 must 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 notify the consumer no later than the business 
day after the banking day on which the bank makes that determination. 
This notice must include--
    (i) The original check or a sufficient copy of the original check, 
except as provided in Sec.  229.58;
    (ii) An explanation of the basis for the bank's determination that 
the substitute check was properly charged or the consumer's warranty 
claim is not valid; and
    (iii) 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 credited to a consumer account must notify the 
consumer no later than the business day after the banking day on which 
the bank made the reversal. This notice must 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 and the amount of paid interest, 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 under Sec.  229.53 or Sec.  229.56.

[[Page 1488]]

Sec.  229.55  Expedited recredit procedures for banks.

    (a) Circumstances giving rise to a claim. A bank that has an 
indemnity claim under Sec.  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 Sec.  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 Sec.  229.54 or otherwise 
has suffered a resulting loss; and
    (3) The production of the original check or a sufficient copy of 
the original check 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 must send its 
claim to the indemnifying bank, subject to the timing, content, and 
form requirements of this section.
    (1) Timing of claim. The claimant bank must submit its claim to the 
indemnifying bank 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 must 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 Sec.  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 of the original check is necessary to determine the 
validity of the charge to the consumer account or the warranty claim; 
and
    (iv) Sufficient information to allow the indemnifying bank to 
identify the substitute check and investigate the claim.
    (3) Requirements relating to copies of substitute checks. If the 
information submitted by a claimant bank under paragraph (b)(2) of this 
section includes a copy of any substitute check, the claimant bank must 
take reasonable steps to ensure that the copy cannot be mistaken for 
the legal equivalent of the check under Sec.  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 may permit 
the claimant bank to submit the written claim electronically. A bank 
that requires the claimant bank to submit a written claim shall compute 
any time period in this subpart that begins with the submission of the 
claim 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 must--
    (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 of the original check; or
    (3) Provide information to the claimant bank regarding why the 
claimant 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 Sec.  229.53 or Sec.  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 
Sec.  229.54 or otherwise receives reimbursement for a substitute check 
that formed the basis of its claim under this section, the claimant 
bank must 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 of the original check under 
paragraph (c)(2) of this section, Sec.  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.


Sec.  229.56  Liability.

    (a) Measure of damages--(1) In general. Except as provided in 
paragraph (a)(2) or (a)(3) of this section or Sec.  229.53, any person 
that breaches a warranty described in Sec.  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 lesser of the amount of the loss suffered by the person as 
a result of the breach or failure or 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 Sec.  229.54 
or Sec.  229.55.
    (3) Comparative negligence. (i) If a person incurs damages that 
resulted in whole or in part from that person's negligence or failure 
to act in good faith, then the amount of any damages due to that person 
under paragraph (a)(1) of this section shall be reduced in proportion 
to the amount of negligence or bad faith attributable to that person.
    (ii) Nothing in this paragraph (a)(3) reduces the rights of a 
consumer or any other person under the U.C.C. or other applicable 
provision of federal or state law.
    (b) Timeliness of action. Delay by a bank beyond any time limits 
prescribed or permitted by this subpart is excused if the delay is 
caused by interruption of communication or computer facilities, 
suspension of payments by another bank, war, emergency conditions, 
failure of equipment, or other circumstances beyond the control of the 
bank and if the bank uses such diligence as the circumstances require.
    (c) Jurisdiction. A person may bring an action to enforce a claim 
under this subpart in any United States district court or in any other 
court of competent jurisdiction. Such claim must 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 party 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

[[Page 1489]]

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 Sec.  
229.54 constitutes timely notice under this paragraph.


Sec.  229.57  Consumer awareness.

    (a) General disclosure requirement and content. Each bank must 
provide, in accordance with paragraph (b) of this section, a disclosure 
to each of its consumer customers that describes--
    (1) That a substitute check is the legal equivalent of an original 
check for all persons and for all purposes, including any provision of 
any federal or state law, if the substitute check meets the legal 
equivalence requirements described in Sec.  229.51(a); 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 must provide the 
disclosure described in paragraph (a) of this section to a consumer who 
receives paid checks with his or her periodic account statement--
    (i) No later than the first regularly scheduled communication with 
the consumer after October 28, 2004, for each consumer who is a 
customer of the bank on that date; and
    (ii) At the time the customer relationship is initiated for each 
consumer account opened after October 28, 2004.
    (2) Disclosure to consumers who receive substitute checks only an 
occasional basis. Unless a bank already has provided the disclosure 
described in paragraph (a) of this section, the bank must provide such 
disclosure to a consumer customer of the bank who--
    [Alternative 1: (i) Requests an original check or a copy of a check 
and receives a substitute check, at the time of such request;]
    [Alternative 2: (i) Requests an original check or a copy of a check 
and receives a substitute check, at the time the bank provides such 
substitute check;] or
    (ii) Receives a returned substitute check, at the time the bank 
provides such substitute check.


Sec.  229.58  Mode of delivery of information required by this subpart.

    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 of an original check, 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.


Sec.  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.


Sec.  229.60  Variation by agreement.

    Any provision of Sec.  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.
* * * * *
    24. In appendix C, revise the title, 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 Availability Policy Disclosures

* * * * *
C-5A Substitute Check Policy Disclosure
* * * * *

Model Notices

* * * * *
C-22 Expedited Recredit Claim, Full Refund
C-23 Expedited Recredit Claim, Partial Refund
C-24 Expedited Recredit Claim, Denial Notice
C-25 Expedited Recredit Claim, Reversal Notice
* * * * *
    25. In appendix C, after model C-5 add the following new model C-5A 
to read as follows:
* * * * *

C-5A--Substitute Check Policy Disclosure

Substitute Checks and Your Rights

    Some or all of the checks that you receive with your account 
statement or by request may look different than the check you wrote. 
To make check processing easier, a federal law permits banks to 
replace original checks with ``substitute checks.'' This notice 
describes substitute checks and the rights that you will have when 
you receive substitute checks.

What Is a Substitute Check?

    A substitute check is a copy of an original check that is the 
same as the original check for all purposes, including proving that 
you made a payment, if it includes an accurate copy of the front and 
back of the original check and contains the words: ``This is a legal 
copy of your check. You can use it the same way you would use the 
original check.'' A substitute check that meets these requirements 
is generally subject to federal and state laws that apply to an 
original check. If you lose money because you received a substitute 
check, you have the right to file a claim for an expedited refund.

Your Right To File a Claim for an Expedited Refund

    Federal law gives you the right to file a claim for an expedited 
refund if you receive a substitute check and believe that all of the 
statements below are true--
    (1) The substitute check was incorrectly charged to your account 
(for example, this may be true if we charged your account for the 
wrong amount or if we charged your account more than once for the 
same check);
    (2) You lost money as a result of the substitute check charge to 
your account; and
    (3) You need the original check or a better copy of the original 
check to demonstrate that we incorrectly charged your account (for 
example, this may be true if you think that we charged your account 
for the wrong amount and the substitute check does not clearly show 
the amount).

Expedited Refunds

    To obtain an expedited refund, you must send us a claim. Federal 
law limits an expedited refund to the amount of your loss, up to the 
amount of the substitute check, plus interest if your account earns 
interest. You should be aware that you could be entitled to 
additional amounts under other state or federal law.

How To Make a Claim for an Expedited Refund

    Please make your claim [by calling (phone number), by writing to 
us at (address), or by e-mailing us at (address)]. You must make 
your claim within 40 calendar days of the later of these two dates:
    (1) The date that we delivered the account statement showing the 
charge that you are disputing, or
    (2) The date on which we made the substitute check available to 
you.

[[Page 1490]]

    If there is a good reason (such as a long trip or a hospital 
stay) that you cannot make your claim by the required day, we will 
give you additional time.
    Your expedited refund claim must--
    (1) Describe why you think the charge to your account was 
incorrect;
    (2) Estimate how much money you have lost because of the 
substitute check charge;
    (3) Explain why the substitute check is not sufficient to show 
whether or not the charge to your account was correct; and
    (4) Provide us with a copy of the substitute check or give us 
information that will help us to identify the substitute check and 
investigate your claim (for example, the check number, the name of 
the person to whom you wrote the check, and the amount of the 
check).

Our Responsibilities for Handling Your Claim

    We will investigate your claim promptly. If we conclude that we 
incorrectly charged your account, we will refund to your account the 
amount of your claim (up to the amount of the substitute check, plus 
interest if your account earns interest) within one business day of 
making that decision. If we conclude that we correctly charged your 
account, we will send you a notice that explains the reason for our 
decision and includes either the original check or a better copy of 
the original check than the one you already received. If we have not 
made a decision on your claim within 10 business days after you 
submitted it, we will refund the amount that we owe to your account, 
up to $2,500, plus interest, by that date. We will refund the 
remaining amount, if any, plus interest, to your account by the 45th 
calendar day after you submitted your claim.
    If we refund your account, on the next business day we will send 
you a notice that tells you the amount of your refund and the date 
on which you may withdraw that amount. Normally, you may withdraw 
your refund on the business day after we make it. In limited cases, 
we may delay your ability to withdraw up to the first $2,500 of the 
refund until the earlier of these two dates: (1) The day after we 
determine that your claim is valid; or (2) the 45th calendar day 
after the day that you submitted your claim.

Reversal of Refund

    We may reverse any refund that we have given you if we later 
determine that the substitute check was correctly charged to your 
account. We also may reverse any interest we have paid you on that 
amount if your account earns interest. Within one business day after 
we reverse a refund, we will send you the original check or a better 
copy of the original check than the one you previously received, 
explain to you why the substitute check was correctly charged to 
your account, and tell you the amount and date of the reversal.
* * * * *
    26. In appendix C, after model C-21 add new models C-22 through C-
25 to read as follows:
* * * * *

C-22--Expedited Recredit Claim, Full Refund Notice

Notice of Refund

    We have determined that your claim that a substitute check was 
incorrectly charged to your account is valid. We are refunding 
(amount) [of which (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 that we credited to your account 
on (date).]
    If we later determine that the substitute check was correctly 
charged to your account, we will reverse the refund by charging your 
account. We will notify you within one day of any such reversal.

C-23--Expedited Recredit Claim, Partial Refund Notice

Notice of Partial Refund

    In response to your claim that a substitute check was 
incorrectly charged to your account, we are refunding (amount) [of 
which (amount) represents accrued interest] to your account, pending 
the completion of our investigation of your claim. You may withdraw 
these funds as of (date). [Unless we determine that your claim is 
not valid, the remaining amount of your refund will be credited to 
your account no later than the 45th calendar day after you submitted 
your claim.]
    If we later determine that the substitute check was correctly 
charged to your account, we will reverse the refund by charging your 
account. We will notify you within one day of any such reversal.

C-24--Expedited Recredit Claim, Denial Notice

Denial of Claim

    We reviewed your claim that a substitute check was incorrectly 
charged to your account. We are denying your claim. As the enclosed 
[(original check) or (copy of the original check)] shows, the charge 
to your account of (amount) was proper because (reason, e.g. amount 
charged is the same or the signature is authentic).
    [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 claim that a substitute check was 
incorrectly charged to your account, we provided a refund of 
(amount) by crediting your account on (date(s)). We now have 
determined that the substitute check was correctly charged to your 
account. As the enclosed [(original check) or (copy of the original 
check)] shows, the charge to your account of (amount) was proper 
because (reason, e.g. amount charged is the same or the signature is 
authentic). As a result, we have reversed the refund to your account 
[plus interest we have paid you on that amount] by charging your 
account in the amount of (amount) 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.]

    27. 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; and
    (B) The indorsement date.
    (ii) The indorsement also may contain--
    (A) The bank's name or location;
    (B) A branch identification;
    (C) A trace or sequence number;
    (D) A telephone number for receipt of notification of large-
dollar returned checks; and
    (E) 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.\1\
---------------------------------------------------------------------------

    \1\ 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 Committee on Financial Services Specification for 
the Placement and Location of MICR Printing, X9.13.
---------------------------------------------------------------------------

    (iv) When printing its depositary bank indorsement or a 
previously applied electronic indorsement of the depositary bank 
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 1.95 and 2.55 inches from the leading edge of 
the check.
    (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 previously

[[Page 1491]]

applied electronic indorsement of a collecting bank or returning 
bank 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) If it is the paying bank with respect to the substitute 
check, then the reconverting bank 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, between 0.25 and 2.10 inches from the trailing edge of the 
check and within 0.575 inches from the top of the check, its nine-
digit routing number (without arrows) and an asterisk at each end of 
the number.
    (iv) The reconverting bank shall place on the front of the 
check, between 2.10 and 2.50 inches from the trailing edge of the 
check and within 2.6 inches from the top of the check, the 
truncating bank's nine-digit routing number (without arrows) and a 
bracket at each end of the number.
    (4) Any indorsement, reconverting bank identification, or 
truncating bank identification placed on an original check or 
substitute check shall be printed in black ink.

Appendix E--[Amended]

    28. 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.
    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 Sec.  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 and interbank deposits, are 
included in the account definition for purposes of subpart D.
* * * * *

    29. 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 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.
* * * * *

    30. 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 Sec.  229.2(zz) is a check 
for purposes of Regulation CC, even if that substitute check does 
not meet the requirements for legal equivalence set forth in Sec.  
229.51(a).
* * * * *

    31. 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. * * *
* * * * *
    32. 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 on 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.
* * * * *

    33. 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. * * *
    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.
* * * * *

    34. 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. * * * Returned checks are identified by placing a ``2'' or, 
in the case of a substitute check, a ``5,'' in position 44 of the 
MICR line as a return identifier in accordance with American 
National Standard Specifications for Placement and Location of MICR 
Printing, X9.13 (hereinafter referred to as ``ANS X9.13'') for 
original checks or American National Standard Specifications for 
Image Replacement Documents, X9.90 (hereinafter referred to as ``ANS 
X9.90'') for substitute checks.
* * * * *

[[Page 1492]]

    35. In appendix E to part 229, add new paragraphs II.QQ through 
II.DDD, 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 the generally applicable industry standards 
contained in ANS X9.13. As discussed in the commentary to the 
definition of substitute check, ANS X9.90 also applies to the 
content of the MICR line of a substitute check.

WW. 229.2(ww) Original Check

    1. The definition of the term 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 or substitute check.

XX. 229.2(xx) [Reserved]

YY. 229.2(yy) Reconverting Bank

    1. A substitute check is ``created'' when and where a paper 
reproduction of an original check that meets the requirements of 
Sec.  229.2(zz) is physically printed.
    2. 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.

    Examples. a. Bank A, by agreement, sends an electronic check 
file for collection to Bank B. If Bank B chooses to use that file to 
print a substitute check that meets the requirements of Sec.  
229.2(zz), Bank B is the reconverting bank as of the time it prints 
the substitute check. Bank A is not a reconverting bank because it 
handled the original check and electronic information about that 
original check but never created a substitute check.
    b. Company A, which is not a bank, agrees to receive check 
information electronically from Bank A in order to create substitute 
checks on behalf of Bank A. Bank A creates a substitute check and 
becomes the reconverting bank when Company A prints a substitute 
check in accordance with that agreement.

    3. 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. 
Under Sec.  229.51, a substitute check is the legal equivalent of 
the original check only if a bank has made the substitute check 
warranties listed in Sec.  229.52. A bank therefore is not required 
to accept a substitute check that was created by a person other than 
a bank and has not yet been transferred by a bank, although a bank 
may agree to do so.

    Example. A bank's customer, which is a nonbank business, 
receives a check for payment and wants to deposit a substitute check 
instead of the original checks with the bank. If no other bank had 
yet handled the substitute check, the depositary bank that agreed to 
accept the substitute checks would be the reconverting bank as of 
the time the depositary bank transferred the substitute check (or 
other paper or electronic representation of that check) for 
collection or otherwise, presented the substitute check (or 
representation) to the paying bank, or returned the substitute check 
(or representation).

    4. 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 payment transaction.

ZZ. 229.2(zz) Substitute Check

    1. For purposes of this definition, a paper reproduction of an 
original check could include a reproduction created directly from an 
original check or a reproduction of the original check created from 
some other source, such as an electronic file or previous substitute 
check that contains an image of the original 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 and 
generally applicable industry standards is not a substitute check. 
Because a substitute check must be a representation of an item that 
is defined as a check under Sec.  229.2(k), a paper reproduction of 
an image of something that is not a check cannot be a substitute 
check.
    3. As described in Sec.  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 on the back of a 
substitute check would include indorsements that were applied to the 
original check prior to truncation plus a physical representation of 
any indorsements that were applied electronically to the check after 
truncation but before creation of the substitute check.

    Example. Bank A truncates an original check and, by agreement, 
transmits to Bank B an electronic image of the check accompanied by 
an electronic indorsement. Bank B then creates a substitute check to 
send to Bank C. The back of the substitute check created by Bank B 
must contain a representation of the indorsement previously applied 
electronically by Bank A and Bank B's own indorsement. (For more 
information on indorsement requirements, see appendix D).

    4. Some substitute checks will not be created directly from the 
original check, but rather will be created from a previous 
substitute check. In that case, the back of the subsequent 
substitute check would contain (1) the indorsements that were 
applied physically to the original check, (2) a physical 
representation of indorsements that were applied electronically to 
the original check after truncation but before creation of the first 
substitute check; (3) indorsements that were applied physically to 
the previous substitute check; and (4) 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. The front of a 
subsequent substitute check should contain an image of the front of 
the original check as that image appeared on the previous substitute 
check at the time the previous substitute check was converted to 
electronic form. Because information could have been physically 
added to the original check image contained 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.
    5. The MICR line of a substitute check must contain the same 
information as the MICR line of the original check, except as 
provided by generally applicable industry standards for substitute 
checks to facilitate the processing of substitute checks.

    Examples. a. The generally applicable industry standards 
contained in ANS X9.90 require the number appearing in position 44 
of the MICR line of a substitute check to differ from the number 
that appeared in position 44 of an original check. On an original 
check, position 44 generally is left blank for forward collection 
and contains a ``2'' for a qualified returned check. ANS X9.90 
provides that a substitute check used for forward collection should 
have a ``4'' and a qualified returned substitute check should have a 
``5'' in position 44. The ``4'' and ``5'' indicate that the check 
image must be clipped at an appropriate size 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 Sec. Sec.  229.30(a)(2) 
and 229.31(a)(2) and the commentary thereto regarding requirements 
for qualified returned substitute checks).
    b. It is a generally applicable industry practice for a bank 
that detects an encoding error in the amount field of the original 
check (including omission of the amount) to correct that error by 
repairing the MICR line, such as by placing an additional MICR strip 
containing the paying bank's routing number and the correct amount 
of the check beneath the original MICR line. In accordance with the 
generally applicable MICR-line repair practice for original checks 
and to facilitate processing of substitute checks in the same manner 
as original checks, a bank that creates a substitute check from an 
original check with a misencoded or unencoded amount or a bank that 
handles a substitute check that reproduces an amount encoding error 
that appeared on the original check may correct the amount encoding 
error that the bank detects. Such a repair will not change the 
item's status as a substitute check under subpart D. A paper 
reproduction of an original check that reproduced an uncorrected 
amount encoding error that

[[Page 1493]]

appeared on the original check would, assuming all other 
requirements of the substitute check definition were met, be a valid 
substitute check that could be transferred, collected, or returned. 
However, subsequent banks that handled that substitute check and the 
drawer might have a claim for breach of an encoding warranty (see 
U.C.C. Sec.  4-209 and Sec.  229.34(c) of Regulation CC).
    c. A MICR-line error could occur if the automated check sorter 
of the bank that truncated the original check electronically 
misinterpreted the MICR line data, such that the MICR line 
information actually used to process the check electronically was 
incorrect or incomplete. For example, if the check sorter detected 
but could not fully interpret the MICR line, the electronic MICR-
line information would contain asterisks where the uninterpreted 
MICR data should appear. Similarly, the check sorter could have read 
a number in the MICR line incorrectly (such as reading a ``3'' 
instead of an ``8'') or intentionally substituted one character for 
another (such as replacing a space or a hyphen with a ``0'') when 
converting the MICR-line information to electronic form. Each of 
these differences from the MICR line of the original check 
constitutes a MICR-read error, and a paper reproduction of an 
original check that contained such a MICR-read error would not 
satisfy the substitute check definition. To ensure that the item 
transferred by the reconverting bank meets the substitute check 
definition, the reconverting bank should repair all MICR-read errors 
(see, for example, American National Standards Specifications for 
Electronic Exchange of Check and Image Data, X9.37, which contains 
provisions that facilitate the repair of the MICR line). As 
discussed in more detail in Sec.  229.51(c) and the commentary 
thereto, a paper reproduction of an original check that contains a 
MICR-read error but that purports to be a substitute check, such as 
by containing the legal equivalence legend or by being delivered 
when an original check is required, would be a substitute check for 
purposes of Sec. Sec.  229.52 through 229.57 of Regulation CC but 
would not be the legal equivalent of the original check.

    6. A substitute check must conform to the generally applicable 
industry standards for substitute checks set forth in ANS X9.90 and 
must be suitable for automated processing in the same manner as the 
original check. Thus, an item that meets all other substitute check 
requirements but that contains a MICR line that is not printed in 
magnetic ink is not a substitute check. Similarly, a substitute 
check image that appears within an image statement containing 
multiple check images is not a substitute check because it does not 
contain a MICR line printed in magnetic ink and also is not the same 
size or suitable for automated processing in the same manner as an 
original check.

AAA. 229.2(aaa) Sufficient Copy and Copy

    1. A bank may limit its liability for an indemnity claim and 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 relevant claim. A 
sufficient copy that contains an image of the back of the original 
check as of the time it was truncated also could contain additional 
information, such as subsequently applied indorsements.
    2. A copy must be a paper reproduction of a check. An electronic 
image that appears on a computer screen but has not yet been printed 
therefore is not a copy or a sufficient copy. However, if an account 
holder 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 Sec.  229.58 and the commentary thereto.

    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 always would constitute a 
sufficient copy. Thus, a substitute check that met the legal 
equivalence requirements would be a sufficient copy. In addition, a 
substitute check that accurately represented all the information on 
the front and back of the original check also would be a sufficient 
copy even if such substitute check did not bear the legal 
equivalence legend or if a bank had not made the substitute check 
warranties.
    b. A copy of the original check that does not accurately 
represent all the information on both the front and back of the 
original check also could be a sufficient copy if such copy 
contained all the information necessary to determine the validity of 
the relevant claim. For instance, if a consumer received a 
substitute check that contained a blurry image of a legible original 
check, the consumer might seek an expedited recredit because his or 
her account was charged for $1,000, but he or she believed that the 
check was written for only $100. A clear copy of only the front of 
the original check that showed the amount of the check likely would 
be sufficient to determine whether the consumer had a valid claim.

BBB. 229.2(bbb) Transfer and Consideration

    1. Under Sec. Sec.  229.52 and 229.53, a bank makes the 
warranties and is responsible for the indemnity when it transfers a 
substitute check (or a representation thereof) for consideration. 
The Check 21 Act contemplates that drawers and other 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, although such parties normally are not 
transferees that receive consideration for purposes of the U.C.C. To 
ensure that these parties are covered by the substitute check 
warranties and indemnity, Sec.  229.2(bbb) 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 non-bank 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 account 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 Sec.  229.52. A 
drawer that suffers a loss as a result of the substitute check (or 
representation thereof) thus would have rights under the Check 21 
Act and subpart D against the paying bank, which is the bank with 
which it has a relationship, as well as against all previous 
warranting banks in the collection chain.
    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 
account statement transfers the substitute check for consideration 
and thereby provides the warranties.
    c. Moreover, 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 to the 
depositor.

CCC. 229.2(ccc) 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.

DDD. 229.2(ddd) 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 a check that was truncated by a person that is not a bank.

    Example. A bank's customer that is a nonbank business receives a 
check for payment and wants to deposit either a substitute check or 
an electronic representation of the original check with its 
depositary bank instead of the original. The depositary bank that 
agrees to accept a check in a form other than the original check 
would be the truncating bank. That bank also would be the 
reconverting bank if it were the first bank to transfer, present, or 
return a substitute check that it created or that it accepted from 
its nonbank customer (see Sec.  229.2(yy) and the commentary 
thereto).
* * * * *

    36. In appendix E, paragraph IV.D.6.e. is amended by adding new 
sentences between the second and third sentences to read as follows:

    IV. * * *
    D. * * *
    6. * * *
    e. * * * Such notice need not be posted at each teller window, 
but the notice must be posted in a place where consumers seeking to 
make deposits are likely to see it before making their deposits. For 
example, the notice might be posted at the point where the

[[Page 1494]]

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

    37. 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.
* * * * *

    38. 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 clear and conspicuous if it is 
reasonably understandable and designed to call attention to the 
nature and significance of the information in the disclosure (see 
the examples listed in Sec.  216.3(b)(2) of this chapter). A 
disclosure is in a form that the customer may keep if, for example, 
it can be downloaded or printed. For a customer that is not a 
consumer, a depositary bank satisfies the written-disclosure 
requirement by sending an electronic disclosure that displays the 
text and is in a form that the customer may keep, if the customer 
agrees to such means of disclosure. For a customer who is a 
consumer, a depositary bank satisfies the written-notice requirement 
by sending an electronic notice in compliance with the requirements 
of the Electronic Signatures in Global and National Commerce Act (12 
U.S.C. 7001 et seq.), which include obtaining the consumer's 
affirmative consent to such means of notice.

* * * * *
    39. 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.

    40. 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 X9.90 for substitute checks.

* * * * *
    41. In appendix E, revise paragraph XVI.C.1.a. 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 
either reaches the returning bank to which it is sent by that bank's 
cut-off hour for the next processing cycle after the applicable 
deadline or reaches the depositary bank to which it is sent by that 
bank's next banking day following the expiration of the applicable 
deadline. The extension also applies if the check reaches the bank 
to which it is sent later than the close of that bank's cut-off hour 
for the next processing cycle or its next banking day, as 
applicable, if highly expeditious means of transportation are used. 
For example, a West Coast paying bank may use this further extension 
to ship a returned check by air courier directly to an East Coast 
returning bank even if the check arrives after the returning bank's 
cut-off hour for the next processing cycle. This paragraph applies 
to the extension of all midnight deadlines except Saturday midnight 
deadlines (see paragraph C.1.b. of this appendix).

* * * * *
    42. 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 X9.90 for substitute checks.

* * * * *
    43. 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 question marks, 
asterisks, or other symbols designated for this purpose by generally 
applicable industry standards, such as ANS X9.37.

* * * * *
    44. In appendix E, paragraph XIX.D.1., insert a new sentence 
between the next-to-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 
Sec.  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 Sec.  229.13(g) if the depositary 
bank invokes the reasonable-cause exception of Sec.  229.13(e) due 
to the receipt of a notice of nonpayment, provided the notice meets 
all the requirements of Sec.  229.13(g).

* * * * *
    45. In appendix E, paragraph XXI.A.1., remove the phrase ``are 
legible'' from the fourth sentence and add the phrase ``can be 
interpreted by a subsequent collecting bank, paying bank, or returning 
bank'' in its place.
    46. In appendix E, paragraph XXI.A., remove existing paragraphs 2. 
through 6., remove paragraph 8., redesignate existing paragraph 7. as 
paragraph 8., and add the following paragraphs 2. through 7. to read as 
follows:

    XXI. * * *
    A.
* * * * *
    2. Banks generally apply indorsements to paper checks in one of 
two ways: (1) Banks print or ``spray'' indorsements onto checks when 
the checks are 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 substitute checks at the time that the 
substitute checks are created. A substitute check will contain, in 
its image of the original check or previous substitute check, 
reproductions of indorsements that were sprayed 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 
a ``previously applied electronic indorsement.'' 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 previously applied electronic indorsements and their own 
indorsements onto substitute checks at the time the substitute 
checks are created.
    3. The location of an indorsement applied to an existing paper 
check in accordance with appendix D may shift if that check is 
truncated and later reconverted to a substitute check. If the 
indorsement is overwritten by a subsequent indorsement that also is 
applied in accordance with appendix D, then the indorsement could be

[[Page 1495]]

rendered illegible. See Sec.  229.38(d) and the commentary thereto 
for information regarding liability for a loss that results from an 
illegible indorsement.
    4. To ensure that indorsements can be easily read and imaged, 
the standard requires all indorsements applied to original checks 
and substitute checks to be printed in black ink.
    5. 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, and (2) the indorsement date. 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.
    6. 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.
    7. A depositary bank may want to include an address in its 
indorsement in order to limit the number of locations at which it 
must accept returned checks. In instances where this address is not 
consistent with the routing number in the indorsement, the 
depositary bank is required to accept returned checks at a branch or 
head office consistent with the routing number. Banks should note, 
however, that Sec.  229.32 requires a depositary bank to accept 
returned checks at the location(s) at which it accepts forward-
collection checks.

* * * * *
    47. In appendix E, paragraph XXI.A.13, in the first sentence add 
the phrase ``collecting banks and'' between the phrases ``standard 
for'' and ``returning banks'' and add a new sentence to the end of the 
paragraph to read as follows:

    XXI. * * *
    A. * * *
    13. * * * With respect to the identification of a paying bank 
that is also a reconverting bank, see the commentary to Sec.  
229.51(b)(2).

* * * * *
    48. In appendix E, paragraph XXIII.A, remove the last sentence.
    49. 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 a 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 X9.90 provides that an image of an original check should 
be reduced in size when placed on a substitute check: images of 
business-sized checks will be reduced to about 65 percent of their 
original size and images of personal-sized checks will be reduced to 
about 80 percent of their original size. Because of this size 
reduction, the location of an indorsement, particularly a depositary 
bank indorsement, applied to an original paper check will likely 
change when a 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.

    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 of the check and 
1.5 inches from the trailing edge of the check. The check's 
conversion to electronic form and subsequent reconversion to paper 
form causes the location of the depositary bank indorsement, now 
contained within the image of the original check, to change such 
that it is less than 3.0 inches from the leading edge of the 
substitute check. In accordance with appendix D's specifications, a 
subsequent collecting bank sprays its indorsement onto the 
substitute check between the leading edge of the check and 3.0 
inches from the leading edge of the check and the indorsement 
happens to be on top of the shifted depositary bank indorsement. If 
the check is returned unpaid and the return is not expeditious 
because of the illegibility of the depositary bank indorsement, and 
the depositary bank incurs a loss that it would not have incurred 
had the return been expeditious, the reconverting bank bears the 
liability for that loss.

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

XXX. Sec.  229.51 General provisions governing substitute checks

A. Sec.  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. Any person therefore 
may transfer or otherwise provide such a check to any other person 
for any purpose without obtaining the recipient's agreement. 
Although a person still would be entitled to receive a paper check 
absent agreement to the contrary, that person would be required to 
accept a legally equivalent substitute check in lieu of the original 
check. A person that receives a substitute check cannot be assessed 
costs associated with the creation of the substitute check, absent 
agreement to the contrary.
    2. A person other than a bank that creates a substitute check 
could transfer that check only by agreement unless and until a bank 
provided the substitute check warranties. For example, a nonbank 
that wanted to create substitute checks for the purpose of 
depositing such checks for collection could not deposit those 
substitute checks without the agreement of a depositary bank.

    Example. A depositary bank could agree to allow a person that is 
not a bank to deposit substitute checks that person created. The 
depositary bank then would provide the substitute check warranties 
and become the reconverting bank when the bank transferred the check 
to another bank for collection, presented the check to the paying 
bank, or otherwise transferred the check. If the substitute check 
also met the accuracy and legend requirements for legal equivalence, 
as warranted, the transferee would be required to accept it just as 
it would the original check.
    3. To be the legal equivalent of the original check, a 
substitute check must accurately represent all the information on 
the front and back of the check as of the time the original check 
was truncated. The 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; (2) 
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; and (3) other information placed on the check 
prior to truncation, such as any required identification information 
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 Sec.  
229.51(a).
    4. To be the legal equivalent of the original check, a 
substitute check also must bear the legal equivalence legend 
described in Sec.  229.51(a)(2). A bank may not vary the language of 
the legal equivalence legend and

[[Page 1496]]

must place the legend on the substitute check as specified by 
generally applicable industry standards for substitute checks 
contained in ANS X9.90.

B. 229.51(b) Reconverting Bank Duties

    1. As discussed in more detail in appendix D and the commentary 
to Sec.  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 should 
be preserved through the image of the back of the original check. If 
indorsements were applied electronically after the original check 
was truncated 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.
    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.

    Example. A bank's customer, which is a nonbank business, 
receives checks for payment and wants to deposit substitute checks 
instead of the original checks with its depositary bank. A bank that 
agrees to accept these substitute checks for deposit would be the 
depositary bank and 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 X9.90, 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) Purported Substitute Checks

    1. A reconverting bank must ensure that a substitute check 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. As discussed in the commentary 
to the substitute check definition, the MICR line of the substitute 
check could vary from the MICR line of the original check in two 
ways and still qualify as a substitute check: (1) The substitute 
check indicator in position 44 would be different on the substitute 
check and (2) the reconverting bank or a subsequent bank could 
correct an amount encoding error (including a failure to encode) 
that is traceable to the original check. If the MICR line differs in 
other ways from the MICR line of the original check, the item would 
not meet the definition of substitute check. If the item is handled 
as if it were a substitute check, however, this section provides 
that the warranties, indemnity, expedited recredit, liability, and 
consumer awareness provisions would apply to that item as if it were 
a substitute check. The item would not, however, be the legal 
equivalent of the original check.

D. 229.51(d) 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 
Sec.  229.51(a).
    2. A law is not inconsistent with the Check 21 Act or subpart D 
merely because it allows for the recovery of a greater amount of 
damages.

    Example. A drawer that suffers a loss with respect to a 
substitute check that was improperly charged to its account and for 
which the drawer has an indemnity claim but not a warranty claim 
would be limited under the Check 21 Act to recovery of the amount of 
the substitute check plus interest and expenses. However, if the 
drawer also suffered damages that were proximately caused because 
the bank wrongfully dishonored subsequently presented checks as a 
result of the improper substitute check charge, the drawer could 
recover those losses under U.C.C. Sec.  4-402.

XXXI Sec.  229.52 Substitute Check Warranties

A. 229.52(a) Warranty Content and Provision

    1. The substitute check warranties are first given by the 
reconverting bank. In the case of a substitute check created by a 
bank, the reconverting bank gives the 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 makes the warranties when it transfers for consideration 
either the substitute check it received or an electronic or paper 
representation of that substitute check. The warranties also are 
given by any subsequent bank that transfers for consideration either 
the substitute check or a paper or electronic representation of the 
substitute check. A paper representation of a substitute check could 
include an image of the substitute check contained within an image 
statement or information about the check (such as the check number 
and amount) that is included on a periodic account statement.
    2. A bank that truncates the original check and by agreement 
transfers the check electronically to a subsequent bank for 
consideration does not make the substitute check warranties to the 
recipient of the electronic form of the original check, because the 
sending bank has not transferred for consideration a substitute 
check or paper or electronic representation of a substitute check. 
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 
the first warrantor. However, that bank may protect itself by 
including in its agreement with the sending bank provisions that 
specify the sending bank's warranties and responsibilities to the 
receiving bank, particularly with respect to the accuracy of the 
check image and check data transmitted under the agreement.
    3. A bank need not affirmatively make the warranties because 
they attach automatically when a bank transfers, presents, or 
returns the substitute check (or a representation thereof) for which 
it receives consideration. Because a substitute check transferred 
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 that reproduced the same original check. When a 
check changes form multiple times in the collection or return 
process, the first reconverting bank and subsequent banks that 
transfer 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 
Sec.  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 Sec.  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 reconverting banks, 
transferring banks, and returning banks

[[Page 1497]]

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. 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. Bank A uses check information that it received 
electronically to create a substitute check, which it presents to 
Bank B for payment. Bank A is a reconverting bank that made the 
substitute check warranties when it presented the check and received 
payment. An employee of Bank A later uses the electronic check 
information to create a second, identical substitute check, which he 
then deposits at Bank C. Bank C presents the second substitute check 
to Bank B for payment. Bank C also is a reconverting bank that has 
made the warranties as of the time it presented the second 
substitute check to Bank B. The drawer of the original check and 
Bank B could pursue a warranty claim against either Bank A or Bank 
C.

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. A person does not receive the warranties if it previously 
handled only the original check or a representation of an original 
check that was not derived from a substitute check. In other words, 
the warranties flow only forward to persons that receive a 
substitute check or something derived from a substitute check; they 
do not flow backward to persons that handled only an original check 
or an image of an original check that predated the first substitute 
check. However, a person that initially handled only the original 
check could become a warranty recipient if that person later 
received a returned substitute check or a paper or electronic 
representation of a substitute check that was derived from that 
original check.

XXXII. Sec.  229.53 Substitute Check Indemnity

A. 229.53(a) Scope of Indemnity

    1. As with the warranties, responsibility for providing the 
indemnity begins with the reconverting bank and is made by each bank 
that subsequently receives consideration for a substitute check (or 
a paper or electronic representation of the substitute check) that 
it transfers, presents, or returns. The indemnity covers losses by 
any subsequent recipient (including the subsequent collecting or 
returning bank, the depositary bank, the drawer, the drawee, the 
payee, the depositor, and any indorser) that are due to the fact 
that any recipient of a substitute check received a substitute check 
instead of the original check. As with the warranties, the indemnity 
is not provided to or by 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.
    2. The indemnity would cover losses that a recipient suffered 
directly because it received a substitute check instead of the 
original check. The indemnity also would cover losses incurred 
because a person provided an indemnity, either to the person that 
suffered a loss due to the receipt of a substitute check or to 
another bank that provided an indemnity in connection with that 
loss. A bank that has provided an indemnity could, in turn, bring an 
indemnity claim regardless of whether that bank received the actual 
substitute check or a paper or electronic representation of the 
substitute check. The indemnity would not, however, cover a loss 
that was not ultimately traceable to the receipt of a substitute 
check instead of the original 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 and likely would have detected the fraud and returned the 
original check before its midnight deadline. The security features 
that the bank would have inspected were security features that did 
not survive the imaging process (see the commentary to Sec.  
229.51(a)). Under these circumstances, the paying bank could assert 
an indemnity claim against the bank that presented the substitute 
check.
    b. By contrast with the previous example, 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 the bank has 
established for examining security features, the bank likely would 
not have caught the error and accordingly would have suffered a loss 
even if it had received the original check.
    c. A paying bank that made payment based on an electronic 
representation of the check and subsequently suffered a loss would 
not have an indemnity claim associated with that payment because its 
loss did not result from receipt of an actual substitute 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 check law.
    d. A drawer has agreed with its bank that the drawer will not 
receive paid checks with periodic account statements. The drawer 
requests a copy of paid check in order to prove payment and received 
a photocopy of the front 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 depositor 
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.

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 discovered that its account had been 
charged mistakenly for a purported substitute check because the 
substitute check contained an ``8'' in the account-number field of 
the MICR line where the original check contained a ``3.'' As a 
result of this erroneous 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 Sec.  
229.52(a)(1). The drawer also could assert an indemnity claim, 
because if the original check had been presented instead of the 
purported substitute check, the bank likely would not have charged 
the drawer's account. It is likely that the drawer would assert its 
warranty and indemnity claims against the paying bank, because that 
is the bank with which the drawer has an account relationship. 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 
purported substitute check also would have a warranty claim against 
the previous transferor of the purported substitute check and could 
seek an indemnity from that bank. 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.
    c. A person received a purported substitute check that did not 
contain the legal equivalence legend, could not use that item to 
prove payment, and suffered a resulting loss. The item did not 
contain the legend and thus did not meet one of the requirements for 
legal equivalence, as warranted, and the person suffered a loss that 
would not have been suffered had the original check been received 
instead. The person therefore could recover all damages proximately 
caused by the warranty breach.


[[Page 1498]]


    2. If the recipient of the substitute check does not have a 
substitute check warranty claim with respect to the substitute 
check, its recovery under Sec.  229.53 is limited to the amount of 
the substitute check, plus interest and expenses. However, the 
indemnified party 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 that was only charged once to 
the drawer's account, 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 and no person was asked to 
pay the substitute check more than once. In that case, the amount of 
the drawer's indemnity would be limited to the amount of the 
substitute check, plus interest and expenses, although the drawer 
could attempt to recover additional losses, if any, under other law.
    b. As described more fully in the commentary to Sec.  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 likely would have returned by its midnight deadline had it 
received the original check. However, if the legally equivalent 
substitute check was only presented once, the paying bank's 
indemnity would be limited to the amount of the substitute check 
plus interest and expenses.

    3. The amount of an indemnity would be reduced in proportion to 
the amount of any amount loss attributable to the indemnified 
party's negligence or bad faith. This comparative negligence 
standard is intended to allocate liability in the same manner as the 
comparative negligence provision of Sec.  229.38(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 party based on an indemnity, warranty, or other claim. The 
party 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 a U.C.C. warranty claim 
against a bank that previously handled the check. The bank also 
could request from the drawer any information that the drawer might 
possess regarding the possible identity of the forger.

XXXIII. Sec.  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. 
Thus, a consumer that received only an image statement containing an 
image of a substitute check would not be entitled to make an 
expedited recredit claim, although he or she could seek redress 
under other provisions of law, such as Sec.  229.52 or U.C.C. 
section 4-401. However, a consumer who originally received only an 
image statement but later received a substitute check, such as in 
response to a request for a copy of a check shown in the statement, 
could bring a claim if the other expedited recredit criteria were 
met. Although a consumer must at some point have received a 
substitute check to make an expedited recredit claim, the consumer 
need not be in possession of the substitute check at the time he or 
she submits the claim.
    2. A consumer must in good faith assert that the bank improperly 
charged the consumer's account for the substitute check or that the 
consumer has a warranty claim for the substitute check (or both). 
The warranty in question could be a substitute check warranty 
described in Sec.  229.52 or any other warranty that a bank provides 
with respect to a check under Sec.  229.34, the U.C.C., or other 
law.
    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. A consumer who 
suffers a 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.
    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 is necessary to verify 
whether the signature is that of the consumer. Under those 
circumstances, the consumer, if acting in good faith, could assert 
that the charge was improper, that he or she therefore had incurred 
a loss in the amount of the check (plus foregone interest if the 
account was an interest-bearing account), and that he or she needed 
the original check to determine the validity of the forgery claim. 
By contrast, if the signature on the substitute check obviously was 
forged (for example, if the forger signed a name other than that of 
the account holder) and there was no other defect with the 
substitute check, the consumer would not need the original check or 
a sufficient copy to determine the fact of the forgery and thus 
would not be able to make an expedited recredit claim under this 
section. However, the consumer would have a claim under U.C.C. 
section 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 mailing, in-person, or electronic delivery of an account 
statement or by the mailing or in-person delivery of a substitute 
check. In the case of a mailed statement or substitute check, the 
40-day period should be calculated using the postmark on the 
envelope.
    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. A consumer's claim must include the reason why the consumer 
believes that his or her account was charged improperly or why he or 
she has a warranty claim. A charge could be improper, for example, 
if the bank charged the consumer's account for an amount different 
than the consumer believes he or she authorized or charged the 
consumer more than once for the same check, or if the check in 
question was a forgery or otherwise fraudulent.
    5. 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

[[Page 1499]]

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.
    6. The information that the consumer is required to provide 
under Sec.  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.
    7. A bank may accept an expedited recredit claim in any form but 
could in its discretion require the consumer to submit the claim in 
writing. A bank that requires a recredit claim to be in writing 
should inform the consumer of that requirement and provide a 
location to which such a written claim should be sent. For example, 
a bank could inform a consumer of the written notice requirement in 
the consumer awareness notice required by Sec.  229.57 or, if the 
consumer attempts to make a claim orally, by informing the consumer 
at that time of the written notice requirement.
    8. A bank may permit a consumer to submit a claim 
electronically. However, a bank cannot require that a written claim 
be submitted electronically.
    9. If a bank requires a consumer to submit a claim in writing, 
the bank must compute time periods that begin with submission of a 
claim from the date that the bank received the written claim. Thus, 
if a consumer called the bank to make an expedited recredit claim 
and the bank required the consumer to submit the claim in writing, 
the time at which the bank must take action on the claim would be 
determined based on the date on which the bank received the written 
claim, not the date on which the consumer placed the call.
    10. 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 Sec.  229.54(b) is not a claim for 
purposes of Sec.  229.54.

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. For example, if a consumer sends claims with 
respect to two different substitute checks in the same envelope or 
e-mail, the bank must make the required provisional credit for each 
of the two claims by the 10th business day thereafter (unless the 
bank already determined whether or not those claims are valid in 
accordance with Sec.  229.54(c)(1) or (c)(2)).
    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 at any 
time 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.

D. 229.54(d) Availability of Recredit

    1. The availability of a recredit provided by a bank under Sec.  
229.54(c) is governed solely by Sec.  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 Sec.  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 withdrawn 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 (see Sec.  229.13(a) 
and (d)).
    2. Section 229.54(d)(2) describes the maximum period of time 
that a bank may delay availability of a recredit provided under 
Sec.  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 Sec.  
229.54(d)(2) is the amount that the bank recredits under Sec.  
229.54(c)(3)(i) 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 Sec.  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 explain 
the reason that it is denying the claim, such as the reason the bank 
believes the substitute check 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 of the original check, 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, Sec.  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. If a consumer receives an 
electronic image of the original check or an electronic image of a 
sufficient copy, the consumer could obtain a sufficient copy simply 
by printing that image.
    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 Sec.  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. Therefore, use of these models may, but will not 
necessarily, be deemed to be compliance with the requirements of 
Sec.  229.54(e).

XXXIV. Sec.  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 Sec.  229.54 or a loss incurred because the 
claimant bank was required to indemnify another bank that provided 
compensation to a consumer or to a bank in connection with a 
consumer expedited recredit claim under Sec.  229.54.

    Examples. a. A paying bank charged a consumer's account based on 
a substitute check that contained a blurry image of a legible 
original check, and the consumer whose account was charged made an 
expedited recredit claim against the paying bank because the 
consumer suffered a loss and needed the original check or a 
sufficient copy to determine the validity of his or her claim. The 
paying bank would have a warranty claim against the presenting bank 
that transferred the defective substitute check to it and against 
any previous transferring bank(s) that handled that substitute check 
or another paper or electronic representation of the check. The 
paying bank therefore would meet each of the requirements necessary 
to bring an interbank expedited recredit claim.
    b. Continuing with the example a., if the presenting bank 
determined that the paying bank's claim was valid and provided a 
recredit, the presenting bank would have

[[Page 1500]]

suffered a loss in the amount of the recredit it provided and could, 
in turn, make an expedited recredit claim against the bank that 
transferred the defective substitute check to it.

B. 229.55(b) Procedures for Making Claims

    1. An interbank recredit claim under this section must be 
brought within 120 calendar days of the transaction giving rise to 
the claim. The length of the time period for bringing an interbank 
recredit claim allows multiple banks that might have suffered a loss 
as a result of a particular transaction sufficient time to bring a 
claim. The time period also allows for the delay between the 
transaction date and the due date for the consumer's claim under 
Sec.  229.54.
    2. When estimating the amount of its loss, Sec.  
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 Sec.  229.54.
    3. The information that the claimant bank is required to provide 
under Sec.  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 Sec.  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 (Sec.  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 explain why that claim or the 
underlying consumer expedited recredit claim is or is not valid.

XXXV. Sec.  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 Sec.  229.53 because 
of a breach of a substitute check warranty also may recover under 
Sec.  229.53 any losses proximately caused by the warranty breach, 
including interest, costs, reasonable attorney's fees, and other 
expenses of representation. As a practical matter, a person likely 
would seek to recover under Sec.  229.53 if it received the 
problematic substitute check and under Sec.  229.56 if it did not.
    2. A reconverting bank also may be liable under Sec.  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.

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. Sec.  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. Sec. Sec.  4-207(d) and 4-208(e), with an added 
provision that a timely Sec.  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 Sec.  229.56(c), all 
actions under Sec.  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. Each bank must provide the disclosure required by this 
section to each of its consumer customers who receives paid checks 
with his or her account statement or who otherwise receives 
substitute checks.
    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 bank must provide the disclosure described in Sec.  
229.57(a) to each consumer who routinely receives paid checks with 
his or her periodic account statement. A bank also must provide the 
disclosure to a consumer who does not routinely receive his or her 
checks but rather receives a substitute check on an occasional 
basis, unless the bank previously provided the disclosure to that 
consumer.

    Examples. a. A consumer who does not receive paid checks with 
each periodic account statement may request a copy of a check on a 
case-by-case basis, such as to prove that he or she made a 
particular payment. [Alternative 1: A bank that responds to the 
consumer's request by providing a substitute check must provide the 
required disclosure at the time the consumer requests the copy.] 
[Alternative 2: A bank that responds to the consumer's request by 
providing a substitute check must provide the required disclosure no 
later than the time at which it provides that substitute check.]
    b. 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, unless it has given such disclosure 
previously.

    51. In appendix E, in newly-redesignated paragraph XXXVII, revise 
paragraph A.1. to read as follows:
* * * * *

XXXVII. 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.
* * * * *
    52. In appendix E, in newly-redesignated paragraph XXXVII.B., 
revise the first sentence of paragraphs 1.a and the first sentence of 
paragraph 1.c and add a new paragraph 7, to read as follows:

XXXVII. * * *

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 Sec.  229.16 and substitute check 
policy disclosure described in Sec.  229.57. * * *
* * * * *
    c. Models C-1 through C-5A generally do not reflect any optional 
provisions of the

[[Page 1501]]

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 Sec.  229.57 explaining when a substitute 
check is the legal equivalent of an original check for all purposes 
and the circumstances under which the consumer may make a claim for 
expedited recredit.
* * * * *
    53. In appendix E, in newly-redesignated paragraph XXXVII.D., 
revise the first sentence of paragraph 1. and add new paragraphs 11. 
through 15., to read as follows:

XXXVII. * * *

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 customer who 
receives substitute checks makes an expedited recredit claim under 
Sec.  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; 
therefore, use of these models may, but will not necessarily, be 
deemed compliance with the requirements of Sec.  229.54(e).
    12. Model C-22 Full Refund Notice. A bank may use this model 
when crediting the entire amount of a customer's expedited recredit 
claim within ten days of the customer submitting the claim or when 
crediting the remaining amount of a customer's expedited recredit 
claim by the 45th calendar day after the customer submitted the 
claim, as required under Sec.  229.54(e)(1).
    13. Model C-23 Partial Refund Notice. A bank may use this model 
when crediting a partial expedited recredit to a customer, pending 
further investigation of the claim, as required under Sec.  
229.54(e)(1).
    14. Model C-24 Denial of Claim. A bank may use this model when 
denying a claim for an expedited recredit under Sec.  229.54(e)(2).
    15. Model C-25 Reversal of Refund. A bank may use this model 
when reversing an expedited recredit that was credited to a 
customer's account under Sec.  229.54(e)(3).
* * * * *
    54. 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, December 22, 2003.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04-300 Filed 1-7-04; 8:45 am]
BILLING CODE 6210-01-P