[Federal Register Volume 69, Number 149 (Wednesday, August 4, 2004)]
[Rules and Regulations]
[Pages 47290-47328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17362]



[[Page 47289]]

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Part IV





Federal Reserve System





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12 CFR Part 229



Availability of Funds and Collection of Checks; Final Rule

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

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FEDERAL RESERVE SYSTEM

12 CFR Part 229

[Regulation CC; Docket No. R-1176]


Availability of Funds and Collection of Checks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board of Governors is publishing final amendments to 
Regulation CC that add a new subpart D, with commentary, to implement 
the Check Clearing for the 21st Century Act. These amendments set forth 
the requirements of the Act that apply to banks, a model consumer 
awareness disclosure and other model notices, and indorsement and 
identification requirements for substitute checks. The final amendments 
also clarify some existing provisions of the rule and commentary.

DATES: This rule is effective on October 28, 2004, except for model 
form C-5A in appendix C, which is effective August 4, 2004, and 
paragraph (4) of appendix D, which is effective on January 1, 2006.

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

SUPPLEMENTARY INFORMATION:

Background

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

    Under current law, a bank must present the original paper check for 
payment unless the paying bank has agreed to accept presentment in some 
other form.\1\ Sections 3-501(b)(2) and 4-110 of the Uniform Commercial 
Code (U.C.C.) specifically authorize banks and other persons to agree 
to alternative means of presentment, such as electronic presentment. 
However, to engage in broad-based electronic presentment, a presenting 
bank would need electronic presentment agreements with each bank to 
which it presents checks. This has proven impracticable because of both 
the large number of paying banks and the unwillingness of some paying 
banks to receive electronic presentment.\2\ The requirement that banks 
present the original check absent agreement to the contrary and the 
difficulty of obtaining alternate presentment agreements with all 
paying banks impedes the ability of banks that want to process checks 
electronically to take full advantage of that technology. As a result, 
the payment system as a whole has not achieved the efficiencies and 
potential cost savings associated with handling checks electronically.
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    \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.
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    By authorizing the use of a new negotiable instrument called a 
substitute check, the Check Clearing for the 21st Century Act (the 
Check 21 Act or the Act) facilitates the broader use of electronic 
check processing without mandating that any bank change its current 
check collection practices.\3\ A substitute check is a paper 
reproduction of an original check that contains an image of the front 
and back of the original check, is suitable for automated processing in 
the same manner as the original check, and meets other technical 
requirements. A bank that for consideration transfers, presents, or 
returns a substitute check (or a paper or electronic representation of 
a substitute check) warrants that (1) the substitute check contains an 
accurate image of the front and back of the original check and a legend 
stating that it is the legal equivalent of the original check, and (2) 
no depositary bank, drawee, drawer, or indorser will be asked to pay a 
check that it already has paid. A substitute check that meets the Check 
21 Act's requirements regarding accuracy, bears the legend, and for 
which a bank has made the substitute check warranties is the legal 
equivalent of the original check for all purposes and all persons.
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    \3\ Pub. L. 108-100, 117 Stat. 1177 (codified at 12 U.S.C. 5001-
5018). The Check 21 Act was enacted on October 28, 2003, and takes 
effect on October 28, 2004.
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    The use of legally equivalent substitute checks should facilitate 
collection and return of checks in electronic form. For example, a 
depositary bank in California that receives a check drawn on a bank in 
New York now must send the original paper check for collection unless 
it, or an intermediary collecting bank that presents checks sent by it, 
has an electronic presentment agreement with the paying bank. Under the 
Check 21 Act, by contrast, the California bank could transfer check 
information electronically to a collecting bank in New York with which 
it had an agreement to do so. The New York collecting bank then could 
create a substitute check to present to the New York paying bank. The 
New York paying bank would be required to take presentment of a 
substitute check that met all the legal equivalence requirements. Thus, 
instead of processing and transporting the original check across the 
country, the California bank could collect the substitute check using 
only local New York transportation.

II. How the Check 21 Act Affects Banks

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

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the substitute check warranties and would be responsible for 
indemnifying any person that suffered a loss due to the receipt of a 
substitute check instead of the original check. A bank that transferred 
a substitute check to a consumer who incurred a loss associated with 
the substitute check also might be required to provide an expedited 
recredit to that consumer. A bank that provides paid checks to consumer 
customers with periodic account statements or that otherwise provides a 
substitute check to a consumer customer must provide a disclosure that 
describes substitute checks and substitute check rights.
    Although the Check 21 Act does not require banks to make processing 
changes to receive substitute checks, a bank will be required to 
qualify a substitute check for return differently than it does an 
original check. A bank must place a ``2'' in position 44 of the MICR 
line of a qualified returned original check. A bank that qualifies a 
substitute check for return instead must encode position 44 of the 
substitute check's qualified return MICR line with a ``5.''
C. Provisions Affecting Banks That Create Substitute Checks
    Although the foregoing provisions of the Check 21 Act would apply 
to all banks, the law is designed so that losses associated with a 
substitute check ultimately would be borne by the party that first 
transferred, presented, or returned the substitute check (the 
reconverting bank).\4\ A bank that paid a warranty claim or provided an 
indemnity or expedited recredit for a substitute check that it received 
from another bank could, in turn, bring a warranty, indemnity, or 
interbank expedited recredit claim against the bank that transferred 
the substitute check to it and thereby pass the associated loss back to 
the reconverting bank.\5\ Thus, if there is a duplicative check payment 
involving a substitute check, a substitute check indemnity claim, or a 
breach of the legal equivalence warranty, the Check 21 Act places 
ultimate responsibility on the reconverting bank.\6\ The Check 21 Act 
also requires the reconverting bank to identify itself as such and to 
preserve the indorsements of parties that previously handled the check 
in any form.
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    \4\ A reconverting bank is (1) the bank that creates a 
substitute check or (2) the first bank that receives a substitute 
check created by a person that is not a bank and transfers either 
that substitute check or in lieu thereof the first paper or 
electronic representation of that substitute check.
    \5\ Banks may further allocate liability amongst themselves as 
part of their agreements to handle checks electronically. A 
reconverting bank that received a check in electronic form therefore 
could, by agreement, pass back to the sender of that item some or 
all of the losses the reconverting bank incurred if it used the 
electronic item to create a substitute check that gave rise to a 
Check 21 Act warranty, indemnity, or expedited recredit claim.
    \6\ But see footnote 5.
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III. Overview of the Board's Proposed Rule

    The Board in January 2004 proposed to implement the Check 21 Act by 
adding to Regulation CC a new subpart D that would incorporate the 
requirements of the Act applicable to banks that create, receive, or 
provide substitute checks or paper or electronic representations of 
substitute checks.\7\ The Board proposed that subpart D would contain 
provisions concerning requirements a substitute check must meet to be 
the legal equivalent of an original check, reconverting bank duties, 
the warranties and indemnity associated with substitute checks, 
expedited recredit procedures for consumers and banks, liability for 
violations of subpart D, and the interaction between subpart D and 
existing federal and state laws. The Board proposed new model notices 
in appendix C for the consumer awareness disclosure and other consumer 
notices regarding substitute checks.
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    \7\ 69 FR 1470 (Jan. 8, 2004).
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    The Board also proposed amendments to implement the Check 21 Act 
that would affect some existing provisions of Regulation CC and its 
commentary. For example, the Board proposed to supplement some existing 
defined terms in Sec.  229.2 for which the Check 21 Act had slightly 
different definitions and to define several new terms used in subpart 
D. The Board also proposed to amend the magnetic ink character 
recognition (MICR) line requirements for qualified returned checks to 
allow for differences to facilitate the processing of substitute checks 
and to amend Sec.  229.35 and appendix D to include indorsement and 
identification standards for substitute checks.
    The Board also proposed revisions to several other provisions of 
Regulation CC and its commentary that were unrelated to the Check 21 
Act. For example, the Board proposed amending the commentary to clarify 
that a returned check notice need not be written, clarify the 
application of the Electronic Signatures in Global and National 
Commerce Act (the E-Sign Act) to consumer disclosures that Regulation 
CC requires to be in writing, and clarify the time by which a paying 
bank may extend the return or notice of nonpayment deadline. The Board 
also sought general comment on several issues, including whether it 
should include in Regulation CC a new U.C.C. warranty regarding the 
drawer's authorization of remotely-created demand drafts.

Overview of Comments on the Proposed Rule

    The Board received comments on the proposed rule from 168 
commenters, including 107 depository institutions and organizations 
representing depository institutions, 35 consumers and consumer groups, 
14 nonbank service providers, and 12 other organizations and persons 
(including one United States Senator). The vast majority of these 
commenters generally approved of the Check 21 Act and the Board's 
proposed rule but expressed views about how the Board could change 
specific provisions of the rule. Specific substantive comments are 
discussed in more detail in the portions of the Section-by-Section 
Analysis that analyze the commented-upon provisions.

I. Comments Expressing General Concerns

    Several commenters expressed general disapproval of the Check 21 
Act and the Board's proposed rule. These commenters expressed concern 
that the use of substitute checks would increase fraud, benefit banks 
at the expense of consumers, and confuse consumers and bank 
employees.\8\
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    \8\ Some commenters argued that banks would be unable to make an 
informed decision about whether to process checks physically or 
switch to electronic processing because of uncertainty about the 
relative costs of each option. There are a variety of factors in 
determining the relative costs of check processing options, some of 
which are institution-specific. The Board expects that most banks 
should be able to analyze their own cost structures and make 
informed processing decisions.
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    The commenters concerned about consumer harm argued that the Check 
21 Act would shorten the time needed to collect checks and would not 
reduce fees for consumers.\9\ The Board expects that the Check 21 Act 
ultimately will decrease the time needed to collect checks, which is an 
outcome that the Board deems desirable, and will result in other 
benefits to banks and their

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customers.\10\ For example, processing changes that a bank makes in 
reliance on the Check 21 Act could enable the bank to offer its 
depositors later cutoff times for certain deposits or to make check 
images available to consumers online. These changes would allow 
consumers faster access to deposited funds and to records relating to 
their check payments, respectively.
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    \9\ Some commenters also expressed concern that existing hold 
periods for deposited checks were either too long or too short. The 
existing hold periods in subpart B of Regulation CC are those set 
forth in the Expedited Funds Availability Act, and the Board is 
required to shorten (but may not lengthen) those hold periods as the 
time periods for clearing local and nonlocal checks improve on a 
widespread basis. The Board will adjust the hold periods in subpart 
B if and when the check clearing timeframes for checks improve 
substantially enough to warrant such adjustments.
    \10\ The more time needed to collect a check, the greater the 
risk that the depositary bank will make funds deposited by check 
available for withdrawal before it knows whether the paying bank 
will pay or return the check. The Board's policies therefore seek to 
reduce, rather than preserve, the time for collecting checks. See, 
e.g., the Board's Policy Statement on Delayed Disbursement, Fed. 
Res. Reg. Service ] 9-750, p. 9-247.
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    Several commenters noted that people already are confused because 
some checks are used to obtain information to initiate an automated 
clearing house (ACH) debit rather than to effect the payment 
transaction by check. These commenters expressed concern that adding 
substitute checks to the payment system would exacerbate confusion 
about the rights associated with checks. The Board agrees with 
commenters that substitute checks could increase confusion about the 
ways in which checks can be used to process payments and the legal 
rights associated with each processing choice. The Board plans to 
prepare guidance on these topics.

II. Comments Urging Action Inconsistent With the Check 21 Act

    Several commenters suggested that the Board take actions that would 
be inconsistent with the language or intent of the Check 21 Act.
    Three commenters suggested that the Board delay the effective date 
of the rule beyond the effective date of the statute. However, to 
implement the Check 21 Act effectively, the rule generally must take 
effect no later than the effective date of the statute.\11\
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    \11\ Model disclosure C-5A in appendix C takes effect 
immediately so that banks need not delay their use of that model in 
preparing the consumer awareness disclosure required by Sec.  
229.57. The requirement in appendix D that all indorsements be 
printed in black ink does not take effect until January 1, 2006, to 
give banks a transition period to make necessary processing changes.
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    One commenter suggested that the Board establish standards for the 
exchange of electronic check images. This would go beyond the scope of 
the provisions of the Check 21 Act, which only relate to substitute 
checks. Electronic presentment will continue to be governed, as it is 
today, by agreements between the paying bank and the presenting 
bank.\12\
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    \12\ One commenter suggested that the Federal Reserve Banks 
publish a list of banks that have agreed to send or receive checks 
in electronic form. Reserve Banks and other collecting banks may 
publish lists of banks that accept electronic presentment from them. 
However, any such lists will reflect only the agreements of the 
listed banks to receive presentment electronically from that 
particular collecting bank and would not indicate a general 
agreement of the receiving bank to receive presentment 
electronically.
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    Another commenter opined that the costs of using substitute checks 
should be borne by paying banks and bank customers that demand paper 
checks. This would be at odds with the Act's intent to allow banks that 
choose to process checks electronically to do so and create substitute 
checks in a manner that is transparent to banks and other persons that 
require paper checks.
    Several commenters expressed particular concern that the use of 
substitute checks would make the original check more difficult to 
obtain, which in turn would impede law enforcement's ability to obtain 
physical evidence, such as fingerprints, pen pressure analysis, and 
other forensic evidence from paper checks.\13\ These commenters 
requested that the Board impose original check retention requirements 
in subpart D. Original checks are truncated in today's environment, and 
the U.C.C. requires the person that truncates the check to give the 
original check to the drawer, keep the original check, or destroy the 
original check but maintain the ability to provide a legible copy for a 
specified period of time (usually seven years). The Board expects that, 
after the Check 21 Act takes effect, more checks potentially will be 
truncated and destroyed. The Check 21 Act does not impose any 
additional requirements on original check retention, and the Board is 
not imposing any such requirements by regulation. Rather, the choice of 
whether, and after what period of time, to destroy a check will remain 
a business decision for the bank or other person that removes the check 
from the collection or return process. Banks and other persons that 
destroy checks may take fraud risks into account when deciding whether 
to destroy a truncated check. For example, some banks may choose to 
keep original checks above a certain dollar amount due to the 
potentially greater risks associated with those items.
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    \13\ The commenters did not quantify how often or how many 
checks are used for forensic purposes by law enforcement; however, 
the Board understands from staff of the Financial Management Service 
of the Department of Treasury that cases in which examination of an 
original Treasury check is necessary to determine a fraud or forgery 
are relatively rare.
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III. Comments That Misunderstood the Check 21 Act or the Board's 
Proposed Rule

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

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facilitate centralized check return programs.
    Another commenter was concerned that the Act and subpart D would 
impede banks' ability to use ``positive pay'' and ``positive payee'' 
programs to detect fraud. Under a positive pay program, a bank compares 
the check number and amount of a presented check against a list of 
check numbers and amount information provided by the drawer. The use of 
a substitute check should not affect this program. In a positive payee 
program, the drawer identifies the payee of a check, and the bank scans 
the payee field of a presented check to verify that the payee 
information is correct. The payee information on a substitute check 
will appear in a different location than on an original check, because 
the image of the original check is reduced and shifted when it is 
placed on a substitute check. However, position 44 of the MICR line of 
a substitute check is required to bear a ``4'' for forward collection 
or a ``5'' for qualified return. This information should allow the 
paying bank's check-processing equipment to identify the document being 
scanned as a substitute check and to adjust the location at which it 
scans the payee field accordingly.

Overview of the Board's Final Rule

    The Board's final rule is substantially similar to the rule that 
the Board proposed for comment. However, the Board has made a number of 
clarifying changes in response to comments received and its own further 
analysis. These changes include adjustments to certain definitions, 
particularly regarding how MICR-line variations affect a document's 
status as a substitute check. The commentary to the final rule provides 
further clarification about the flow of responsibility for the 
warranties and indemnity. In addition, the final rule clarifies the 
scope of, and timeframes that apply to, expedited recredit claims and 
the general consumer awareness notice requirement. The Board also has 
provided additional commentary in response to comments that indicated 
confusion about the interaction between particular provisions of the 
Check 21 Act and particular provisions of the U.C.C.

Section-by-Section Analysis

    This section-by-section analysis focuses on the provisions of the 
rule that the Board changed or considered changing in light of comments 
or the Board's further consideration. This analysis does not discuss 
provisions of the final rule that are substantially similar to the 
corresponding provision of the proposed rule and on which the Board 
received no substantive comment. Regarding the Board's reasoning for 
those provisions, the section-by-section analysis of the Board's 
proposed rule is incorporated by reference.

I. Amendments To Implement the Check 21 Act

A. Definitions and Word Usage
    1. In General. Three commenters suggested that the final rule 
should use terms that are defined in Articles 3 and 4 of the U.C.C. in 
a manner consistent with the U.C.C.'s usage of those terms. The 
commenters argued that to do otherwise would produce uncertainty and 
increase the likelihood of litigation. In particular, these commenters 
stated that the commentary of the proposed rule used the terms accept 
and party in ways not contemplated by the U.C.C. The Board agrees that 
subpart D's word usage should be consistent with the U.C.C. The final 
rule and commentary therefore replace the word accept with more 
appropriate verbs, such as take or receive, and replace the word party 
with person where subpart D contemplates a meaning of the term party 
that is different from the meaning in the U.C.C.
    2. Section 229.2(a) Account; Section 229.2(n) Consumer Account. 
Four commenters expressed concern about aspects of the Board's proposed 
definitions of account and consumer account.
    One commenter suggested that the Board's expansion of the 
definition of account to include any deposit account at a bank for 
purposes of subpart D was inappropriately broad. The broad account 
definition for purposes of the Check 21 Act and subpart D is statutory, 
and the final rule retains it. Although the Board has not substantively 
modified the account definition, it has revised the language of the 
rule and commentary to distinguish more clearly accounts for purposes 
of subpart D from accounts for purposes of the other subparts of 
Regulation CC.
    One commenter expressed confusion about when interbank deposits 
would be excluded from the account definition. Existing Regulation CC 
excludes interbank accounts for purposes of all subparts of Regulation 
CC. However, the context in which subpart C uses the term account 
clearly indicates that interbank accounts are meant to be included 
within that term. The final rule retains the proposed rule's exclusion 
of interbank accounts for purposes of only subpart B and, in connection 
therewith, subpart A. The commentary to the final rule explicitly notes 
that interbank deposits are included in the account definition for 
purposes of subparts C and D.
    To determine when a consumer awareness notice would be necessary, 
one commenter asked whether the term consumer account included an 
omnibus clearing account held by a brokerage firm at a bank for 
purposes of allowing the brokerage firm to pay checks drawn by 
consumers. The commentary to the final rule clarifies that this type of 
account is not a consumer account. The commentary to the consumer 
account definition also clarifies that a credit card account or home 
equity line of credit that a consumer can access by check is not a 
consumer account for purposes of Regulation CC because in those cases 
the consumer's relationship with the bank is a loan rather than a 
deposit relationship.
    3. Section 229.2(m) Check Processing Region. One commenter stated 
that the commentary to Sec.  229.2(m) erroneously states that there are 
46 check processing regions. A check processing region is defined as 
the area served by a Reserve Bank's main office, branch, or other 
office for check processing purposes. Because the number of Reserve 
Bank locations that process checks is not static, the final rule omits 
any numerical reference.
    4. Section 229.2(z) Paying Bank. One commenter expressed concern 
that the proposed rule's definition of paying bank stated that the 
Treasury of the United States or the U.S. Postal Service was a paying 
bank for a check payable by that entity and sent to that entity for 
collection, whereas the statutory definition states that these entities 
are paying banks to the extent that they act as payors. The commenter 
expressed concern that the proposed rule's definition could be read to 
exclude Treasury checks and postal service money orders that are sent 
to Federal Reserve Banks for collection rather than sent directly to 
the Treasury or the U.S. Postal Service.
    The proposed amendment to the paying bank definition was intended 
to parallel the construction of the existing definition and not to 
alter the meaning of the Check 21 Act's definition. The final rule 
retains the proposed definition. The Board has amended the commentary 
to the definition to clarify that, because the Federal Reserve Banks 
act as fiscal agents for the Treasury and U.S. Postal Service, Treasury 
checks and U.S. Postal Service money orders that are sent to the 
Reserve Banks for collection are deemed to be sent to the Treasury or 
the U.S. Postal Service, respectively.

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    5. Section 229.2(ww) Original Check. One commenter expressed 
confusion about the proposed definition of original check and stated 
that the definition could be read to mean that only one substitute 
check could be created with respect to any original check. As indicated 
in the proposed rule and commentary, the Board defined the term 
original check to distinguish the first paper item authorized by the 
drawer from any later electronic file or substitute check that 
represents that item. The Board has left the definition unchanged but 
has provided commentary to clarify that multiple substitute checks 
could be created at various points in the collection and return process 
to represent the same original check.
    6. Section 229.2(vv) MICR Line. The final rule identifies the 
applicable industry standards for MICR-line printing and adds a 
sentence to the commentary to highlight that those standards can vary 
the technical aspects of printing the MICR line. This would include, 
for example, the circumstances under which magnetic ink is not 
required. This revision responds to comments suggesting that a bank not 
be required to use magnetic ink when printing a paid substitute check 
solely for the purpose of providing it to the account holder.
    7. Section 229.2(xx) Paper or Electronic Representation of a 
Substitute Check. The phrase ``paper or electronic representation of a 
substitute check'' was used at many points of the proposed rule and 
commentary, particularly with respect to the flow of the warranties and 
indemnity. Several commenters expressed confusion about the need for 
this phrase or asked that the Board provide more detail about what 
types of documents or files were included within its scope.
    The statute intends that the chain of banks that make the 
warranties and indemnity will flow uninterrupted from the first 
reconverting bank to the claimant regardless of how many times the form 
of the item changed after creation of the first substitute check. The 
phrase ``paper or electronic representation of a substitute check'' 
ensures that responsibility for the warranties and indemnity will flow 
from the reconverting bank to the last bank that for consideration 
transfers, presents, or returns the substitute check or representation 
thereof. The phrase also ensures, as contemplated by the statute, that 
drawers will have the ability to make a warranty claim under the Check 
21 Act even if they received a paper or electronic representation of a 
substitute check instead of a substitute check. The final rule 
therefore defines the phrase, and the commentary to the new definition 
provides examples to illustrate its scope.
    8. Section 229.2(zz) Reconverting Bank (corresponding to Section 
229.2(yy) of the proposed rule). Several commenters expressed concern 
about the proposed definition of reconverting bank and the accompanying 
commentary.\15\ Most of these comments focused on the portion of the 
definition describing the identity of the reconverting bank when a 
nonbank created the substitute check.
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    \15\ One commenter was confused that the rule used the term 
reconverting, rather than converting, bank. Reconverting bank is the 
statutory term and reflects the fact that the original check is 
converted to electronic form and then later reconverted back to a 
paper substitute check.
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    A few commenters opined that the rule should prohibit a person 
other than a bank from creating a substitute check. However, the 
statutory text defining a reconverting bank explicitly contemplates 
nonbank creation of a substitute check, because it states that a bank 
can be a reconverting bank if it is the first bank to transfer or 
present a substitute check created by a person other than a bank. The 
legislative history also explicitly states that Congress intended to 
allow nonbanks to create substitute checks.\16\ The Board therefore has 
retained the portion of the definition pertaining to nonbank creation 
of substitute checks.
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    \16\ When discussing circumstances under which the substitute 
check warranties are made, the House Report on the Check 21 Act 
states as follows:
    The Committee intends that this language allow depositing 
customers of a bank to create substitute checks with the same legal 
protections for recipients under this legislation as if they had 
been converted by a financial institution at the point of first 
deposit. If a bank allows its depositing customer to create 
substitute checks, the bank is warrantor for the substitute checks 
created by its depositing customer. For example, if a grocery store 
creates a substitute check, the bill makes the grocery store's bank, 
and not the grocery store, responsible for the section 4 warranties. 
A bank may choose to pass along, by agreement with the depositor 
that creates the substitute check, any liability it may incur due to 
the depositor in this regard. The Committee believes that requiring 
a bank's credit to stand behind a substitute check will provide 
strong protections when paper checks are removed from the system at 
the point of sale or purchase before they are deposited at, or 
presented to a financial institution. H.R. Rep. No. 108-132, at 17 
(2003).
---------------------------------------------------------------------------

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

[[Page 47295]]

was labeled ANS X9.90 and contemplated three different types of 
documents, one of which was the substitute check that the Check 21 Act 
authorizes. Going forward, this standard will be known as ANS X9.100-
140 and apply only to substitute checks. However, any document that met 
all the requirements of 229.2(aaa) would be a substitute check.
    Nine commenters expressed concerns about the image standards and 
other quality standards that apply to substitute checks. Three 
commenters suggested that the Board identify or give examples of 
industry standards for substitute checks, and one commenter suggested 
that the industry standards for substitute checks that the Board 
identified should not disrupt existing industry standards for checks. 
The proposed commentary to the substitute check definition identified 
ANS X9.90 as the industry standard for substitute checks. Because that 
standard was renamed, the final rule identifies the industry standard 
for substitute checks as ANS X9.100-140 (unless the Board by rule or 
order determines that a different standard applies), notes that that 
standard is exclusive standard, and further notes that ANS X9.100-140 
incorporates by reference other existing generally applicable industry 
standards for checks. The Board has included the ``unless the Board by 
rule or order determines that a different standard applies'' language 
to indicate specifically that the Board ultimately determines what 
standard applies to substitute checks. The Board does not expect to 
change the identified standard. In the unlikely event that the Board 
does identify a different standard, it almost certainly would do so by 
amending Regulation CC. The Board in no case would change the standard 
without providing notice of such change.
    Three commenters requested that the Board establish standards 
regarding image quality for substitute checks. In particular, these 
commenters suggested that substitute checks should be required to use 
gray-scale, as opposed to black-and-white, images. The Board believes 
that this level of detail is more appropriately left to industry 
standards. Although ANS X9.100-140 does not prescribe image standards, 
that standard may evolve as the industry gains more experience with 
substitute checks.
    A few commenters had particular questions about how the image of 
the original check would be applied to a substitute check. Two of these 
commenters erroneously believed that a second substitute check would 
contain an image of the full front and back of the previous substitute 
check. Persons wishing to obtain detailed information regarding the 
layout of a substitute check should consult ANS X9.100-140. This 
standard generally provides that the images of the front and back of 
the original check will be reduced so that they can be placed on the 
first substitute check. A subsequent substitute check would not contain 
an image of the entire first substitute check. Rather, a subsequent 
substitute check would contain the image of the original check as that 
image appeared at the time the previous substitute check was converted 
to electronic form, and the remainder of the front of the second 
substitute check would contain identification, MICR-line, and legend 
information applied by the second reconverting bank. By contrast, the 
back of a subsequent substitute check would contain an image of the 
full length of the back of the previous substitute check in order to 
preserve previous indorsements. The commentary to the substitute check 
definition and the commentary to Sec.  229.35 regarding indorsement 
requirements explain image and indorsement requirements for later-
generation substitute checks in detail.
    b. Substitute Checks and ACH Debits. Several commenters requested 
clarification about how, if at all, checks that are used as source 
documents to create ACH debits are covered under the Check 21 Act, 
particularly whether such checks can be used to create substitute 
checks.
    A substitute check must be a representation of an original check. 
Therefore, something that is not an original check cannot be 
reconverted to a substitute check. The final rule defines an original 
check as the first paper check issued with respect to a particular 
payment transaction. Under U.C.C. 3-105, a check is issued when it is 
delivered by a drawer with the purpose of giving rights on the check to 
any person.
    The drawer's authorization regarding the use of a check it provides 
to initiate an ACH debit will determine whether the drawer has issued 
the check within the meaning of Regulation CC and thus whether the 
check may be used to create a substitute check. If the drawer 
authorizes the check only to be used as a source document for an ACH 
debit and does not authorize the check to be collected as a check, then 
the check has not been issued because it has not been delivered in a 
manner that gives any person rights on the check. Therefore, a check 
authorized for use solely as an ACH debit source document is not an 
original check within the meaning of Regulation CC, and a bank cannot 
create a substitute check from that document.
    c. MICR-line Requirement. The Board's proposed rule adopted the 
statutory definition of substitute check without substantive change, 
although the commentary provided extensive discussion of how the MICR 
line of a substitute check could vary from the MICR line of the 
original check. Specifically, the proposed commentary clarified that 
(1) position 44 of the MICR line must contain a ``4'' or a ``5,'' (2) a 
bank could correct an encoding error that appeared on the original 
check when applying a MICR line to the substitute check, (3) a bank 
could encode an amount on the substitute check if the original check's 
MICR line did not contain that information, and (4) no other variation 
from the original check's MICR line would be permitted. The proposed 
commentary highlighted that an impermissible error could be caused, for 
example, if a check reader-sorter misread or failed to read the MICR 
line of the original check, causing the MICR line applied to the 
substitute check to contain an error that did not appear on the 
original check. The proposed rule further provided that a document that 
failed to meet the substitute check definition only because of a MICR-
line error (i.e., a document that ``purported'' to be a substitute 
check) would be treated as if it were a substitute check for purposes 
of the liability and consumer-related provisions of subpart D but would 
not be the legal equivalent of the original check.
    The Board received comments on its proposed treatment of the MICR-
line component of the substitute definition from numerous commenters, 
most of which were depository institutions or organizations 
representing depository institutions. Some of these commenters 
generally approved of the MICR-line clarifications and the related 
purported substitute check provision proposed by the Board. However, 
the vast majority of commenters on these issues disagreed with the 
proposed approach.
    Commenters that disagreed with the proposed rule expressed concern 
that the proposed commentary would create confusion because it would 
allow substitute check MICR lines to contain some variations from the 
original check but not others. These commenters also expressed concern 
that paying banks could not charge a customer's account for a document 
that was not a substitute check because of a MICR-line error and 
therefore not the legal equivalent of the original check. These 
commenters advocated that a document with any MICR-line error should be 
a substitute

[[Page 47296]]

check that could be the legal equivalent of the original check. 
Commenters also stated that the proposed rule provided insufficient 
guidance about (1) the requirement for encoding position 44 of the MICR 
line on a qualified return substitute check, (2) whether a bank that 
failed to encode a substitute check properly would be liable under the 
Check 21 Act or existing encoding warranties, and (3) which bank 
ultimately would bear liability for substitute check encoding errors. 
Many of these commenters suggested that encoding of substitute checks 
should be covered by existing encoding warranties. Commenters opposing 
the Board's proposed treatment of the MICR-line requirement also 
expressed concern that the proposed rule inadequately addressed the 
extent to which banks could repair a MICR-line error. These commenters 
generally indicated that the rules for repairing the MICR line of a 
substitute check should parallel as closely as possible the rules for 
repairing the MICR line of an original check.\17\
    The MICR-line component of the substitute check definition in the 
Check 21 Act provides that a substitute check is a paper representation 
of an original check that ``bears a MICR line containing all the 
information appearing on the MICR line of the original check, except as 
provided under generally applicable industry standards for substitute 
checks to facilitate the processing of substitute checks.''
---------------------------------------------------------------------------

    \17\ In response to the many concerns expressed about the 
Board's proposed treatment of the MICR-line replication requirement, 
the Board's staff invited commenters that addressed MICR-line issues 
to a meeting to explore these issues further. The meeting took place 
on May 3, 2004, at the Board, and representatives of 53 commenters 
attended in person or by conference call. A summary of this meeting, 
including a list of participants, is available at 
www.federalreserve.gov/SECRS/2004/May/20040625/R-1176/R-1176_150_1.pdf.
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    ANS X9.100-140 requires a substitute check used for forward 
collection to bear a ``4'' in position 44 and a qualified returned 
substitute check to bear a ``5'' in that position. Proper encoding of 
position 44 ensures that downstream banks will be on notice that the 
document they have received is a substitute check and can, if 
converting such an item to electronic form or qualifying it for return, 
handle it appropriately. The final commentary to the substitute check 
definition therefore clarifies that a reconverting bank or a bank 
qualifying a substitute check for return must encode position 44 with a 
``4'' or a ``5,'' as appropriate.
    The final rule clarifies that a substitute check MICR line must 
have information in each field of the MICR line that was encoded on the 
original check at any time before an image of the original check was 
captured. This would include all of the information preprinted on the 
original check, plus any additional information, such as the amount, 
that was encoded prior to the time the image of the original check was 
captured.
    In light of the highly technical nature of the MICR line and its 
important operational role in check processing, the Board's final rule 
leaves the details regarding permissible MICR-line variations up to ANS 
X9.100-140 instead of identifying them in the rule and commentary. The 
Board believes that allowing the MICR line of a substitute check to 
vary from the original check's MICR line as specified in ANS X9.100-140 
is appropriate because the full range of issues relating to MICR-line 
errors and the most practical solutions to those issues will be 
revealed through operational experience with substitute checks.
    The Board expects that the variations from the original check's 
MICR line permitted by ANS X9.100-140 would be kept to the minimum 
necessary to facilitate substitute check processing in the same manner 
as the original checks. Such variations could include, for example, 
allowing reconverting banks to correct errors appearing on the MICR-
line of the original check. The commentary to the final rule clarifies, 
however, that industry standards cannot allow a substitute check MICR 
line to omit a field that, at any time prior to truncation, was encoded 
on the original check's MICR line. The Board further expects that, in 
determining what variations from the original check's MICR line should 
be permitted, the standards committee will incorporate the overriding 
goal of the Check 21 Act that substitute checks should function as much 
as possible like original checks so that paying banks and other persons 
that demand paper checks will not bear costs associated with receiving 
a substitute check instead of an original check. If the Board concludes 
that the variations permitted by ANS X9.100-140 are inconsistent with 
this or other purposes of the Check 21 Act, the Board will consider 
identifying permissible MICR-line variations by rule or order instead 
of relying on ANS X9.100-140.
    Through revisions to Sec.  229.34(c)(3) and its commentary, the 
final rule provides that application of MICR-line information to a 
substitute check is subject to Regulation CC's encoding warranties. The 
commentary to the substitute check definition also notes that, once a 
document that meets the substitute check definition has been created, 
banks may apply MICR-encoded strips to that document as necessary to 
complete the collection and return process.
    10. Section 229.2(bbb) Sufficient Copy and Copy (corresponding to 
Sec.  229.2(aaa) of the proposed rule). The final rule's definition of 
sufficient copy more closely tracks the statutory language in the 
indemnity section of section 6(d)(1) of the Check 21 Act than did the 
proposed rule. The Board also has reorganized and revised the 
commentary to illustrate more clearly the definitions of copy and 
sufficient copy.
    Several commenters were confused about the relationship between 
copy and sufficient copy, which are defined as paper documents, and 
Sec.  229.58, which allows banks to provide information electronically 
if the recipient agrees. Although the terms copy and sufficient copy, 
as well as the term original check, refer only to particular pieces of 
paper, a bank that is required to provide a paper check or copy may 
satisfy that requirement by instead providing an electronic image of 
the check or copy in accordance with Sec.  229.58.
    11. Section 229.2(ccc) Transfer and consideration (corresponding to 
Section 229.2(bbb) of the proposed rule). In response to a comment, the 
Board has revised the definition of consideration to clarify that a 
bank receives consideration for the substitute check (or paper or 
electronic representation thereof) that it transfers to a nonbank if 
the bank has received value for the check in that or any other form.
    The proposed rule contained an exception from the consideration 
definition stating that a bank would not receive consideration for a 
substitute check solely in response to a warranty, indemnity, expedited 
recredit, or other claim with respect to the substitute check. The 
Board proposed this exception so that a bank could respond to an 
indemnity or expedited recredit claim by providing a substitute check 
without a legal equivalence legend as a sufficient copy without 
automatically breaching the legal equivalence warranty. Several 
commenters were confused about the operation of this exception. The 
Board has deleted the exception from the final rule. Because industry 
standards require application of the legal equivalence legend to a 
substitute check, the problem that the exception was designed to 
address is not likely to arise in practice. Moreover, on further 
consideration, the Board believes that it would be appropriate for a 
substitute check provided in response

[[Page 47297]]

to a claim to carry full warranty, indemnity, and recredit rights.
    12. Section 229.2(ddd) Truncate; Section 229.2(eee) Truncating Bank 
(corresponding to sections 229.2(ccc) and 229.2(ddd) of the proposed 
rule, respectively). Several commenters expressed concern about the 
definitions of and commentary to truncate and truncating bank. For 
example, one commenter expressed concern that the definition of 
truncate would preclude banks from truncating items that are not 
handled on a cash basis. Another commenter suggested that the Board 
clarify that a truncating bank does not make the substitute check 
warranties and indemnity under Sec. Sec.  229.52 and 229.53, but that a 
bank receiving a check electronically could by agreement pass back to 
the truncating bank losses that the recipient bank incurred under those 
sections.
    The proposed rule used the statutory definition of truncate, and 
the final rule retains that definition. However, the Board has amended 
the commentary to truncating bank to clarify that a bank receiving a 
check electronically from the truncating bank may pass back losses by 
agreement.
B. Section 229.30(d) Identification of Returned Checks
    Section 229.30(d) requires a paying bank to identify its reason for 
returning a check unpaid on the front of the returned check but does 
not require a specific location for that information. The Board has 
revised this section and the accompanying commentary to clarify that a 
paying bank that returns a substitute check must place the reason for 
return within the image of the original check. This requirement ensures 
that the reason for return would be retained on any subsequent 
substitute check.
C. Issues Relating to Indorsement and Identification Standards--
Sections 229.35 and 229.38 and Appendix D
    The Board proposed to require all indorsements to be in black ink 
and to make depositary bank name/location information optional as 
opposed to mandatory. The Board requested comment about whether 
returning banks should retain the option to indorse a check on the 
front. The Board proposed applying to existing substitute checks the 
indorsement standards in Sec.  229.35 and appendix D, with proposed 
amendments, that would apply to original checks. The Board proposed 
separate indorsement and identification requirements that would apply 
to reconverting banks at the time they create substitute checks.
    The Board received a number of comments relating to its proposed 
treatment of indorsements. Several of these commenters generally 
questioned whether the proposed changes would improve the legibility of 
indorsements, particularly because some indorsements on substitute 
checks would be preserved through images of a previous item. The Board 
believes that it is too early to determine how the use of substitute 
checks ultimately will affect the legibility of indorsements. It is 
likely, as commenters stated, that more indorsements will be preserved 
through images of previous items. It also is likely that, as the 
efficiency of the collection process improves through wider use of 
electronic processing and substitute checks, fewer banks will handle 
and thus be required to indorse a check. A reduction in the number of 
indorsements on an item should contribute to greater legibility of the 
indorsements that are applied.
    A few commenters stated that, in some cases, check-handling 
equipment would first capture an image of a check and then spray a 
physical indorsement on the check. These commenters requested that the 
Board clarify that in such cases the indorsement applied after the 
check image was captured would be conveyed as an electronic indorsement 
rather than an image of the physical indorsement. The Board agrees with 
these commenters' analysis of how such an indorsement would be carried 
forward and has revised the commentary to the substitute check 
definition and Sec.  229.35 accordingly.\18\ The Board has made 
additional clarifying changes to these portions of the commentary to 
address questions posed by commenters regarding the application and 
preservation of indorsements.
---------------------------------------------------------------------------

    \18\ One commenter requested clarification about how a second 
depositary bank should indorse a substitute check that was returned 
and redeposited. Substitute checks in such a case would be indorsed 
just as a redeposited original check is indorsed today.
---------------------------------------------------------------------------

    Commenters generally agreed with the Board's proposal to require 
indorsements to be in black ink, although several indicated that 
requiring banks to switch from purple to black ink immediately would be 
burdensome and requested a grace period.\19\ The final rule retains the 
black ink requirement but delays the mandatory compliance date until 
January 1, 2006.
---------------------------------------------------------------------------

    \19\ One commenter suggested that the Board should delay the 
effective date for all the new reconverting bank indorsement and 
identification requirements. The requirement that a substitute check 
contain a reconverting bank identification is statutory and takes 
effect on the effective date of the Check 21 Act.
---------------------------------------------------------------------------

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

[[Page 47298]]

in the commentary that identifications applied to the front of the 
check are not acceptances or indorsements. A reconverting bank that is 
a paying bank must place its routing number on the back of the check to 
ensure that its identification as a reconverting bank is not lost if 
there is a subsequent substitute check.\20\ The Board also has 
clarified in the commentary to Sec. Sec.  229.35(a) and 229.51(b) that 
this use of the paying/reconverting bank's routing number is for 
identification only and is not an indorsement.
---------------------------------------------------------------------------

    \20\ One commenter questioned why a reconverting bank must apply 
its routing number twice to a substitute check. The routing number 
on the front of the substitute check identifies the bank as the 
reconverting bank for that particular check. The front of a 
subsequent substitute check thus would bear the routing number of 
the reconverting bank for that substitute check but not the routing 
number of the reconverting bank for the previous substitute check. A 
reconverting bank's routing number on the back of the check 
therefore serves both as its indorsement (except when the 
reconverting bank also is the paying bank) and also, because it is 
set off by asterisks, preserves its identity as a reconverting bank 
on subsequent substitute checks.
---------------------------------------------------------------------------

    The proposed rule contained amendments to the text of and 
commentary to Sec.  229.38(d) to clarify a reconverting bank's 
liability for indorsements that, although applied in accordance with 
Sec.  229.35 and appendix D, were illegible because of the reduction in 
size of the original check image that appeared on the first substitute 
check and the corresponding shifting in the placement of indorsements 
preserved within the image of the original check. Several commenters 
requested clarification about how this provision would work in 
practice. The final rule clarifies that the reconverting bank is liable 
if the reduction in size and placement of the original check image on 
the substitute check caused an indorsement previously applied to the 
original check in accordance with Sec.  229.35 and appendix D to be 
rendered illegible by a subsequent indorsement that also was applied to 
the substitute check in accordance with those standards. The final rule 
also clarifies that the reconverting bank is liable if the shift in 
placement on a substitute check of an indorsement that was applied to 
the original check in accordance with Sec.  229.35 and appendix D 
precluded the subsequent bank from legibly applying its indorsement to 
the substitute check in accordance with those standards.\21\
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    \21\ Subsequent substitute checks will contain an image of the 
entire back of the previous substitute check and therefore should 
not perpetuate the shifting indorsement problem.
---------------------------------------------------------------------------

D. Section 229.51 General Provisions Governing Substitute Checks
    1. Legal Equivalence. Section 229.51 combined the legal equivalence 
and warranty concepts in sections 4(a) and 4(b) of the Check 21 Act by 
stating that a substitute check would be the legal equivalent of the 
original check for all purposes and all persons if (1) a bank had made 
the substitute check warranties in Sec.  229.52 and (2) the substitute 
check accurately represented all the information on the front and back 
of the original check as of the time of truncation and bore the 
required legal equivalence legend.
    a. General Comments about Legal Equivalence. The Board received 
several general comments about legal equivalence. One commenter agreed 
with the concept that a substitute check should not be legally 
equivalent to an original check unless the substitute check were 
subject to bank warranties. Two commenters opined that a substitute 
check created by a nonbank should not be a legal equivalent unless the 
first bank to transfer that substitute check explicitly agreed to do 
so. However, the definition of reconverting bank indicates that a bank 
that transfers a substitute check created by a nonbank thereby becomes 
the reconverting bank, even if that bank did not explicitly agree to 
accept the item. If such a substitute check met the accuracy and legend 
requirements for legal equivalence, it would become a legally 
equivalent substitute check as of the time the bank transferred it for 
consideration and thereby made the substitute check warranties. As 
discussed in the analysis of the reconverting bank definition, banks 
should be able to work with customers that wish to create and deposit 
substitute checks so that the banks do not become reconverting banks 
unwittingly.
    b. Accuracy of Information and Image Quality. Commenters generally 
supported the concept that a substitute check must contain an accurate 
representation of all the information on the original check as a 
condition of legal equivalence. One commenter requested clarification 
that a substitute check need not be more legible than an original check 
to meet the legal equivalence requirements. The Board agrees that a 
substitute check is not held to a higher standard of accuracy in order 
to satisfy the legal equivalence requirements. The Board has clarified 
in the commentary that an accurate image of an illegible original check 
would, if all other requirements for legal equivalence were satisfied, 
be a legally equivalent substitute check. This commenter further 
suggested that, if the back of the original check contained no 
indorsement information, only an image of the front of that item should 
be required for a substitute check associated with that item. The Check 
21 Act defines a substitute check as a representation of an original 
checks that bears ``an image of the front and back of the original 
check.'' A bank that creates a document without an image of the back of 
the original check and sends that document as if it were a substitute 
check therefore bears the associated risk of doing so.
    Several commenters raised specific concerns about the proposed 
commentary to the accuracy requirement. The commentary to that 
requirement generally stated that ``all the information'' on the 
original check that must be retained includes the information 
preprinted on the original check, payment information added to the 
check, and other required information added to the check. Requiring 
features that do not survive the image capturing process to appear on a 
substitute check as a condition of legal equivalence would preclude the 
use of substitute checks, thus undermining the primary purpose of the 
Check 21 Act. The proposed commentary therefore noted that watermarks, 
micro printing, and other security features that cannot survive the 
imaging process need not be represented on a substitute check as a 
condition of legal equivalence.
    Some commenters expressed concern about the loss of security 
features during the creation of a legally equivalent substitute check. 
Although the loss of some paper-based security features will be 
inevitable, the Board expects that the industry will develop additional 
security features that can survive the image capturing process.\22\ 
Other commenters expressed concern about whether the accuracy 
requirement for legal equivalence would be met if the drawer or a bank 
applied payment

[[Page 47299]]

information to the check using an ink color or ink type that would not 
survive the image capturing process. The commentary to the final rule 
clarifies that payment information always must be accurately 
represented on a substitute check because that information is an 
essential element of a negotiable instrument. If a substitute check 
failed the legal equivalence requirement because of ink choice or some 
other feature, such as check color or a decorative image, the 
reconverting bank would be responsible for associated liabilities. 
However, a reconverting bank could attempt to address this issue 
through agreements with its depositors and the banks that send checks 
to it.
---------------------------------------------------------------------------

    \22\ One commenter expressed concern because the proposed 
commentary indicated that a latent security feature that became 
clearer after an image was captured (such as a void watermark that 
is faint on an original check but is revealed clearly on a photocopy 
or other image) would not cause a substitute check to fail the 
accuracy requirement, provided that it did not render any of the 
required information illegible. The presence of the void language on 
the substitute check is problematic to the extent that the recipient 
of the substitute check is unable to determine if the substitute 
check reproduced a fraudulent original item that contained clear 
void language before it was truncated or a legitimate original check 
on which the void language was latent. A person that suffered a loss 
because of this uncertainty would have an indemnity claim under 
Sec.  229.53 and possibly an expedited recredit claim under Sec.  
229.54.
---------------------------------------------------------------------------

    Several commenters expressed concern about the lack of uniform 
standards that apply to the image requirements for substitute checks. 
The Board understands that some banks intend to capture black and white 
images of items converted to electronic form, while other banks intend 
to capture gray scale images that contain a wider range of tones. Any 
substitute check that is subject to bank warranties, contains an 
accurate representation of the front and back of the original check, 
and bears the legal equivalence legend is the legal equivalent of the 
original check regardless of whether the image is black and white or 
gray scale. If issues relating to capturing images of checks prove 
problematic in the creation of substitute checks, the Board expects 
that industry standards would evolve to address those issues.
    2. Section 229.51(c) Applicable Law. One commenter requested 
clarification about whether a substitute check that represented a 
fraudulent original check would have legal equivalence. The commentary 
to the final rule clarifies that such a substitute check, if it met the 
legal equivalence requirements, would be legally equivalent to the 
underlying check but as such would be treated in the same manner as the 
original fraudulent item for purposes of other law. For example, a bank 
could not properly charge a customer's account for a substitute check 
that represented a fraudulent original check.
    This commenter also enquired about the legal status of a substitute 
check that did not meet the legal equivalence requirements. An item 
that meets the substitute check definition is a check even if it does 
not meet the additional requirements for legal equivalence. The 
proposed commentary to the check definition acknowledged that such 
substitute checks would be subject to the U.C.C. and Regulation CC. The 
final rule retains this sentence and, in addition, amends the check 
definition to state specifically that the term check includes an 
original check and a substitute check.
    3. Purported Substitute Checks. In the proposed rule, the Board 
recognized that some banks attempting to create a substitute check 
would instead create a document that failed to satisfy the MICR-line 
replication requirement to be a substitute check. The proposed rule 
referred to these documents as purported substitute checks. In many 
cases, a purported substitute check would be processed just like a 
check but because of the MICR-line error would cause a loss. For 
example, a document with a MICR-line error only in the amount field or 
the account number field likely would go through the entire collection 
process but may be charged for the wrong amount or to the wrong 
account, respectively. Because purported substitute checks would not be 
subject to the Check 21 Act, a person suffering such a loss would not 
have the Act's rights and protections regarding substitute checks. To 
fill this gap and protect persons who collect, pay, or otherwise 
receive a purported substitute check, Sec.  229.51(d) of the proposed 
rule provided that a purported substitute check would be subject to the 
warranty, indemnity, and consumer-related provisions of the Check 21 
Act and subpart D.
    Several commenters generally supported the concept of the purported 
substitute check, although some of these commenters suggested specific 
revisions to this provision or clarifications about its application. A 
few commenters that supported the provision requested that it be 
expanded to apply to a document that failed any of the four substitute 
check requirements. One commenter neither supported nor opposed the 
purported substitute check concept but requested clarification about 
how a document would purport to be a substitute check.
    The majority of commenters, however, suggested that the Board 
delete the purported substitute check provision. These commenters 
suggested that a document should be a substitute check and a legal 
equivalent if it contained any MICR-line error, thus obviating the 
purported substitute check provision.
    The final rule leaves the scope of permissible MICR-line variations 
to ANS X9.100-140. The Board expects this standard to identify the 
circumstances under which a substitute check's MICR line may vary from 
the original check in order to facilitate processing of substitute 
checks. An item that satisfies all the requirements of ANS X9.100-140 
is a substitute check that is legally equivalent to the original check 
(provided all the other requirements for substitute checks and legal 
equivalency are met).
    Regardless of how ANS X9.100-140 addresses permissible MICR-line 
variations and other substitute check requirements, there inevitably 
will be instances where a document intended to be a substitute check 
will fail one or more components of the substitute check definition and 
thus will not be a substitute check.
    The Board notes that there are cases in the current check-
processing environment where documents that are not checks or the legal 
equivalent thereof (for example, photocopies and image replacement 
documents) nonetheless go through the collection and return process and 
ultimately are paid, resulting in a charge to a customer's account. It 
is uncertain how often a bank attempting to create a substitute check 
instead will create a document with a MICR line that does not satisfy 
the substitute check definition. The Board therefore has removed the 
purported substitute check provision from the final rule. If the 
purported substitute check problem appears broad in scope, creates 
uncertainty for paying banks regarding whether to make payments, or is 
detrimental to drawers, the Board will consider addressing those 
problems by rule or order.
E. Section 229.52 Substitute Check Warranties
    The Check 21 Act provides that any bank that transfers, presents, 
or returns a substitute check for consideration warrants that the 
substitute check meets the requirements for legal equivalence and that 
no depositary bank, drawee, drawer, or indorser will be asked to make a 
duplicative payment.
    Section 229.52 of the proposed rule reorganized the statutory 
language and clarified that the responsibility for the warranties flows 
with the substitute check and with a paper or electronic representation 
of that substitute check. The proposed commentary also clarified that 
warranties associated with the first substitute check continue to flow 
if a second substitute check is created. These clarifications were 
intended to ensure that the warranty chain would continue from the 
first reconverting bank all the way through to the final recipient of a 
substitute check or representation thereof. The proposed commentary 
also clarified that a bank's responsibility for the warranties would 
run only to subsequent parties that received a substitute check or a 
paper or

[[Page 47300]]

electronic representation thereof, not to parties that handled only the 
original check or that handled the substitute check or representation 
prior to the warranting bank.
    The final rule adopts the text of proposed Sec.  229.52 without 
revision. However, the Board has revised the commentary to clarify 
further the issues identified in the previous paragraph and additional 
issues identified by commenters.
    1. Legal Equivalence Warranty. Several commenters expressed concern 
about a reconverting bank being held liable for breaching the legal 
equivalence warranty because of something that was beyond its control, 
for example if the drawer wrote payment information on the original 
check in a type of ink that did not survive the image capturing process 
well. One commenter suggested that the paying bank should bear the loss 
for breach of the legal equivalence warranty in such cases because it 
can control for ink type and the use of security features by agreements 
with its depositors. This commenter also suggested that the drawer in 
such cases should not be permitted to make an indemnity claim or 
expedited recredit claim if the legal equivalence defect was 
attributable to the drawer's action. Another commenter requested 
clarification about whether a bank would have an obligation not to 
convert a check that would not legibly survive the image capturing 
process.
    The Check 21 Act contemplates that a bank can create a substitute 
check to represent any check as defined in Sec.  229.2(k) and use that 
substitute check instead of the original check. However, the statute 
also attempts to place as little burden as possible on those that 
receive substitute checks, such as a drawer that receives paid checks 
or a paying bank that demands presentment of a paper check. Because the 
reconverting bank chose to use a substitute check instead of the 
original check, the Check 21 Act allocates liability to the 
reconverting bank for a substitute check that, at the time of its 
creation, did not meet the legal equivalence requirements. However, a 
reconverting bank may by agreement pass this liability back to the 
party that sent the electronic check image to it.
    2. Duplicative Payment Warranty. One commenter stated that the 
duplicative payment warranty should apply regardless of the order in 
which duplicative payment requests occur. The commentary to the final 
rule makes this point explicitly.
    Several commenters acknowledged that the commentary to the proposed 
rule stated that a reconverting bank would be liable for breach of the 
duplicative payment warranty even if a duplicative payment was caused 
by a fraud of which the bank was unaware. However, some of these 
commenters suggested that the reconverting bank should not be liable 
for a warranty breach under these circumstances. Responsibility under 
the Check 21 Act for the duplicative payment warranty does not depend 
upon the warranting bank's knowledge or fault, although a bank can 
further allocate such liability by agreement or under provisions of 
otherwise applicable check law. The final rule therefore contains a 
fraudulent duplicative payment example.
    The Board's proposed rule did not directly address whether a 
payment made through an ACH debit, as opposed to a check payment made 
by electronic presentment, would be subject to the duplicative payment 
warranty. The Board noted that the language of the warranty, which 
states that a person will not be asked to pay a check it already has 
paid, could be read to exclude a payment made by ACH debit. The Board 
specifically requested comment on this issue.
    Several commenters stated that an ACH debit should be covered under 
the duplicative payment warranty because recipients of such debits were 
not adequately protected by Regulation E and the NACHA rules. 
Approximately 60 commenters stated that the duplicative payment 
warranty should not apply to ACH debits because such debits are already 
adequately covered by existing laws and rules.
    The statutory language indicates that the duplicative payment 
warranty applies to charges initiated by check, and ACH debits are not 
checks. The Board therefore believes that the best reading of the Check 
21 Act is to exclude ACH debits from coverage under the Act's 
duplicative payment warranty. The Board notes that the U.C.C. applies 
to unauthorized check payments and the NACHA rules apply to 
unauthorized ACH debits. In addition, Regulation E applies to 
unauthorized ACH debits to consumer accounts.
F. Section 229.53 Substitute Check Indemnity
    The Check 21 Act indemnity protects against losses that any 
recipient of a substitute check suffers due to receipt of a substitute 
check instead of an original check. The Board's proposed rule and 
commentary clarified that, like the Check 21 warranties, all banks that 
transfer a substitute check or a paper or electronic representation of 
a substitute check make the indemnity. This is to ensure that, if an 
indemnity recipient makes a claim for a loss caused by receipt of a 
substitute check, that loss would be passed back to the first 
reconverting bank regardless of the number of times the item changed 
forms. The proposed rule and commentary also attempted to clarify that, 
unlike a warranty claim, which can be triggered by receipt of a 
substitute check or a representation of a substitute check, an 
indemnity claim is triggered in the first instance only by a loss that 
is due to receipt of a substitute check instead of the original check. 
The proposed commentary further clarified the scope of losses 
recoverable under the indemnity. The Board has adopted the regulatory 
text of the proposed indemnity section and the accompanying commentary 
with changes, discussed in the following paragraphs, designed to 
further clarify operation of that provision.
    One commenter indicated that the Board should more clearly 
distinguish between the flow of responsibility for making the indemnity 
and the flow of an indemnity claim back up the chain of indemnifying 
banks. In particular, the commenter requested that the Board better 
articulate that an indemnity claim must be based on a loss due to any 
person's receipt of a substitute check. The proposed commentary noted 
that an indemnity claim must be ``ultimately traceable'' to the receipt 
of a substitute check, but another commenter objected to that language 
and preferred that the Board return to the statutory ``due to'' 
language. The commentary to the final rule addresses these concerns.
    Several commenters requested clarification about the interaction 
between the substitute check indemnity and other law. Two commenters 
suggested clarification about the measure of damages under the 
indemnity section and the general liability provision (Sec.  229.56). 
The proposed commentary contained examples of the indemnity amount with 
and without a warranty breach, and the final rule further clarifies 
this distinction. The Board also has added a paragraph describing how 
production of the original check or a sufficient copy by the 
indemnifying bank will limit that bank's damages under Sec.  229.53. 
Production of that item, however, would not absolve the indemnifying 
bank from warranty claims under any other law. In response to a 
comment, the Board has clarified that Regulation CC and the U.C.C. are 
sources of such other warranties.
    Three commenters suggested that the Board establish a time limit 
for bringing an indemnity claim. The liability

[[Page 47301]]

provisions of the Check 21 Act, as implemented at Sec.  229.56 of 
Regulation CC, already establish a one-year statute of limitations for 
claims under the Check 21 Act.
    Several commenters indicated that the examples the Board provided 
in the commentary to Sec.  229.53 to illustrate the application of the 
indemnity provision were useful, although some commenters requested 
that the Board include additional examples. Although the Board has 
clarified the existing examples, the final rule does not provide 
additional examples. If experience indicates that there are particular 
aspects of the indemnity that call for greater clarification, the Board 
may add examples.
G. Section 229.54 Expedited Recredit for Consumers
    The Board's proposed rule reorganized the structure of the consumer 
expedited recredit provision and clarified how to calculate the time 
periods that applied for consumer and bank action. The proposed 
commentary provided a number of examples about how the expedited 
recredit provision would work in practice.
    1. General Comments. Numerous commenters, including consumers and 
consumer groups, stated that the expedited recredit provision should 
apply even if the consumer was not provided a substitute check. These 
commenters argued that the Check 21 Act produces this result because 
the information a consumer must provide to make a claim does not 
include a statement that the consumer received a substitute check. 
These commenters also suggested that the legislative history indicated 
a congressional intent that the expedited recredit apply any time a 
substitute check was used to process a check. Several of these 
commenters further suggested that, if the Board retained the 
requirement that a consumer must receive a substitute check as a 
condition of the expedited recredit right, then provision of a 
substitute check or a paper or electronic representation of a 
substitute check should meet that requirement.\23\
---------------------------------------------------------------------------

    \23\ Another commenter understood the rule to mean that the 
expedited recredit procedure would apply if a consumer received a 
substitute check that was returned unpaid to the consumer's account 
but was concerned that the introductory paragraph to the model 
consumer awareness disclosure (which focused on checks written by 
consumers) might obscure that point. The Board has amended the model 
notice to address this concern.
---------------------------------------------------------------------------

    The requirement that a consumer must receive a substitute check to 
have an expedited recredit claim comes directly from section 7(a) of 
the Check 21 Act, which states that a consumer may make an expedited 
recredit claim if he or she can assert in good faith that, among other 
things, ``the bank charged the consumer's account for a substitute 
check that was provided to the consumer'' (emphasis added).\24\ When 
the Check 21 Act gives rights to a person that received a paper or 
electronic representation of a substitute check, it explicitly so 
indicates. For example, section 5 states that the warranties are given 
to the listed persons ``regardless of whether the warrantee receives 
the substitute check or another paper or electronic form of the 
substitute check or original check.'' The consumer expedited recredit 
provision contains no language to indicate that receipt of something 
other than a substitute check is meant to trigger the right. In 
addition, only those consumers who receive substitute checks are 
entitled to the consumer awareness disclosure that explains expedited 
recredit rights, which further demonstrates that the right applies only 
to recipients of substitute checks.
---------------------------------------------------------------------------

    \24\ Section 7(h) further provides that ``a consumer who was 
provided a substitute check may make a claim for an expedited 
recredit under this section with regard to a transaction involving 
the substitute check whether or not the consumer is in possession of 
the substitute check'' (emphasis added).
---------------------------------------------------------------------------

    The expedited recredit procedure is intended to place consumers who 
receive substitute checks in the same position to the extent 
practicable as if they had received the original check. The right is 
not intended to apply to consumers who already have agreed not to 
receive paper checks. Giving consumers an expedited recredit right in 
the additional situations suggested by the commenters thus would exceed 
both the text and the underlying intent of the statute. The Board 
therefore has not expanded the scope of Sec.  229.54.
    Several commenters requested clarification about whether the 
expedited recredit right would apply to checks that are not drawn on a 
consumer account, such as travelers' checks, credit card checks, and 
checks used to access a home equity line of credit. The statute 
specifically states that a substitute check is subject to the expedited 
recredit right if the bank holding the consumer's account charged the 
account for that substitute check. The Act specifically defines the 
term account to be a deposit account. Therefore, a consumer generally 
would not have an expedited recredit right associated with a check that 
was not drawn on his or her deposit account. However, the consumer 
could have an expedited recredit right for such a check deposited into 
his or her account if the check was returned to the consumer unpaid in 
the form of a substitute check for which the bank debited the 
consumer's account. A consumer who did not have an expedited recredit 
right for a substitute check that he or she wrote but that was not 
charged to his or her account nonetheless might have a substitute check 
warranty or indemnity claim or a U.C.C. claim with respect to that 
item. The Board has clarified these points in the commentary to Sec.  
229.54(a).
    Several commenters objected to the portion of the proposed 
commentary to Sec.  229.54 stating that any warranty claim, not just a 
claim for a substitute check warranty provided in Sec.  229.52, could 
trigger an expedited recredit right. The Board notes that the returned 
check warranties in Sec.  229.34(b) of Regulation CC would run to the 
drawer of the check. In addition, the Check 21 Act states that a 
consumer may use the expedited recredit procedure to recover for ``a 
warranty claim'' and does not limit such claims to the substitute check 
warranties. The final commentary therefore retains the concept that 
losses associated with any warranty breach are recoverable under Sec.  
229.54, although the Board has provided more detail about the 
additional warranties contemplated.
    Several commenters suggested that, if a consumer requests an 
original check, then the bank should be required to provide either the 
original check or a legally equivalent substitute check. Such a 
requirement is beyond the scope of the Check 21 Act, which does not 
establish requirements for when an original check or substitute check 
must be given but rather establishes the circumstances under which a 
substitute check may be used as the legal equivalent of the original 
check. Such a requirement also would go beyond the scope of U.C.C. 4-
406, which, as adopted in most states, does not require a bank to 
provide original checks to consumers or to retain original checks.\25\ 
The Board therefore has not adopted the commenters' suggestion.
---------------------------------------------------------------------------

    \25\ However, State law in New York and Massachusetts requires 
banks to give their customers the option of receiving paid paper 
checks with periodic account statements.
---------------------------------------------------------------------------

    The Board also has clarified in the commentary that the amount a 
consumer may claim as a loss under the consumer expedited recredit 
section includes the amount of the improper charge as well as any 
resulting fees that the consumer believes were improper, up to the 
amount of the substitute check. The commentary provides examples about 
the amount a consumer could claim.

[[Page 47302]]

    2. Time Period for Consumer Action. The Check 21 Act states that 
the consumer must make a claim within 40 days of the later of two 
dates: either the date on which the relevant account statement was 
mailed (or delivered by other means to which the consumer agreed) or 
the date on which the problematic substitute check was made available 
to the consumer. The proposed rule combined these concepts by stating 
that the claim was due within 40 days of the date that the relevant 
account statement or substitute check was mailed or delivered. The 
accompanying commentary clarified that the term delivery includes 
making the account statement or substitute check available through 
various means agreed to by the consumer, including in-person delivery.
    The Board received numerous comments expressing concerns about the 
events that should trigger the 40-day time period within which a 
consumer must make an expedited recredit claim and what a consumer must 
do to constitute timely action within that period. A few commenters 
suggested that the final rule's construction should parallel that of 
the statute.
    The Board has retained the ``mailed or delivered'' language in the 
rule text because the Board believes this construction clarifies rather 
than changes the statute's meaning. The Board has amended the final 
commentary to clarify that delivery includes making the statement or 
check available at the bank for the customer's retrieval pursuant to 
the customer's request.
    Several commenters suggested that the Board adjust the 40-day time 
period for consumer action to parallel Regulation E (which gives 
consumers a 60-day period to make a claim for a disputed electronic 
fund transfer) or the U.C.C. (which gives consumers a reasonable period 
to examine a bank statement for errors). These commenters were 
concerned that having three different yet somewhat related timing 
requirements for consumer action would be confusing. Some commenters 
also were concerned that a consumer might receive a substitute check 
that triggered the time period for making a claim well after the 
underlying transaction, which could compromise the bank's ability to 
make a timely interbank expedited recredit claim under Sec.  229.55.
    The 40-day period in the proposed rule comes directly from the 
statute, and the Board has retained it in the final rule. A bank 
concerned about differences between Regulation E and Sec.  229.54 could 
choose to give a consumer a longer period than required by Sec.  229.54 
to bring a substitute check claim.
    Several commenters asked for further clarification about what 
constituted extenuating circumstances that would require a bank to 
extend the consumer's 40-day period for making a claim. The proposed 
rule paralleled the approach in Regulation E by stating the existence 
of the extenuating circumstances extension in the rule text but moving 
to the commentary the statutory examples of what might justify an 
extension. The Board is unaware of any problems in applying the 
Regulation E extension provision and does not expect problems applying 
the corresponding provision in Sec.  229.54. The Board therefore is not 
further clarifying the extenuating circumstances provision at this 
time.
    Several commenters requested further clarification about what 
action by the consumer would satisfy the requirement to ``submit'' a 
claim within the specified period. These commenters noted that some 
portions of the rule and commentary referred to a consumer's making the 
claim, while others appeared to focus on the bank's receipt of the 
claim. Other commenters requested further clarification about the 
interaction between the consumer's ability to make an oral claim and 
the bank's right to require a consumer to submit a claim in writing.
    The Board has clarified in the final rule that a consumer must 
submit his or her claim such that the bank receives it within the 40-
day time period (extended if necessary) described in the regulation. 
The final rule also clarifies that, if a consumer submits a claim 
orally and the bank requires a written claim, the bank must inform the 
consumer of the written claim requirement at that time and may require 
the consumer to submit that written claim such that the bank receives 
it within 10 business days of the oral claim. This time period 
parallels the corresponding period in Regulation E for written 
confirmation of oral claims. In such a case, the consumer's claim would 
be timely if the bank received the oral claim within the 40-day period 
and the written claim within the 10-day period. In addition, the final 
rule and commentary provide that if a consumer attempts to submit a 
claim in any form and does not provide all the information required to 
constitute a claim, the bank must inform the consumer that the claim is 
incomplete and identify what information is missing.
    One commenter requested that the Board clarify that a consumer who 
fails to bring a timely expedited recredit claim under Sec.  229.54 
nonetheless might have claims under other law, such as a warranty or 
indemnity claim under Sec.  229.52 or Sec.  229.53, respectively, or a 
claim under the U.C.C. The Board has made this clarification in the 
commentary.
    3. Form of Claim and Time Period for Bank Action on Consumer 
Claims. The statute provides that a bank must act on a consumer 
expedited recredit claim within 10 business days after the business day 
on which the consumer submits the claim. The proposed rule changed the 
latter occurrence of business day to banking day to parallel other 
provisions of Regulation CC. The Board received numerous comments on 
this clarification, all but four of which supported the adjustment. The 
final rule retains the proposed rule's use of the term banking day. The 
final rule also clarifies that the 10-day period within which the bank 
must act on the consumer's claim does not begin until the bank receives 
the claim. The Board believes that it is appropriate to focus on the 
bank's receipt, rather than the date of the consumer's mailing or 
delivery to provide certainty to the bank about the time period within 
which it must take action.
    The final rule retains, with some revisions, the proposed rule's 
provision stating that the time period for bank action is measured from 
the bank's receipt of the written claim if the bank requires a consumer 
to submit an initial oral claim in writing. The final rule and 
commentary also clarify, in response to a comment, that a bank that 
requires a claim to be in writing must state that requirement in the 
consumer awareness disclosure it provides under Sec.  229.57 and always 
must inform a consumer who makes a claim orally of the requirement at 
the time of the oral claim.
    4. Bank Action on Consumer Claims.
    a. Bank Action Generally. The proposed rule reorganized and 
clarified the provisions of the Check 21 Act related to the bank's 
options for responding to consumer claims and the notices associated 
with each of those options. Commenters that addressed the Board's 
reorganization strongly supported it. The final rule therefore retains 
the proposed organization of the bank action and notice provisions, but 
with some specific revisions suggested by commenters.
    b. A Bank's Choices for Responding to a Consumer Claim. Under the 
Act and final rule, a bank may grant or deny a consumer's claim or 
provisionally recredit a consumer's account pending further 
investigation. The bank may reverse a recredit if it later determines 
the claim was invalid. A bank must provide a specific notice for each 
of

[[Page 47303]]

these actions. In addition, a bank that denies a claim must demonstrate 
to the consumer why the claim is not valid and provide the original 
check or a sufficient copy. One commenter asked whether a bank must 
retain a copy of expedited recredit claims that it receives. The Check 
21 Act does not contain a retention requirement, although other record 
retention laws and regulations to which the bank is subject might 
apply.
    Regarding provisional recredits, one commenter requested that the 
Board clarify that the interest due on a provisional recredit would be 
interest only on the amount of the recredit, rather than on the entire 
amount claimed by the consumer if that amount is greater than the 
recredit. The Board agrees that this is the correct result under the 
rule and therefore has not revised the final rule or commentary to 
address this point.
    A few commenters expressed concern that the Board had diminished 
the requirement that the bank ``demonstrate to the consumer that the 
claim is not valid'' because the proposed rule instead stated that the 
bank must explain to the consumer the basis for its denial. The Board 
did not intend to deviate from the statutory requirement but rather to 
describe more specifically how a bank would satisfy it. These 
commenters also suggested that the consumer, rather than the bank, is 
the person that should determine whether a copy provided with a denied 
claim was sufficient to determine that the claim was not valid. In 
response to these comments, the text of the final rule uses the 
statutory language, and the commentary provides more detail about how a 
bank would demonstrate to the consumer that a claim is not valid.
    In describing the bank's ability to reverse a recredit on a later 
determination that a claim was not valid, the proposed rule clarified 
that the bank could reverse the basic amount of the recredit plus 
interest on that amount. All commenters that addressed this point 
supported allowing a bank to reverse associated interest, although some 
suggested that the Board further clarify that the interest to be 
reversed included both the interest component of the initial recredit 
and the interest that accrued on the entire recredited amount. The 
final rule and commentary make this clarification.
    Several commenters expressed concern about the provision of the 
proposed rule allowing the bank to reverse a recredit, particularly the 
statement that the bank may reverse a recredit ``at any time.''\26\ The 
Board has removed the quoted language from the text of the final rule 
and clarified in the commentary that the time period for the bank's 
reversal is subject to the applicable statute of limitations.
---------------------------------------------------------------------------

    \26\ One commenter suggested that the Board clarify that a bank 
cannot use the recredit reversal provision as a blanket right of set 
off to recover amounts from the consumer that are unrelated to the 
recredit claim. The recredit reversal provision of the rule only 
allows a bank to reverse a previously-provided recredit and does not 
apply to other amounts that the consumer might owe the bank.
---------------------------------------------------------------------------

    5. Delayed Availability. In response to comments, the commentary to 
the final rule clarifies that the rule allows a bank to delay the 
availability of both the base amount of the recredit and any interest 
on that amount. The Board in response to comments also has clarified in 
the commentary that the new account and repeated overdraft exceptions 
in subpart D apply as described in the commentary to the corresponding 
exceptions in subpart B.
    6. Notice Requirements. Several commenters suggested that a bank 
should not be required to notify a consumer of a recredit if the bank 
affirmatively determines that the consumer's claim is valid. Section 
7(f)(2) requires a notice for all recredits, not just those that are 
made provisionally pending further investigation. The Board therefore 
has retained the requirement in Sec.  229.54 that a bank always notify 
the consumer of a recredit.
    Notices regarding expedited recredit claims are deemed to be given 
on the business day that they are mailed or otherwise delivered in a 
manner agreed to by the consumer. One commenter suggested that 
electronic delivery of the consumer expedited recredit notices should 
be subject to the E-Sign Act. The E-Sign Act applies to notices that 
other law requires to be in writing (rather than in electronic form) 
and requires a consumer to affirmatively consent to electronic delivery 
of a written notice after the bank provides a detailed notice 
concerning electronic delivery. The Check 21 Act specifically states 
that a bank may provide the expedited recredit notices through any 
means to which the consumer has agreed. The Board believes that because 
the Check 21 Act specifically addresses alternative means of providing 
written information required by that Act, the E-Sign Act does not 
apply. A bank therefore need not comply with E-Sign when providing 
materials electronically under the Check 21 Act, although a bank 
voluntarily may choose to do so.
    7. Other Claims Not Affected. One commenter questioned the need for 
Sec.  229.54(f) of the proposed rule, which stated that providing a 
consumer expedited recredit under Sec.  229.54 does not absolve a bank 
from liability under other law. This provision of the Board's proposed 
rule came directly from the statute. A consumer may recover only up to 
the amount of the substitute check under Sec.  229.54, although the 
consumer's losses associated with the substitute check may exceed that 
amount. Paragraph (f) is intended to clarify that a consumer may be 
able to recover those additional losses under other provisions that 
allow for proximately-caused damages exceeding the amount of the check, 
such as the substitute check indemnity or U.C.C. 4-402. The Board has 
added a reference to the U.C.C. in the rule text and a paragraph in the 
commentary that explains the intent and application of Sec.  229.54(f).
    8. Sufficiency of Commentary and Examples. The Board specifically 
requested comment on whether additional commentary to Sec.  229.54 was 
needed. Commenters' reactions to this request were mixed. Thirteen 
commenters requested more commentary. Some of these were general 
requests, while other commenters offered specific examples that they 
wanted the Board to include. By contrast, ten commenters argued that no 
additional examples were needed, and some of these commenters even 
suggested that the Board omit certain of the proposed examples.
    The Board has retained the examples from the commentary to the 
proposed rule with some clarifying changes. The Board has not, however, 
added examples or commentary except as noted in the preceding 
paragraphs. The Board expects that use of the consumer expedited 
recredit provision will be relatively rare and that the commentary 
addresses the most likely questions that banks might have regarding 
practical application of that provision. The Board will consider adding 
or deleting commentary and examples if experience indicates that the 
level of detail in the commentary is inappropriate.
H. Section 229.55 Expedited Recredit Procedures for Banks
    Several banks expressed concern that the interbank recredit right 
would not work well in practice and identified various reasons for that 
concern. For example, some commenters stated that a bank that received 
an interbank expedited recredit claim might not know within the 10-day 
period for acting on that claim whether it could produce an original 
check or sufficient

[[Page 47304]]

copy. Such a bank might seek to obtain the original check or sufficient 
copy by submitting its own interbank recredit claim, which also would 
be subject to a 10-day response time. One commenter requested that the 
Board identify which transaction gave rise to a bank's claim and thus 
started the clock for making an interbank expedited recredit claim. A 
commenter also requested that the Board specify a particular method for 
calculating interest on a claim.\27\ Other commenters requested 
additional clarification about who would enforce the interbank recredit 
process. Still another commenter asked how a consumer's receipt of an 
extension to make a consumer expedited recredit claim would affect the 
timing requirements for the interbank recredit process.
---------------------------------------------------------------------------

    \27\ Another commenter questioned why banks had 120 days to make 
a claim when the corresponding provision of Sec.  229.54 gives 
consumers only 40 days. As the commentary to the proposed rule 
explained, the 120-day period for a bank to make a claim allows time 
for the statement to be delivered to the consumer and for the 
consumer to make a timely claim, plus it allows for multiple 
interbank claims with respect to the same substitute check. The 
Board thinks this explanation is more appropriate in the preamble, 
which discusses the basis for the rule's provisions, than in the 
commentary, which clarifies the application of those provisions. The 
Board accordingly has omitted this text from the commentary to the 
final rule.
---------------------------------------------------------------------------

    The Board has amended the time periods in Sec.  229.55(b)-(c) for 
making and responding to an interbank claim to parallel the Board's 
amendments to the corresponding provisions of the consumer expedited 
recredit section. In response to a comment, the final commentary also 
clarifies which transaction triggers the claimant bank's 120-day period 
for making a claim. Aside from those changes, the Board has adopted 
Sec.  229.55 and the accompanying commentary as proposed. The interbank 
recredit section may be varied by agreement. If banks determine that 
particular provisions of Sec.  229.55 are problematic, they may agree 
to modify those provisions by agreement as they deem appropriate.
I. Section 229.56 Liability
    The Board has adopted the provisions of proposed Sec.  229.56 with 
some minor changes suggested by commenters.
    In response to a comment, Sec.  229.56(a)(1)(i) now contains 
language that parallels Sec.  229.53(b)(1)(ii) when describing that 
losses recoverable under subpart D are, in the absence of a warranty 
and indemnity claim, limited to the amount of the substitute check plus 
interest and expenses.
    Several commenters expressed concern that the Board's proposed rule 
included the identity of the party to be sued as an element of accrual 
of a cause of action under Sec.  229.56. The Board included this 
clarification in the proposed rule to make the standard for accrual 
parallel to the standard for making a timely claim. The final rule 
therefore retains the proposed accrual language regarding the identity 
of the party to be sued.
    Two commenters expressed concern or confusion about the interaction 
of Sec.  229.54, which requires a consumer to bring an expedited 
recredit claim within 40 days of the delivery of the relevant account 
statement or substitute check, with the timing requirements of Sec.  
229.56. One commenter noted that Sec.  229.56 generally states that a 
claim must be made within 30 days of accrual to be timely, whereas 
Sec.  229.54 provides that a consumer has 40 days from delivery of the 
relevant account statement or substitute check to make a timely 
expedited recredit claim. This commenter suggested that a consumer be 
allowed this same 40-day period to make a timely claim for purposes of 
Sec.  229.56. The Board notes that the statute and rule produce this 
result by providing that a timely consumer recredit claim under Sec.  
229.54 satisfies the timing requirement of Sec.  229.56.
J. Section 229.57 and Appendix C Consumer Awareness and the Board's 
Model Language
    1. Consumer Awareness Disclosure in General. The Board has amended 
the text of Sec.  229.57 of the rule to parallel the statutory text 
more closely by providing that the consumer awareness disclosure 
required by subpart D must be brief.
    The proposed rule required banks to provide the disclosure to 
consumers who received paid checks and consumers who received 
substitute checks on an occasional basis. Several commenters suggested 
that banks should be required to provide the disclosure to all 
consumers, not just those who receive substitute checks. Requiring 
notice for consumers who do not receive substitute checks would go 
beyond the requirements of the statute and could confuse consumers who 
receive a notice describing rights that they do not have. The Board 
therefore has not altered the basic scope of the consumer disclosure 
requirement. However, the final rule and commentary clarify that the 
reference to paid checks means paid original checks and paid substitute 
checks and does not refer to a statement that contains multiple check 
images per page.
    The proposed rule stated that a bank responding to a request for a 
check by providing a substitute check must provide the disclosure in 
connection with that substitute check ``unless [the] bank already has 
provided the disclosure'' to a consumer who receives paid checks. Some 
commenters understood the proposed rule to mean that a bank that 
already had provided the notice to a consumer who received paid checks 
with account statements would not be required to provide an additional 
notice when responding to a consumer's request for a check. Other 
commenters believed that notice upon provision of a substitute check 
always would be required.
    The final rule provides that a bank always is required to provide 
the disclosure when responding to a request for a check by providing a 
substitute check. This approach more closely parallels the statutory 
language, which does not provide an exception to the requirement to 
provide a disclosure when providing a substitute check on an occasional 
basis. Moreover, the time that a consumer receives a substitute check 
in response to a particular request is likely when the disclosure will 
be most useful.
    One commenter suggested that a bank should not be required to 
provide the substitute check disclosure in a separate mailing but 
rather should be allowed to provide the disclosure along with other 
account information. The rule would permit a bank to combine the 
substitute check disclosure with other information.
    One commenter suggested that the consumer awareness disclosure 
should be required based on the consumer relationship rather than the 
account relationship, such that a bank need not provide an additional 
disclosure if an existing consumer customer opened a new account. The 
text of the final rule incorporates this interpretation. Another 
commenter suggested that the Board explain how the consumer awareness 
disclosure would apply in the context of joint account relationships. 
This commenter stated that notice to one account holder on a joint 
account should suffice as notice to each consumer on the account. The 
final rule includes language similar to that in Sec.  229.15(c) 
regarding notice to joint account holders.
    2. Timing for a Disclosure Provided in Response to a Consumer's 
Request for a Check. The statute requires a bank that provides a 
substitute check in response to a consumer's request for a check to 
provide the consumer awareness disclosure to the consumer ``at the time 
of the request.'' There are some cases in which a bank would be able to 
provide the notice at the time of the consumer's request in a manner 
that is useful to the consumer, while other requests may

[[Page 47305]]

present practical difficulties for banks. For example, a bank may not 
know at the time of the request what it will provide in response. 
Ultimately, the bank might provide something other than a substitute 
check to the consumer. If that bank had given the substitute check 
disclosure to the consumer at the time of the request, the consumer 
might be confused by receipt of a disclosure explaining rights that did 
not apply to the document (s)he received. Moreover, the consumer may 
make his or her request in such a manner (such as by telephone) that 
the bank is unable to provide the disclosure at the time of the 
request.
    In light of the foregoing difficulties, the Board proposed two 
alternatives for when a bank must provide the disclosure to a consumer 
who requests a substitute check and requested comment on which 
alternative was preferable. The first alternative used the statutory 
language, while the second would have allowed the bank in all cases to 
provide the disclosure at the time it provided a substitute check in 
response to the consumer's request. Commenters overwhelmingly preferred 
the second alternative.
    The final rule takes an approach that combines elements from the 
first and second alternatives. The final rule states that a bank must 
provide the disclosure to a consumer who requests a check or check copy 
at the time of the request if feasible and otherwise must provide the 
disclosure no later than the time at which the bank provides a 
substitute check in response to the request. The commentary provides 
examples of when it would not be feasible to provide the disclosure at 
the time of the request.
    3. Model Language for the Disclosure Required by Sec.  229.57. The 
Check 21 Act requires the Board to publish model language that banks 
could use to satisfy the consumer awareness disclosure requirement and 
that, when used appropriately, would be deemed to comply with that 
requirement. The Board requested comment on the model language that it 
proposed to include in existing appendix C.
    The Board received numerous comments on the proposed model 
disclosure. Several commenters generally opined that the proposed 
language was adequate, although some of these commenters suggested that 
the model disclosure could be more concise. Numerous commenters 
expressed concern that the proposed language was so detailed that it 
would discourage consumers from reading the disclosure. These 
commenters suggested a specific, alternative model disclosure that was 
much shorter than the Board's proposed disclosure. By contrast, five 
commenters suggested that the model disclosure should provide consumers 
with more detail about expedited recredit rights.\28\ Many commenters 
made specific wording suggestions for the Board's consideration.
---------------------------------------------------------------------------

    \28\ These commenters also suggested that the Board should 
require banks to respond accurately to consumer enquiries about how 
a particular check was processed. The Check 21 Act does not contain 
such a requirement. However, banks have a business incentive to 
respond appropriately to consumer enquiries on this and other 
topics.
---------------------------------------------------------------------------

    The final model disclosure, published as model 5A in appendix C, is 
shorter than the proposed model. In crafting this model disclosure, the 
Board has attempted to balance the requirement that the disclosure be 
brief and the need for the disclosure to contain enough information to 
enable a consumer to understand and, if necessary, exercise the 
expedited recredit right in Sec.  229.54. The Board's revisions also 
reflect its consideration of the specific wording concerns expressed by 
commenters.
    4. Additional Model Language for Consumer Expedited Recredit 
Notices. Although not required to do so by statute, the Board published 
for comment model notices that banks could use to respond to consumer 
expedited recredit claims under Sec.  229.54(e). The Check 21 Act does 
not provide a safe harbor for appropriate use of these model notices, 
and the Board requested comment on whether having model language would 
be useful for banks in the absence of a safe harbor. Commenters 
strongly supported inclusion of the model notices, although many 
requested that the Board either give the language safe harbor status or 
specifically state that appropriate use of the models in the Board's 
view would constitute compliance with the Check 21 Act.
    The Board has retained the model consumer expedited recredit 
notices in appendix C but has revised them. The proposed models focused 
on responding to claims for an improper charge to a consumer account, 
but the final models instead focus on whether the consumer's claim is 
or is not valid. These revisions will allow banks to use the model 
notices to respond to a consumer's claim regarding an improper charge 
to his or her account or regarding a warranty breach. Because the 
statute does not provide safe harbor status to these model notices, the 
Board has not indicated that appropriate use of the notice constitutes 
compliance with the rule. However, the Board has revised the language 
discussing the status of the model notices to indicate that the Board 
has provided these models to help banks to comply with the rule.
K. Section 229.58 Mode of Delivery of Information Required by This 
Subpart
    One commenter suggested that the Board should delete Sec.  229.58, 
which contains the rule for electronic delivery of documents that 
applies to all of subpart D, and instead discuss electronic delivery of 
documents in each place in the rule where that concept is relevant. The 
Board has retained the proposed organization because it believes that 
discussing the issue of electronic delivery in one section and cross-
referencing that section when appropriate is straightforward and 
efficient.
L. Section 229.60 Variation by Agreement
    The Check 21 Act and final rule provide that the only provision 
that may be varied by agreement is the interbank recredit provision at 
section 8 of the Act and Sec.  229.55 of the rule. The final rule 
provides commentary clarifying that this provision does not prevent a 
bank from taking action that is more favorable to the consumer than 
required by the Check 21 Act or the final rule.

II. Changes Unrelated to the Check 21 Act

    In addition to the changes necessary to implement the Check 21 Act, 
the Board also proposed changes to a number of existing provisions in 
Regulation CC based on a general review of the rule. Commenters 
generally supported these proposed changes, although some expressed 
particular concerns as noted in the following paragraphs. With the 
exception of the changes discussed in the following paragraphs, the 
Board is adopting the proposed revisions to existing provisions in 
substantially the same form as in the Board's proposed rule.
A. Section 229.15 General Disclosure Requirements
    The Board proposed to amend the commentary to Sec.  229.15 to 
require that disclosures under subpart B be clear and conspicuous. The 
Board proposed this change in Regulation CC to parallel proposed 
changes to its consumer regulations.\29\ However, the Board received 
numerous comments opposing the proposed changes to the consumer rules, 
and several commenters opposed inclusion of clear and conspicuous

[[Page 47306]]

language in the Regulation CC commentary.
---------------------------------------------------------------------------

    \29\ See 68 FR 68786, 68788, 68791, 68793, 68799 (all dated Dec. 
10, 2003).
---------------------------------------------------------------------------

    In response to concerns expressed regarding the proposed consumer 
regulations, the Board recently withdrew all the proposed amendments to 
the consumer rules.\30\ In connection with that action, the Board 
determined that the goal of ensuring that consumers receive noticeable 
and understandable information should be achieved by developing 
proposals that focus on improving individual disclosures rather than 
the adoption of general definitions and standards applicable across all 
regulations.
---------------------------------------------------------------------------

    \30\ See 69 FR 35541 (June 25, 2004).
---------------------------------------------------------------------------

    The existing notice requirements in subparts B and C of Regulation 
CC have been in effect since 1988, and the Board is not aware that 
recipients of those notices have expressed concerns regarding the 
manner in which banks provide them. The Board therefore has determined 
that adding a clear and conspicuous requirement is unnecessary at this 
time and has not amended the commentary as proposed. The Board will 
reevaluate this issue in connection with its future periodic reviews of 
Regulation CC.
B. Section 229.30(c)(1) Paying Bank's Responsibility for Return of 
Checks
    Section 229.30(c)(1) currently provides that a paying bank's 
midnight deadline for returning a check is extended if it uses a means 
of delivery that ordinarily would result in receipt by the receiving 
bank's next banking day. In response to a case holding that Reserve 
Banks have a 24-hour banking day for processing checks (see Oak Brook 
v. Northern Trust, 256 F.3d 638 (7th Cir., 2001)), the Board proposed 
to amend Sec.  229.30(c)(1) to provide that the deadline would be 
extended if a paying bank used a means of delivery that ordinarily 
would result in the receiving bank's receipt of the check before the 
cutoff hour for its next processing cycle if sent to a returning bank 
or before its next banking day if sent to a depositary bank.
    The Board received several comments on this proposed change, most 
of which indicated that using the cutoff hour for the next processing 
cycle would be confusing and difficult to apply. These commenters noted 
that some banks have more than one such cutoff hour and that paying 
banks might not know the relevant times for each of the banks to which 
they return checks.
    In response to these comments, the final rule provides that a 
paying bank must return a check ``on or before the receiving bank's 
next banking day following the otherwise applicable deadline by the 
earlier of the close of that banking day or a cutoff hour of 2 p.m. or 
later set by the receiving bank under U.C.C. 4-108.'' This approach 
should provide the certainty of identifying a specific cutoff hour but 
also allow the receiving bank to set a cutoff hour of 2 p.m. or later 
or to close before 2 p.m.
C. Other Comments Concerning Non-Check 21-Related Changes
    1. Manner of Providing Subpart B notices. Commenters generally 
supported the proposed changes to the commentary to Sec. Sec.  229.13 
and 229.15 that clarified the application of the E-Sign Act to notices 
and disclosures that subpart B requires to be in writing. However, one 
commenter expressed concern about existing language in the commentary 
stating that a notice is in a form that the consumer can keep if it can 
be ``downloaded or printed.'' This commenter suggested that the 
standard be changed to ``downloaded and printed.'' The Board is not 
aware of consumer problems associated with this requirement and notes 
that downloading information on a computer allows the recipient to 
access and use the information later. The Board also believes that it 
would be unusual for a bank to send an electronic notice such that it 
could not be printed. The Board therefore has retained the existing 
language.
    Another commenter expressed concern about the requirement that 
notices and disclosures required by Sec. Sec.  229.13(g), 229.16(c)(2), 
and 229.33(a)-(b) must include an account number, which the commenter 
interpreted to mean the entire account number. The commenter suggested 
that a bank should be permitted to redact all but the last four digits 
for information security purposes. The Board has amended Sec. Sec.  
229.13(g) and 229.16(c)(2) to allow for the proposed redaction. The 
Board has not amended Sec.  229.33(a)-(b) because the notice required 
by that section is an interbank notice, and the receiving bank likely 
would need full account information for the notice to serve its 
intended purpose.
    2. Section 229.33 Notice of Nonpayment. The Board received eleven 
comments concerning its request for comment on whether the time period 
for giving the notice of nonpayment should be reduced. Only two 
commenters opined that an adjustment was necessary. The Board therefore 
has left the time period unchanged. One commenter suggested that the 
Board amend this section to state that the bank must ``provide or 
give'' the notice, as opposed to the ``send or give'' language proposed 
by the Board. This commenter was concerned that the Board's proposed 
language might be read to exclude providing notice by e-mail. The Board 
believes that the send or give language is sufficiently broad to allow 
notice in any form, and the proposed commentary explicitly stated that 
electronic notice would suffice if sent to the address specified by the 
recipient for that purpose. The Board therefore has adopted the 
language as proposed.
    Another commenter suggested that the Board amend Sec.  229.33 to 
provide that a bank could provide notice in the form of a substitute 
check or another paper or electronic representation of a check. The 
Board believes that the text of Sec.  229.33(a), when combined with the 
revised commentary addressing the form of the nonpayment notice, 
already produces this result.

III. Responses to Specific Requests for Comment

    In addition to proposing Check 21-related and non-Check 21-related 
changes, the Board also requested comment on several specific issues.
A. Remotely-Created Demand Drafts
    The Board requested comment on whether Regulation CC should 
incorporate a U.C.C. warranty that would shift liability for an 
unauthorized remotely-created demand draft from the paying bank to the 
depositary bank, although the Board did not propose specific regulatory 
language. Approximately 76 commenters addressed this issue, all but two 
of which strongly supported the general idea of covering liability for 
remotely-created demand drafts in Regulation CC. However, many 
commenters advocated changes from the uniform version of the warranty. 
For example, some commenters stated that the warranty should apply to 
all remotely-created demand drafts instead of only those drafts drawn 
on consumer accounts, and others suggested that the warranty should 
extend to all the draft's terms instead of the amount only. Many 
commenters encouraged the Board to propose specific language for 
comment in a separate rulemaking. The Board intends to issue a separate 
proposal regarding remotely-created demand drafts later this year.
B. Treatment of Industry Standards
    The Board also received comments regarding whether it should 
identify specific industry standards in the rule text or the 
commentary. The vast majority of commenters on this issue preferred the 
Board's proposed

[[Page 47307]]

approach of placing a general reference to industry standards in the 
text of the rule and identifying specific standards in the commentary. 
However, particularly with respect to substitute checks, many 
commenters preferred that the Board should indicate that a particular 
standard is exclusive.
    In cases where the Board intends that an exclusive industry 
standard apply, such as the standards relating to MICR-line printing 
and substitute checks, the Board has identified a specific standard in 
the text of the final rule. The Board believes that this approach is 
more transparent for the reader and will better facilitate compliance 
with the rule.
C. Plain Language
    The Board received four comments about whether the proposed rule 
and commentary were in plain language. Two of these commenters opined 
that the rule and commentary were in plain language, especially in 
light of the complexity of some provisions of the law. Another 
commenter suggested that the rule could be shortened if some elements 
were moved to an appendix but did not identify specific changes it 
would make. Another commenter requested that the rule better clarify 
the application or non-application of the Check 21 Act to non-consumer 
accounts. The Board has addressed this concern through its revisions to 
the account and consumer account definitions and through revisions to 
certain parts of the commentary.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (PRA) (44 
U.S.C. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the final 
rule under the authority delegated to the Board by the Office of 
Management and Budget (OMB). The final rule contains requirements 
subject to the PRA. The collection of information that is required by 
this final rule is found in 12 CFR 229.54, 229.55, and 229.57. This 
information is required to obtain a benefit for consumers and mandatory 
for depository institutions.
    All depository institutions, of which there are approximately 
19,280, potentially are affected by this collection of information, and 
thus are respondents for purposes of the PRA, because all depository 
institutions may respond to and make expedited recredit claims under 
Sec. Sec.  229.54 and 229.55, respectively. In addition, all depository 
institutions that provide paid checks to consumer customers with 
periodic account statements or that otherwise provide substitute checks 
to consumer customers must provide the consumer awareness notice in 
Sec.  229.57. However, the extent to which this collection of 
information affects a particular depository institution will depend on 
whether and under what circumstances that depository institution 
provides substitute checks to consumers. For example, institutions that 
do not provide paid checks with account statements or provide 
substitute checks in response to consumers' occasional requests for 
paid checks will have significantly fewer consumer awareness 
disclosures and expedited recredit notices than will depository 
institutions that routinely provide paid checks to consumers.
    The collection of information in this regulation is a new 
requirement for which the Federal Reserve has no direct method for 
estimating burden. The following average burden estimates for 
respondents regulated by the Federal Reserve therefore are based on the 
Federal Reserve's experience under similar, existing regulations with 
respect to the 1,244 state member banks and uninsured U.S. branches and 
agencies of foreign banks for which the Federal Reserve has 
administrative enforcement authority (collecting referred to in the 
following paragraphs as respondents regulated by the Federal Reserve) 
and for consumers who submit claims to those depository institutions. 
The following average burden estimates for respondents regulated by the 
Federal Reserve also represent an average across all such respondents 
and reflect variations between institutions based on their size, 
complexity, and practices. The Federal Reserve also has estimated the 
total annual burden associated with each notice both for respondents 
regulated by the Federal Reserve and for all affected depository 
institutions. The Federal Reserve estimates that half of all depository 
institutions affected by this rule do not provide paid checks with 
account statements or provide substitute checks and thus would have 
little or no burden for these requirements. The Federal Reserve has 
taken this fact into account by estimating total burden for all 
affected depository institutions on a weighted basis. The other banking 
agencies are responsible for estimating and reporting to OMB the total 
paperwork burden for the depository institutions for which they have 
administrative enforcement authority. They may, but are not required 
to, use the Federal Reserve's burden estimates.
    Except as noted in the following paragraphs, the burden estimates 
for the final rule are the same as those the Federal Reserve identified 
for the proposed rule. One commenter expressed concern that the Federal 
Reserve's proposed paperwork burden estimates in its proposed rule were 
too low. However, that commenter did not suggest specific revisions to 
those estimates.
    The first notice, described in Sec.  229.54(b)(2), is the 
information a consumer would provide when making an expedited recredit 
claim in writing. The Federal Reserve estimates that each respondent 
regulated by the Federal Reserve will receive, on average, 25 of these 
claims per year. The Federal Reserve estimates that it will take 
consumers, on average, 15 minutes to complete and send this claim. The 
Federal Reserve estimates that the total annual burden for consumers 
submitting claims to respondents regulated by the Federal Reserve is 
7,775 hours. Using the Federal Reserve's methodology, the total annual 
burden for consumers submitting claims to all depository institutions 
would be approximately 67,300 hours.
    The second notice, described in Sec.  229.54(e), is required when a 
depository institution validates the consumer's claim, denies a 
consumer's recredit claim, or reverses a consumer's recredit claim. The 
Federal Reserve estimates that each respondent regulated by the Federal 
Reserve will send, on average, 35 of these notices per year. The 
Federal Reserve estimates that it will take each such respondent, on 
average, 15 minutes to prepare and distribute these notices (the Board 
has provided a model disclosure that depository institutions may use 
for this purpose). The estimated total annual burden for the 
respondents regulated by the Federal Reserve to respond to consumer 
claims is 10,885 hours. Using the Federal Reserve's, the total annual 
burden for all depository institutions would be approximately 94,200 
hours.
    The third notice, described in Sec.  229.55 (b)(2), is required for 
each depository institution that is required to make a written claim 
against an indemnifying depository institution for a substitute check. 
The Federal Reserve estimates that each respondent regulated by the 
Federal Reserve will submit, on average, 15 of these claims per year. 
The Federal Reserve estimates that it will take each such respondent, 
on average, 15 minutes to complete and send each claim. The estimated 
total annual burden for respondents regulated by the Federal Reserve to 
submit interbank recredit claims is 4,665 hours. Using the Federal 
Reserve's methodology, the total annual burden for all depository 
institutions would be approximately 40,400 hours.
    Finally, Sec.  229.57 describes the requirements for depository 
institutions

[[Page 47308]]

to provide consumer awareness disclosures to consumers who receive paid 
checks with their periodic statements, who receive a substitute check 
in response to a request for a check, and who receive a returned check 
in the form of a substitute check. A model disclosure that depository 
institutions may use is provided in appendix C-5A.
    The proposed rule contained an exception to the disclosure 
requirement for a depository institution that provided a substitute 
check on an occasional basis to a consumer who already had received the 
disclosure. The final rule, by contrast, requires that a depository 
institution always provide the disclosure when providing a substitute 
check on an occasional basis. The Federal Reserve believes that 
provision of a substitute check on an occasional basis in response to a 
consumer's request will be rare and thus does not expect that 
elimination of the proposed rule's exception will appreciably increase 
the number of disclosures. The final rule's paperwork burden estimate 
for notices provided on an occasional basis therefore is only slightly 
higher than that in the proposed rule.
    The Federal Reserve estimates that each respondent regulated by the 
Federal Reserve will, on average, provide 510 disclosures per year (as 
compared with 500 disclosures per year in the proposed rule) and that, 
on average, it will take one minute to prepare and distribute the 
disclosure to each consumer. The one-minute estimate is a change from 
the proposed rule due to further analysis. The consumer awareness 
disclosures are standardized and machine-generated and do not 
substantively change from one individual account to another; thus, the 
average time for providing the disclosure to all consumers who are 
entitled to receive it should be small. The Federal Reserve estimated 
that the estimated total annual burden for respondents regulated by the 
Federal Reserve to provide the consumer awareness disclosure is 10,574 
hours. Using the Federal Reserve's methodology, the total annual burden 
for all depository institutions would be approximately 91,500 hours.
    The final rule would increase the total burden under Regulation CC 
for respondents regulated by the Federal Reserve and consumers 
submitting claims to those respondents by 33,899 hours, from 327,052 to 
360,951. Using the methodology explained above, the final rule would 
increase total burden under Regulation CC for all depository 
institutions by approximately 293,400 hours.
    The Federal Reserve may not conduct or sponsor, and an organization 
is not required to respond to, this information collection unless it 
displays a currently valid OMB control number. The OMB control number 
is 7100-0235.

Regulatory Flexibility Act

    The Board has prepared a final regulatory flexibility analysis as 
required by the Regulatory Flexibility Act (see 12 U.S.C. 604).

I. Need for and Objective of Rule

    The Board is adopting this rule to implement the Check 21 Act. The 
Act requires the Board to publish a model disclosure that depository 
institutions may use to satisfy their consumer awareness disclosure 
requirements. The Act also authorizes the Board to adopt rules 
necessary to implement, prevent circumvention or evasion of, or 
facilitate compliance with the Act. The final rule adopts the text of 
the Check 21 Act with clarifying changes and commentary designed to aid 
depository institutions' understanding of and compliance with the Act. 
The final rule is incorporated into existing Regulation CC so that all 
the Board's generally applicable check collection requirements will be 
contained within one rule.

II. Summary of Issues Raised by Comments in Response to the Initial 
Regulatory Flexibility Analysis

    The Board received two comments on its initial regulatory 
flexibility analysis. One commenter opined that the impact of the rule 
on small depository institutions should be proportional to that on 
larger depository institutions and should not be adverse to either. The 
other commenter expressed concern that the use of substitute checks 
could increase fraud and that small depository institutions would not 
have sufficient resources to develop fraud prevention techniques to 
respond to such increased risks. This commenter acknowledged that 
additional fraud risks associated with substitute checks could not yet 
be quantified but expressed concern that these risks would be 
burdensome. These comments did not provide specific information about 
the impact of the proposed rule on affected small depository 
institutions. The Board has not made regulatory changes based on the 
comments.

III. Description of Affected Small Entities

    Under section 3 of the Small Business Act, as implemented at 13 CFR 
part 121, a bank is considered a ``small entity'' or ``small bank'' if 
it has $150 million or less in assets. Based on March 2004 call report 
data, the Board estimates that there are approximately 14,251 
depository institutions with assets of $150 million or less.
    The Check 21 Act does not require any depository institution to 
create substitute checks or change its general check collection 
procedures, although after the Act's effective date any depository 
institution may receive a substitute check instead of an original 
check. The provisions of the Check 21 Act and the final rule 
potentially apply to all depository institutions regardless of their 
size. However, the extent to which any depository institution will be 
economically affected by the final rule depends on several variables, 
including how many substitute checks a depository institution handles 
and whether it creates those substitute checks. Even though all 
depository institutions that handle a substitute check for value make 
the substitute check warranties and indemnity and potentially are 
responsible for providing expedited recredit for a substitute check to 
a consumer or another depository institution, the final rule allocates 
most associated losses to the reconverting depository institution that 
first transferred, presented, or returned the substitute check for 
value. Thus, a depository institution's costs associated with 
substitute check-related problems primarily will depend on whether it 
chooses to create substitute checks. In addition, whether a depository 
institution must provide the consumer awareness disclosure contained in 
the final rule will depend on the depository institution's specific 
practices regarding providing checks to consumers.
    Due to current uncertainty about each of the foregoing variables, 
aside from the burden estimates in the Paperwork Reduction Act section, 
the Board cannot at this time determine the number of small depository 
institutions that will be directly affected by the final rule or the 
rule's overall economic impact on small depository institutions.

IV. Recordkeeping, Reporting, and Compliance Requirements

    The final rule does not contain recordkeeping or reporting 
requirements. However, a depository institution that provides paid 
checks to consumer customers with account statements or otherwise 
provides a substitute check to a consumer must provide consumer 
awareness disclosures. In addition, a depository institution that 
receives an expedited recredit claim from a consumer or other 
depository institution must comply with

[[Page 47309]]

the requirements of the relevant expedited recredit provision, 
including the requirements regarding timing for and notification of the 
depository institution's determination regarding the claim. The final 
rule allows depository institutions to vary by agreement the terms of 
the interbank recredit provision, but not the consumer expedited 
recredit provision.

V. Steps Taken To Minimize the Economic Impact on Small Entities

    The requirements of the Check 21 Act that potentially affect small 
depository institutions are statutory. The Board has minimal 
flexibility to vary those requirements by regulation, but when possible 
it has indicated steps depository institutions may take to minimize 
risks under the Act. The substitute check warranties and indemnity are 
made as a matter of law when a depository institution transfers, 
presents, or returns a substitute check, but the final rule and 
commentary clarify in various places that depository institutions may 
further allocate liability amongst themselves by agreement. The maximum 
periods for acting on claims and the notices and other documentation 
that depository institutions must provide in connection with providing 
an expedited recredit to a consumer are specifically prescribed by the 
statute, but Sec.  229.60 of the Board's final rule and the associated 
commentary clarify that a depository institution may choose to act in a 
manner more favorable to the consumer than the Act requires. Although 
the final rule also uses the statute's requirements regarding interbank 
expedited recredits, Sec.  229.60 specifically notes that depository 
institutions themselves may vary any of those requirements by 
agreement. Finally, the statute specifically sets forth the events that 
trigger provision of and the timing requirements that apply to the 
consumer awareness disclosure, but Sec.  229.57(b)(2)(i) gives 
depository institutions flexibility to provide disclosures for a 
substitute check given in response to specific request for a check at a 
later date when necessary.

Administrative Procedure Act

    In accordance with 12 U.S.C. 553(d)(3), the Board for good cause 
finds that model disclosure C-5A in appendix C is effective 
immediately. The Check 21 Act requires the Board to publish model 
disclosure C-5A three months before the Act's effective date. A bank's 
appropriate use of model C-5A would constitute compliance with the 
consumer awareness disclosure requirements in section 12 of the Act and 
Sec.  229.57 of the final rule. The Board believes that delaying the 
effective date of model disclosure C-5A would undermine the Act's 
intent that banks be able to rely on the model language as soon as the 
Board publishes it.

12 CFR Chapter II

List of Subjects in 12 CFR Part 229

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

Authority and Issuance

0
For the reasons set forth in the preamble, the Board is amending 12 CFR 
part 229 to read as follows:

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

0
1. The authority citation for part 229 is amended to read as follows:

    Authority: 12 U.S.C. 4001-4010, 12 U.S.C. 5001-5018.


Sec.  229.1  [Amended]

0
2. In Sec.  229.1, revise paragraph (a) and add a new paragraph (b)(4) 
to read as follows:
    (a) Authority and purpose. This part is issued by the Board of 
Governors of the Federal Reserve System (Board) to implement the 
Expedited Funds Availability Act (12 U.S.C. 4001-4010 ) (the EFA Act) 
and the Check Clearing for the 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 provided to consumers; and the 
disclosure and notices that banks must provide.


Sec.  229.2  [Amended]

0
3. In Sec.  229.2, revise the introductory sentence to read as follows:
    As used in this part, and unless the context requires otherwise, 
the following terms have the meanings set forth in this section, and 
the terms not defined in this section have the meanings set forth in 
the Uniform Commercial Code:
* * * * *

0
4. In Sec.  229.2(a):
0
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;
0
B. Designate paragraph (a) as paragraph (a)(1) and revise the first 
sentence of that paragraph;
0
C. Designate the undesignated paragraph as paragraph (2) and revise 
that paragraph; and
0
D. Add a new paragraph (3).
    The revisions and addition read as follows:
    (a) Account. (1) Except as provided in paragraphs (a)(2) and (a)(3) 
of this section, account means a deposit as defined in 12 CFR 
204.2(a)(1)(i) that is a transaction account as described in 12 CFR 
204.2(e). * * *
    (2) For purposes of subpart B of this part and, in connection 
therewith, this subpart A, account does not include an account where 
the account holder is a bank, where the account holder is an office of 
an institution described in paragraphs (e)(1) through (e)(6) of this 
section or an office of a ``foreign bank'' as defined in section 1(b) 
of the International Banking Act (12 U.S.C. 3101) that is located 
outside the United States, or where the direct or indirect account 
holder is the Treasury of the United States.
    (3) For purposes of subpart D of this part and, in connection 
therewith, this subpart A, account means any deposit, as defined in 12 
CFR 204.2(a)(1)(i), at a bank, including 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.
* * * * *

0
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.

* * * * *

0
6. In Sec.  229.2(k):
0
A. After paragraph (6), add a new paragraph (7) to read as follows:
    (k) * * *
    (7) The term check includes an original check and a substitute 
check.
0
B. Designate the undesignated paragraph with the word ``Note'' followed 
by a colon and remove the phrase ``subpart C'' from the last sentence 
of that paragraph and add the phrase ``subparts C and D'' in its place.

0
7. In Sec.  229.2(q), add the phrase ``to a collecting bank for 
settlement or'' between the words ``basis'' and ``to.''

[[Page 47310]]


0
8. In Sec.  229.2(z), remove the phrase ``subpart C'' from the 
undesignated paragraph and add the phrase ``subparts C and D'' in its 
place, and after the undesignated paragraph add a new paragraph to read 
as follows:
* * * * *

    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.

* * * * *

0
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.
* * * * *

0
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.

0
11. In Sec.  229.2, after paragraph (qq) add the following new 
paragraphs (rr) through (eee), to read as follows:
* * * * *
    (rr) Collecting bank means any bank handling a check for forward 
collection, except the paying bank.
    (ss) Consumer means a natural person who--
    (1) With respect to a check handled for forward collection, draws 
the check on a consumer account; or
    (2) With respect to a check handled for return, deposits the check 
into or cashes the check against a consumer account.
    (tt) Customer means a person having an account with a bank.
    (uu) Indemnifying bank means a bank that provides an indemnity 
under 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 routing number, account number, check 
number, check amount, and other information, that are printed near the 
bottom of a check in magnetic ink in accordance with American National 
Standard Specifications for Placement and Location of MICR Printing, 
X9.13 (hereinafter ANS X9.13) for an original check and American 
National Standard Specifications for an Image Replacement Document--
IRD, X9.100-140 (hereinafter ANS X9.100-140) for a substitute check 
(unless the Board by rule or order determines that different standards 
apply).
    (ww) Original check means the first paper check issued with respect 
to a particular payment transaction.
    (xx) Paper or electronic representation of a substitute check means 
any copy of or information related to a substitute check that a bank 
handles for forward collection or return, charges to a customer's 
account, or provides to a person as a record of a check payment made by 
the person.
    (yy) Person means a natural person, corporation, unincorporated 
company, partnership, government unit or instrumentality, trust, or any 
other entity or organization.
    (zz) Reconverting bank means--
    (1) The bank that creates a substitute check; or
    (2) With respect to a substitute check that was created by a person 
that is not a bank, the first bank that transfers, presents, or returns 
that substitute check or, in lieu thereof, the first paper or 
electronic representation of that substitute check.
    (aaa) Substitute check means a paper reproduction of an original 
check that--
    (1) Contains an image of the front and back of the original check;
    (2) Bears a MICR line that, except as provided under ANS X9.100-140 
(unless the Board by rule or order determines that a different standard 
applies), contains all the information appearing on the MICR line of 
the original check at the time that the original check was issued and 
any additional information that was encoded on the original check's 
MICR line before an image of the original check was captured;
    (3) Conforms in paper stock, dimension, and otherwise with ANS 
X9.100-140 (unless the Board by rule or order determines that a 
different standard applies); and
    (4) Is suitable for automated processing in the same manner as the 
original check.
    (bbb) Sufficient copy and copy. (1) A sufficient copy is a copy of 
an original check that accurately represents all of the information on 
the front and back of the original check as of the time the original 
check was truncated or is otherwise sufficient to determine whether or 
not a claim is valid.
    (2) A copy of an original check means any paper reproduction of an 
original check, including a paper printout of an electronic image of 
the original check, a photocopy of the original check, or a substitute 
check.
    (ccc) Transfer and consideration. The terms transfer and 
consideration have the meanings set forth in the Uniform Commercial 
Code and in addition, for purposes of subpart D--
    (1) The term transfer with respect to a substitute check or a paper 
or electronic representation of a substitute check means delivery of 
the substitute check or other representation of the substitute check by 
a bank to a person other than a bank; and
    (2) A bank that transfers a substitute check or a paper or 
electronic representation of a substitute check directly to a person 
other than a bank has received consideration for the substitute check 
or other paper or electronic representation of the substitute check if 
it has charged, or has the right to charge, the person's account or 
otherwise has received value for the original check, a substitute 
check, or a representation of the original check or substitute check.
    (ddd) Truncate means to remove an original check from the forward 
collection or return process and send to a recipient, in lieu of such 
original check, a substitute check or, by agreement, information 
relating to the original check (including data taken from the MICR line 
of the original check or an electronic image of the original check), 
whether with or without the subsequent delivery of the original check.
    (eee) Truncating bank means--
    (1) The bank that truncates the original check; or
    (2) If a person other than a bank truncates the original check, the 
first bank that transfers, presents, or returns, in lieu of such 
original check, a substitute check or, by agreement with the recipient, 
information relating to the original check (including data taken from 
the MICR line of the original check or an electronic image of the 
original check), whether with or without the subsequent delivery of the 
original check.


Sec.  229.3  [Amended]

0
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.  229.13  [Amended]

0
13. Revise Sec.  229.13(g)(1)(i)(A) to read as follows:
    (g) * * *
    (1) * * *
    (i) * * *
    (A) A number or code, which need not exceed four digits, that 
identifies the customer's account;

[[Page 47311]]

Sec.  229.16  [Amended]

0
14. Revise Sec.  229.16(c)(2)(i)(A) to read as follows:
    (c) * * *
    (2) * * *
    (i) * * *
    (A) A number or code, which need not exceed four digits, that 
identifies the customer's account.


Sec.  229.20  [Amended]

0
15. 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]

0
16. 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]

0
17. In Sec.  229.30:
0
A. In the undesignated paragraph after paragraph (a)(2)(iii), remove 
the next-to-last sentence and add two new sentences in its place; and
0
B. Revise paragraphs (c)(1) and (d).
    The revisions and addition read as follows.
    (a) * * *
    (2) * * *
    (iii) * * *
    * * * A qualified returned check shall be encoded in magnetic ink 
with the routing number of the depositary bank, the amount of the 
returned check, and a ``2'' in the case of an original check (or a 
``5'' in the case of a substitute check) in position 44 of the 
qualified return MICR line as a return identifier. A qualified returned 
original check shall be encoded in accordance with ANS X9.13, and a 
qualified returned substitute check shall be encoded in accordance with 
ANS X9.100-140. * * *
* * * * *
    (c) * * *
    (1) On or before the receiving bank's next banking day following 
the otherwise applicable deadline by the earlier of the close of that 
banking day or a cutoff hour of 2 p.m. or later set by the receiving 
bank under U.C.C. 4-108, for all deadlines other than those described 
in paragraph (c)(2) of this section; this deadline is extended further 
if a paying bank uses a highly expeditious means of transportation, 
even if this means of transportation would ordinarily result in 
delivery after the receiving bank's next cutoff hour or banking day 
referred to above; or
* * * * *
    (d) Identification of returned check. A paying bank returning a 
check shall clearly indicate on the front of the check that it is a 
returned check and the reason for return. If the check is a substitute 
check, the paying bank shall place this information within the image of 
the original check that appears on the front of the substitute check.
* * * * *


Sec.  229.31  [Amended]

0
18. In the undesignated paragraph after Sec.  229.31(a)(2)(iii), remove 
the third sentence and add the following sentences in its place:
    (a) * * *
    (2) * * *
    (iii) * * *
    * * * A qualified returned check shall be encoded in magnetic ink 
with the routing number of the depositary bank, the amount of the 
returned check, and a ``2'' in the case of an original check (or a 
``5'' in the case of a substitute check) in position 44 of the 
qualified return MICR line as a return identifier. A qualified returned 
original check shall be encoded in accordance with ANS X9.13, and a 
qualified returned substitute check shall be encoded in accordance with 
ANS X9.100-140. * * *
* * * * *


Sec.  229.33  [Amended]

0
19. In Sec.  229.33:
0
A. In paragraph (b), remove the phrase ``with question marks'' from the 
last sentence of the undesignated paragraph; and
0
B. In paragraph (d), add the phrase ``or give'' between the words 
``send'' and ``notice.''


Sec.  229.34  [Amended]

0
20. In Sec.  229.34(c), add a new sentence at the end of paragraph (3) 
to read as follows:
    (c) * * *
    (3) * * * For purposes of this paragraph, the information encoded 
after issue on the check or returned check includes any information 
placed in the MICR line of a substitute check that represents that 
check or returned check.
* * * * *


Sec.  229.35  [Amended]

0
21. 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 permits a person to interpret the 
indorsement, in accordance with the indorsement standard set forth in 
appendix D of this part.
* * * * *


Sec.  229.38  [Amended]

0
22. In Sec.  229.38(d)(1), designate the last sentence with the word 
``Note'' and revise it, and add a new sentence after the second 
sentence to read as follows:
    (d) Responsibility for certain aspects of checks--(1) * * * A 
reconverting bank is responsible for damages under paragraph (a) of 
this section to the extent that the condition of the back of a 
substitute check transferred, presented, or returned by it--
    (i) Adversely affects the ability of a subsequent bank to indorse 
the check legibly in accordance with Sec.  229.35; or
    (ii) Causes an indorsement that previously was applied in 
accordance with Sec.  229.35 to become illegible.

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

* * * * *

0
23. In Sec.  229.38(f), remove the phrase ``the Act'' and add the 
phrase ``the EFA Act'' in its place.

0
24. Add a new subpart D to read as follows:
Subpart D--Substitute Checks
Sec.
229.51 General provisions governing substitute checks.
229.52 Substitute check warranties.
229.53 Substitute check indemnity.
229.54 Expedited recredit for consumers.
229.55 Expedited recredit for banks.
229.56 Liability.
229.57 Consumer awareness.
229.58 Mode of delivery of information.
229.59 Relation to other law.
229.60 Variation by agreement.

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

Subpart D--Substitute Checks


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

[[Page 47312]]

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


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) of this section to the person to which the bank 
transfers, presents, or returns the substitute check or a paper or 
electronic representation of such substitute check and to any 
subsequent recipient, which could include a collecting or returning 
bank, the depositary bank, the drawer, the drawee, the payee, the 
depositor, and any indorser. These parties receive the warranties 
regardless of whether they received the substitute check or a paper or 
electronic representation of a substitute check.


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 the loss, up to the amount of the substitute 
check; and
    (B) Interest and expenses (including costs and reasonable 
attorney's fees and other expenses of representation) related to the 
substitute check.
    (2) Comparative negligence. (i) If a loss described in paragraph 
(a) of this section results in whole or in part from the indemnified 
person's negligence or failure to act in good faith, then the indemnity 
amount described in paragraph (b)(1) of this section shall be reduced 
in proportion to the amount of negligence or bad faith attributable to 
the indemnified person.
    (ii) Nothing in this paragraph (b)(2) reduces the rights of a 
consumer or any other person under the U.C.C. or other applicable 
provision of state or federal law.
    (3) Effect of producing the original check or a sufficient copy--
    (i) If an indemnifying bank produces the original check or a 
sufficient copy, the indemnifying bank shall--
    (A) Be liable under this section only for losses that are incurred 
up to the time that the bank provides that original check or sufficient 
copy to the indemnified person; and
    (B) Have a right to the return of any funds it has paid under this 
section in excess of those losses.
    (ii) The production by the indemnifying bank of the original check 
or a sufficient copy under paragraph (b)(3)(i) of this section shall 
not absolve the indemnifying bank from any liability under any warranty 
that the bank has provided under 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 person that it indemnifies to 
the extent of the indemnity it has provided and may attempt to recover 
from another person based on a warranty or other claim.
    (2) Duty of indemnified person for subrogated claims. Each 
indemnified person shall have a duty to comply with all reasonable 
requests for assistance from an indemnifying bank in connection with 
any claim the indemnifying bank brings against a warrantor or other 
person related to a check that forms the basis for the indemnification.


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

[[Page 47313]]

because of extenuating circumstances, the bank shall extend the 40-
calendar-day period by an additional reasonable amount of time.
    (iii) If a consumer makes a claim orally and the bank requires the 
claim to be in writing, the consumer's claim is timely if the oral 
claim was received within the time described in paragraphs (b)(1)(i)-
(ii) of this section and the written claim was received within the time 
described in paragraph (b)(3)(ii) of this section.
    (2) Content of claim. (i) The consumer's claim shall include the 
following information:
    (A) A description of the consumer's claim, including the reason why 
the consumer believes his or her account was improperly charged for the 
substitute check or the nature of his or her warranty claim with 
respect to such check;
    (B) A statement that the consumer suffered a loss and an estimate 
of the amount of that loss;
    (C) The reason why production of the original check or a sufficient 
copy is necessary to determine whether or not the charge to the 
consumer's account was proper or the consumer's warranty claim is 
valid; and
    (D) Sufficient information to allow the bank to identify the 
substitute check and investigate the claim.
    (ii) If a consumer attempts to make a claim but fails to provide 
all the information in paragraph (b)(2)(i) of this section that is 
required to constitute a claim, the bank shall inform the consumer that 
the claim is not complete and identify the information that is missing.
    (3) Form and submission of claim; computation of time for bank 
action. The bank holding the account that is the subject of the 
consumer's claim may, in its discretion, require the consumer to submit 
the information required by this section in writing. A bank that 
requires a written submission--
    (i) May permit the consumer to submit the written claim 
electronically;
    (ii) Shall inform a consumer who submits a claim orally of the 
written claim requirement at the time of the oral claim and may require 
such consumer to submit the written claim such that the bank receives 
the written claim by the 10th business day after the banking day on 
which the bank received the oral claim; and
    (iii) Shall compute the time periods for acting on the consumer's 
claim described in paragraph (c) of this section from the date on which 
the bank received the written claim.
    (c) Action on claims. A bank that receives a claim that meets the 
requirements of paragraph (b) of this section shall act as follows:
    (1) Valid consumer claim. If the bank determines that the 
consumer's claim is valid, the bank shall--
    (i) Recredit the consumer's account for the amount of the 
consumer's loss, up to the amount of the substitute check, plus 
interest if the account is an interest-bearing account, no later than 
the end of the business day after the banking day on which the bank 
makes that determination; and
    (ii) Send to the consumer the notice required by paragraph (e)(1) 
of this section.
    (2) Invalid consumer claim. If a bank determines that the 
consumer's claim is not valid, the bank shall send to the consumer the 
notice described in paragraph (e)(2) of this section.
    (3) Recredit pending investigation. If the bank has not taken an 
action described in paragraph (c)(1) or (c)(2) of this section before 
the end of the 10th business day after the banking day on which the 
bank received the claim, the bank shall--
    (i) By the end of that business day--
    (A) Recredit the consumer's account for the amount of the 
consumer's loss, up to the lesser of the amount of the substitute check 
or $2,500, plus interest on that amount if the account is an interest-
bearing account; and
    (B) Send to the consumer the notice required by paragraph (e)(1) of 
this section; and
    (ii) Recredit the consumer's account for the remaining amount of 
the consumer's loss, if any, up to the amount of the substitute check, 
plus interest if the account is an interest-bearing account, no later 
than the end of the 45th calendar day after the banking day on which 
the bank received the claim and send to the consumer the notice 
required by paragraph (e)(1) of this section, unless the bank prior to 
that time has determined that the consumer's claim is or is not valid 
in accordance with paragraph (c)(1) or (c)(2) of this section.
    (4) Reversal of recredit. A bank may reverse a recredit that it has 
made to a consumer account under paragraph (c)(1) or (c)(3) of this 
section, plus interest that the bank has paid, if any, on that amount, 
if the bank--
    (i) Determines that the consumer's claim was not valid; and
    (ii) Notifies the consumer in accordance with paragraph (e)(3) of 
this section.
    (d) Availability of recredit--(1) Next-day availability. Except as 
provided in paragraph (d)(2) of this section, a bank shall make any 
amount that it recredits to a consumer account under this section 
available for withdrawal no later than the start of the business day 
after the banking day on which the bank provides the recredit.
    (2) Safeguard exceptions. A bank may delay availability to a 
consumer of a recredit provided under paragraph (c)(3)(i) of this 
section until the start of the earlier of the business day after the 
banking day on which the bank determines the consumer's claim is valid 
or the 45th calendar day after the banking day on which the bank 
received the oral or written claim, as required by paragraph (b) of 
this section, if--
    (i) The consumer submits the claim during the 30-calendar-day 
period beginning on the banking day on which the consumer account was 
established;
    (ii) Without regard to the charge that gave rise to the recredit 
claim--
    (A) On six or more business days during the six-month period ending 
on the calendar day on which the consumer submitted the claim, the 
balance in the consumer account was negative or would have become 
negative if checks or other charges to the account had been paid; or
    (B) On two or more business days during such six-month period, the 
balance in the consumer account was negative or would have become 
negative in the amount of $5,000 or more if checks or other charges to 
the account had been paid; or
    (iii) The bank has reasonable cause to believe that the claim is 
fraudulent, based on facts that would cause a well-grounded belief in 
the mind of a reasonable person that the claim is fraudulent. The fact 
that the check in question or the consumer is of a particular class may 
not be the basis for invoking this exception.
    (3) Overdraft fees. A bank that delays availability as permitted in 
paragraph (d)(2) of this section may not impose an overdraft fee with 
respect to drafts drawn by the consumer on such recredited funds until 
the fifth calendar day after the calendar day on which the bank sent 
the notice required by paragraph (e)(1) of this section.
    (e) Notices relating to consumer expedited recredit claims--(1) 
Notice of recredit. A bank that recredits a consumer account under 
paragraph (c) of this section shall send notice to the consumer of the 
recredit no later than the business day after the banking day on which 
the bank recredits the consumer account. This notice shall describe--
    (i) The amount of the recredit; and
    (ii) The date on which the recredited funds will be available for 
withdrawal.
    (2) Notice that the consumer's claim is not valid. If a bank 
determines that a

[[Page 47314]]

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


Sec.  229.55  Expedited recredit 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 is 
necessary to determine the validity of the charge to the consumer 
account or the validity of any warranty claim connected with such 
substitute check.
    (b) Procedures for making claims. A claimant bank shall send its 
claim to the indemnifying bank, subject to the timing, content, and 
form requirements of this section.
    (1) Timing of claim. The claimant bank shall submit its claim such 
that the indemnifying bank receives the claim by the end of the 120th 
calendar day after the date of the transaction that gave rise to the 
claim.
    (2) Content of claim. The claimant bank's claim shall include the 
following information--
    (i) A description of the consumer's claim or the warranty claim 
related to the substitute check, including why the bank believes that 
the substitute check may not be properly charged to the consumer 
account;
    (ii) A statement that the claimant bank is obligated to recredit a 
consumer account under 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 is necessary to determine the validity of the charge to 
the consumer account or the warranty claim; and
    (iv) Sufficient information to allow the indemnifying bank to 
identify the substitute check and investigate the claim.
    (3) Requirements relating to copies of substitute checks. If the 
information submitted by a claimant bank under paragraph (b)(2) of this 
section includes a copy of any substitute check, the claimant bank 
shall take reasonable steps to ensure that the copy cannot be mistaken 
for the legal equivalent of the check under 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--
    (i) May permit the claimant bank to submit the written claim 
electronically;
    (ii) Shall inform a claimant bank that submits a claim orally of 
the written claim requirement at the time of the oral claim; and
    (iii) Shall compute the 10-day time period for acting on the claim 
described in paragraph (c) of this section from the date on which the 
bank received the written claim.
    (c) Action on claims. No later than the 10th business day after the 
banking day on which the indemnifying bank receives a claim that meets 
the requirements of paragraph (b) of this section, the indemnifying 
bank shall--
    (1) Recredit the claimant bank for the amount of the claim, up to 
the amount of the substitute check, plus interest if applicable;
    (2) Provide to the claimant bank the original check or a sufficient 
copy; or
    (3) Provide information to the claimant bank regarding why the 
indemnifying bank is not obligated to comply with paragraph (c)(1) or 
(c)(2) of this section.
    (d) Recredit does not abrogate other liabilities. Providing a 
recredit to a claimant bank under this section does not absolve the 
indemnifying bank from liability for claims brought under any other law 
or from additional damages under 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 shall provide a refund promptly to any indemnifying bank that 
previously advanced funds to the claimant bank. The amount of the 
refund to the indemnifying bank shall be the amount of the reversal or 
reimbursement obtained by the claimant bank, up to the amount 
previously advanced by the indemnifying bank.
    (2) If the indemnifying bank provides the claimant bank with the 
original check or a sufficient copy under paragraph (c)(2) of this 
section, 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--

[[Page 47315]]

    (i) The amount of the loss suffered by the person as a result of 
the breach or failure, up to the amount of the substitute check; and
    (ii) Interest and expenses (including costs and reasonable 
attorney's fees and other expenses of representation) related to the 
substitute check.
    (2) Offset of recredits. The amount of damages a person receives 
under paragraph (a)(1) of this section shall be reduced by any amount 
that the person receives and retains as a recredit under 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 shall be brought within one 
year of the date on which the person's cause of action accrues. For 
purposes of this paragraph, a cause of action accrues as of the date on 
which the injured person first learns, or by which such person 
reasonably should have learned, of the facts and circumstances giving 
rise to the cause of action, including the identity of the warranting 
or indemnifying bank against which the action is brought.
    (d) Notice of claims. Except as otherwise provided in this 
paragraph (d), unless a person gives notice of a claim under this 
section to the warranting or indemnifying bank within 30 calendar days 
after the person has reason to know of both the claim and the identity 
of the warranting or indemnifying bank, the warranting or indemnifying 
bank is discharged from liability in an action to enforce a claim under 
this subpart to the extent of any loss caused by the delay in giving 
notice of the claim. A timely recredit claim by a consumer under Sec.  
229.54 constitutes timely notice under this paragraph.


Sec.  229.57  Consumer awareness.

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


Sec.  229.58  Mode of delivery of information.

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


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.
    25. In appendix C, revise the title and introductory paragraph and 
amend the table of contents by adding the new entries to read as 
follows:

Appendix C to Part 229--Model Availability Policy Disclosures, Clauses, 
and Notices; Model Substitute Check Policy Disclosure and Notices

    This appendix contains model availability policy and substitute 
check policy disclosures, clauses, and notices to facilitate 
compliance with the disclosure and notice requirements of Regulation 
CC (12 CFR part 229). Although use of these models is not required, 
banks using them properly (with the exception of models C-22 through 
C-25) to make disclosures required by Regulation CC are deemed to be 
in compliance.

Model Disclosures

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

Model Notices

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

0
26. In appendix C, after model C-5 add the following new model C-5A to 
read as follows:
* * * * *

C-5A--Substitute Check Policy Disclosure

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

Substitute Checks and Your Rights

What Is a Substitute Check?

    To make check processing faster, federal law permits banks to 
replace original checks with ``substitute checks.'' These checks are 
similar in size to original checks with a slightly reduced image of 
the front and back of the original check. The front of a substitute

[[Page 47316]]

check states: ``This is a legal copy of your check. You can use it 
the same way you would use the original check.'' You may use a 
substitute check as proof of payment just like the original check.
    Some or all of the checks that you receive back from us may be 
substitute checks. This notice describes rights you have when you 
receive substitute checks from us. The rights in this notice do not 
apply to original checks or to electronic debits to your account. 
However, you have rights under other law with respect to those 
transactions.

What Are My Rights Regarding Substitute Checks?

    In certain cases, federal law provides a special procedure that 
allows you to request a refund for losses you suffer if a substitute 
check is posted to your account (for example, if you think that we 
withdrew the wrong amount from your account or that we withdrew 
money from your account more than once for the same check). The 
losses you may attempt to recover under this procedure may include 
the amount that was withdrawn from your account and fees that were 
charged as a result of the withdrawal (for example, bounced check 
fees).
    The amount of your refund under this procedure is limited to the 
amount of your loss or the amount of the substitute check, whichever 
is less. You also are entitled to interest on the amount of your 
refund if your account is an interest-bearing account. If your loss 
exceeds the amount of the substitute check, you may be able to 
recover additional amounts under other law.
    If you use this procedure, you may receive up to (amount, not 
lower than $2,500) of your refund (plus interest if your account 
earns interest) within (number of days, not more than 10) business 
days after we received your claim and the remainder of your refund 
(plus interest if your account earns interest) not later than 
(number of days, not more than 45) calendar days after we received 
your claim.
    We may reverse the refund (including any interest on the refund) 
if we later are able to demonstrate that the substitute check was 
correctly posted to your account.

How Do I Make a Claim for a Refund?

    If you believe that you have suffered a loss relating to a 
substitute check that you received and that was posted to your 
account, please contact us at (contact information, for example 
phone number, mailing address, e-mail address). You must contact us 
within (number of days, not less than 40) calendar days of the date 
that we mailed (or otherwise delivered by a means to which you 
agreed) the substitute check in question or the account statement 
showing that the substitute check was posted to your account, 
whichever is later. We will extend this time period if you were not 
able to make a timely claim because of extraordinary circumstances.
    Your claim must include--
     A description of why you have suffered a loss (for 
example, you think the amount withdrawn was incorrect);
     An estimate of the amount of your loss;
     An explanation of why the substitute check you received 
is insufficient to confirm that you suffered a loss; and
     A copy of the substitute check [and/or] the following 
information to help us identify the substitute check: (identifying 
information, for example the check number, the name of the person to 
whom you wrote the check, the amount of the check).
* * * * *

0
27. In appendix C, after model C-21 add new models C-22 through C-25 to 
read as follows:
* * * * *

C-2--Expedited Recredit Claim, Valid Claim Refund Notice

Notice of Valid Claim and Refund

    We have determined that your substitute check claim is valid. We 
are refunding (amount) [of which [(amount) represents fees] [and] 
[(amount) represents accrued interest]] to your account. You may 
withdraw these funds as of (date). [This refund is the amount in 
excess of the $2,500 [plus interest] that we credited to your 
account on (date).]

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

Notice of Provisional Refund

    In response to your substitute check claim, we are refunding 
(amount) [of which [(amount) represents fees] [and] [(amount) 
represents accrued interest]] to your account, while we complete our 
investigation of your claim. You may withdraw these funds as of 
(date). [Unless we determine that your claim is not valid, we will 
credit the remaining amount of your refund to your account no later 
than the 45th calendar day after we received your claim.]
    If, based on our investigation, we determine that your claim is 
not valid, we will reverse the refund by withdrawing the amount of 
the refund [plus interest that we have paid you on that amount] from 
your account. We will notify you within one day of any such 
reversal.

C-24--Expedited Recredit Claim, Denial Notice

Denial of Claim

    Based on our review, we are denying your substitute check claim. 
As the enclosed (type of document, for example original check or 
sufficient) shows, (describe reason for denial, for example the 
check was properly posted, the signature is authentic, there was no 
warranty breach).
    [We have also enclosed a copy of the other information we used 
to make our decision.] [Upon your request, we will send you a copy 
of the other information that we used to make our decision.]

C-25--Expedited Recredit Claim, Reversal Notice

Reversal of Refund

    In response to your substitute check claim, we provided a refund 
of (amount) by crediting your account on (date(s)). We now have 
determined that your substitute check claim was not valid. As the 
enclosed (type of document, for example original check or sufficient 
copy) shows, (describe reason for reversal, for example the check 
was properly posted, the signature is authentic, there was no 
warranty breach). As a result, we have reversed the refund to your 
account [plus interest that we have paid you on that amount] by 
withdrawing (amount) from your account on (date).
    [We have also enclosed a copy of the other information we used 
to make our decision.] [Upon your request, we will send you a copy 
of the information we used to make our decision.]


0
28. In appendix D, revise the title and text to read as follows:

Appendix D to Part 229--Indorsement, Reconverting Bank Identification, 
and Truncating Bank Identification Standards

    (1) The depositary bank shall indorse an original check or 
substitute check according to the following specifications:
    (i) The indorsement shall contain--
    (A) The bank's nine-digit routing number, set off by an arrow at 
each end of the number and pointing toward the number, and, if the 
depositary bank is a reconverting bank with respect to the check, an 
asterisk outside the arrow at each end of the routing number to 
identify the bank as a reconverting bank;
    (B) The indorsement date; and
    (C) The bank's name or location, if the depositary bank applies 
the indorsement physically.
    (ii) The indorsement also may contain--
    (A) A branch identification;
    (B) A trace or sequence number;
    (C) A telephone number for receipt of notification of large-
dollar returned checks; and
    (D) Other information, provided that the inclusion of such 
information does not interfere with the readability of the 
indorsement.
    (iii) The indorsement, if applied to an existing paper check, 
shall be placed on the back of the check so that the routing number 
is wholly contained in the area 3.0 inches from the leading edge of 
the check to 1.5 inches from the trailing edge of the check.\31\
---------------------------------------------------------------------------

    \31\ The leading edge is definded as the right side of the check 
looking at it from the front. The trailing edge is defined as the 
left side of the check looking at it from the front. See American 
National Standards Specifications for the Placement and Location of 
MICR Printing, X9.13.
---------------------------------------------------------------------------

    (iv) When printing its depositary bank indorsement (or a 
depositary bank indorsement that previously was applied 
electronically) onto a substitute check at the time that the 
substitute check is created, a reconverting bank shall place the 
indorsement on the back of the check between 1.88 and 2.74 inches 
from the leading edge of the check. The reconverting bank may omit 
the depositary bank's name and location from the indorsement.
    (2) Each subsequent collecting bank or returning bank indorser 
shall protect the identifiability and legibility of the depositary 
bank indorsement by indorsing an original check or substitute check 
according to the following specifications:
    (i) The indorsement shall contain only--
    (A) The bank's nine-digit routing number (without arrows) and, 
if the collecting bank

[[Page 47317]]

or returning bank is a reconverting bank with respect to the check, 
an asterisk at each end of the number to identify the bank as a 
reconverting bank;
    (B) The indorsement date, and
    (C) An optional trace or sequence number.
    (ii) The indorsement, if applied to an existing paper check, 
shall be placed on the back of the check from 0.0 inches to 3.0 
inches from the leading edge of the check.
    (iii) When printing its collecting bank or returning bank 
indorsement (or a collecting bank or returning bank indorsement that 
previously was applied electronically) onto a substitute check at 
the time that the substitute check is created, a reconverting bank 
shall place the indorsement on the back of the check between 0.25 
and 2.50 inches from the trailing edge of the check.
    (3) A reconverting bank shall comply with the following 
specifications when creating a substitute check:
    (i) If it is a depositary bank, collecting bank, or returning 
bank with respect to the substitute check, the reconverting bank 
shall place its own indorsement onto the back of the check as 
specified in this appendix.
    (ii) A reconverting bank that also is the paying bank with 
respect to the substitute check shall so identify itself by placing 
on the back of the check, between 0.25 and 2.50 inches from the 
trailing edge of the check, its nine-digit routing number (without 
arrows) and an asterisk at each end of the number.
    (iii) The reconverting bank shall place on the front of the 
check, outside the image of the original check, its nine-digit 
routing number (without arrows) and an asterisk at each end of the 
number, in accordance with ANS X9.100-140.
    (iv) The reconverting bank shall place on the front of the 
check, outside the image of the original check, the truncating 
bank's nine-digit routing number (without arrows) and a bracket at 
each end of the number, in accordance with ANS X9.100-140.
    (4) Any indorsement, reconverting bank identification, or 
truncating bank identification placed on an original check or 
substitute check shall be printed in black ink.


0
29. In appendix E, paragraph II.B., revise the first, second, third, 
and last sentences of paragraph 1., revise paragraph 3., and add a new 
paragraph 4., to read as follows:

    II. * * *

B. 229.2(a) Account

    1. The EFA Act defines account to mean ``a demand deposit 
account or similar transaction account at a depository 
institution.'' The regulation defines account, for purposes other 
than subpart D, in terms of the definition of ``transaction 
account'' in the Board's Regulation D (12 CFR part 204). This 
definition of account, however, excludes certain deposits, such as 
nondocumentary obligations (see 12 CFR 204.2(a)(1)(vii)), that are 
covered under the definition of ``transaction account'' in 
Regulation D. * * * The Board believes that it is appropriate to 
exclude these accounts because of the reference to demand deposits 
in the EFA Act, which suggests that the EFA Act is intended to apply 
only to accounts that permit unlimited third party transfers.
* * * * *
    3. Interbank deposits, including accounts of offices of domestic 
banks or foreign banks located outside the United States, and direct 
and indirect accounts of the United States Treasury (including 
Treasury General Accounts and Treasury Tax and Loan deposits) are 
exempt from subpart B and, in connection therewith, subpart A. 
However, interbank deposits are included as accounts for purposes of 
subparts C and D and, in connection therewith, subpart A.
    4. The Check 21 Act defines account to mean any deposit account 
at a bank. Therefore, for purposes of subpart D and, in connection 
therewith, subpart A, account means any deposit, as that term is 
defined by 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, are accounts for purposes 
of subpart D.
* * * * *

0
30. In appendix E, paragraph II.F., remove the phrase ``subpart C'' 
wherever it appears and add the phrase ``subparts C and D'' in its 
place and add a new paragraph 4 to read as follows:

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

0
31. In appendix E, paragraph II.K., remove the phrase ``subpart C'' in 
paragraph 8. and add the phrase ``subparts C and D'' in its place, 
redesignate paragraph 9. as paragraph 10., and add a new paragraph 9. 
to read as follows:

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

0
32. In appendix E, paragraph II.M., remove the number ``46'' in the 
second sentence.

0
33. In appendix E, paragraph II.N.1., add new sentences between the 
second and third sentences to read as follows:

    II. * * *
    N. * * *
    1. * * * A clearing account maintained at a bank directly by a 
brokerage firm is not a consumer account, even if the account is 
used to pay checks drawn by consumers using the funds in that 
account. The bank's relationship is with the brokerage firm, and the 
account is used by the brokerage firm to facilitate the clearing of 
its customers' checks. Because for purposes of Regulation CC the 
term account includes only deposit accounts, a consumer's revolving 
credit relationship or other line of credit with a bank is not a 
consumer account, even if the consumer draws on such credit lines by 
using a check. * * *
* * * * *

0
34. In appendix E, paragraph II.Q.1., revise the first sentence to read 
as follows:

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

0
35. In appendix E, revise paragraph II.S.1.b. and add a new paragraph 
II.S.1.c. to read as follows:

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

0
36. In appendix E, paragraph II.Z., revise the second and third 
sentences of paragraph 1., remove the phrase ``subpart C'' in paragraph 
3. and add the phrase ``subparts C and D'' in its place, and add a new 
paragraph 6. to read as follows:

    II. * * *
    Z. * * *
    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

[[Page 47318]]

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

0
37. In appendix E, paragraph II.BB.1. remove the last two sentences and 
add the following new sentence in their place to read as follows:

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

0
38. In appendix E to part 229, add new paragraphs II.QQ. through 
II.EEE. to read as follows:

II. Section 229.2 Definitions

* * * * *

QQ. 229.2(qq) [Reserved]

RR. 229.2(rr) [Reserved]

SS. 229.2(ss) [Reserved]

TT. 229.2(tt) [Reserved]

UU. 229.2(uu) [Reserved]

VV. 229.2(vv) MICR Line

    1. Information in the MICR line of a check must be printed in 
accordance with ANS X9.13 for original checks and ANS X9.100-140 for 
substitute checks. These standards could vary the requirements for 
printing the MICR line, such as by indicating circumstances under 
which the use of magnetic ink is not required.

WW. 229.2(ww) Original Check

    1. The definition of original check distinguishes the first 
paper check signed or otherwise authorized by the drawer to effect a 
particular payment transaction from a substitute check or other 
paper or electronic representation that is derived from an original 
check or substitute check. There is only one original check for any 
particular payment transaction. However, multiple substitute checks 
could be created to represent that original check at various points 
in the check collection and return process.

XX. 229.2(xx) Paper or Electronic Representation of a Substitute 
Check

    1. Receipt of a paper or electronic representation of a 
substitute check does not trigger indemnity or expedited recredit 
rights, although the recipient nonetheless could have a warranty 
claim or a claim under other check law with respect to that document 
or the underlying payment transaction. A paper or electronic 
representation of a substitute check would include a representation 
of a substitute check that was drawn on an account, as well as a 
representation of a substitute traveler's check, credit card check, 
or other item that meets the substitute check definition. The 
following examples illustrate the scope of the definition.

Examples.

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

YY. 229.2(yy) [Reserved]

ZZ. 229.2(zz) Reconverting Bank

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

Examples.

    a. Bank A, by agreement, sends an electronic check file for 
collection to Bank B. Bank B chooses to use that file to print a 
substitute check that meets the requirements of Sec.  229.2(aaa). 
Bank B is the reconverting bank as of the time it prints the 
substitute check.
    b. Company A, which is not a bank, by agreement receives check 
information electronically from Bank A. Bank A becomes the 
reconverting bank when Company A prints a substitute check on behalf 
of Bank A in accordance with that agreement.
    c. A depositary bank's customer, which is a nonbank business, 
receives a check for payment, truncates that original check, and 
creates a substitute check to deposit with its bank. The depositary 
bank receives that substitute check from its customer and is the 
first bank to handle the substitute check. The depositary bank 
becomes the reconverting bank as of the time that it transfers or 
presents the substitute check (or in lieu thereof the first paper or 
electronic representation of the substitute check) for forward 
collection.
    d. A bank is the payable-through bank for checks that are drawn 
on a nonbank payor, which is the bank's customer. When the customer 
decides not to pay a check that is payable through the bank, the 
customer creates a substitute check for purposes of return. The 
payable-through bank becomes the reconverting bank when it returns 
the substitute check (or in lieu thereof the first paper or 
electronic representation of the substitute check) to a returning 
bank or the depositary bank.
    e. A paying bank returns a substitute check to the depositary 
bank, which in turn gives that substitute check back to its nonbank 
customer. That customer then redeposits the substitute check for 
collection at a different bank. Because the substitute check was 
already transferred by a bank, the second depositary bank does not 
become a reconverting bank when it transfers or presents that 
substitute check for collection.
    2. In some cases there will be one or more banks between the 
truncating bank and the reconverting bank.

Example.

    A depositary bank truncates the original check and sends an 
electronic representation of the original check for collection to an 
intermediary bank. The intermediary bank sends the electronic 
representation of the original check to the presenting bank, which 
creates a substitute check to present to the paying bank. The 
presenting bank is the reconverting bank.
    3. A check could move from electronic form to substitute check 
form several times during the collection and return process. It 
therefore is possible that there could be multiple substitute 
checks, and thus multiple reconverting banks, with respect to the 
same underlying payment.

AAA. 229.2(aaa) Substitute Check

    1. ``A paper reproduction of an original check'' could include a 
reproduction created directly from the original check or a 
reproduction of the original check that is

[[Page 47319]]

created from some other source that contains an image of the 
original check, such as an electronic representation of an original 
check or substitute check, or a previous substitute check.
    2. Because a substitute check must be a piece of paper, an 
electronic file or electronic check image that has not yet been 
printed in accordance with the substitute check definition is not a 
substitute check.
    3. Because a substitute check must be a representation of a 
check, a paper reproduction of something that is not a check cannot 
be a substitute check. For example, a savings bond or a check drawn 
on a non-U.S. branch of a foreign bank cannot be reconverted to a 
substitute check.
    4. As described in 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 of the original check 
that appears on the back of a substitute check would include 
indorsements that were physically applied to the original check 
before an image of the original check was captured. An indorsement 
that was applied physically to the original check after an image of 
the original check was captured would be conveyed as an electronic 
indorsement (see paragraph 3 of the commentary to Sec.  229.35(a)). 
The back of the substitute check would contain a physical 
representation of any indorsements that were applied electronically 
to the check after an image of the check was captured but before 
creation of the substitute check.

Example.

    Bank A, which is the depositary bank, captures an image of an 
original check, indorses it electronically and, by agreement, 
transmits to Bank B an electronic image of the check accompanied by 
the electronic indorsement. Bank B then creates a substitute check 
to send to Bank C. The back of the substitute check created by Bank 
B must contain a representation of the indorsement previously 
applied electronically by Bank A and Bank B's own indorsement. (For 
more information on indorsement requirements, see Sec.  229.35, 
appendix D, and the commentary thereto.)
    5. Some substitute checks will not be created directly from the 
original check, but rather will be created from a previous 
substitute check. The back of a subsequent substitute check will 
contain an image of the full length of the back of the previous 
substitute check. ANS X9.100-140 requires preservation of the full 
length of the back of the previous substitute check in order to 
preserve previous indorsements and reconverting bank 
identifications. By contrast, the front of a subsequent substitute 
check will not contain an image of the entire previous substitute 
check. Rather, the image field of the subsequent substitute check 
will contain the image of the front of the original check that 
appeared on the previous substitute check at the time the previous 
substitute check was converted to electronic form. The portions of 
the front of the subsequent substitute check other than the image 
field will contain information applied by the subsequent 
reconverting bank, such as its reconverting bank identification, the 
MICR line, the legal equivalence legend, and optional security 
information.

Examples.

    a. The back of a subsequent substitute check would contain the 
following indorsements, all of which would be preserved through the 
image of the back of the previous substitute check: (1) The 
indorsements that were applied physically to the original check 
before an image of the original check was captured; (2) a physical 
representation of indorsements that were applied electronically to 
the original check after an image of the original check was captured 
but before creation of the first substitute check; and (3) 
indorsements that were applied physically to the previous substitute 
check. In addition, the reconverting bank for the subsequent 
substitute check must overlay onto the back of that substitute check 
a physical representation of any indorsements that were applied 
electronically after the previous substitute check was converted to 
electronic form but before creation of the subsequent substitute 
check.
    b. Because information could have been physically added to the 
image of the front of the original check that appeared on the 
previous substitute check, the original check image that appears on 
the front of a subsequent substitute check could contain information 
in addition to that which appeared on the original check at the time 
it was truncated.
    6. The MICR line applied to a substitute check must contain 
information in all fields of the MICR line that were encoded on the 
original check at any time before an image of the original check was 
captured. This includes all the MICR-line information that was 
preprinted on the original check, plus any additional information 
that was added to the MICR line before the image of the original 
check was captured (for example, the amount of the check). The 
information in each field of the substitute check's MICR line must 
be the same information as in the corresponding field of the MICR 
line of the original check, except as provided by ANS X9.100-140 
(unless the Board by rule or order determines that a different 
standard applies). Industry standards may not, however, vary the 
requirement that a substitute check at the time of its creation must 
bear a full-field MICR line.
    7. ANS X9.100-140, provides that a substitute check must have a 
``4'' in position 44 and that a qualified returned substitute check 
must have a ``4'' in position 44 of the forward-collection MICR line 
as well as a ``5'' in position 44 of the qualified return MICR line. 
The ``4'' and ``5'' indicate that the document is a substitute check 
so that the size of the check image remains constant throughout the 
collection and return process, regardless of the number of 
substitute checks created that represent the same original check 
(see also Sec. Sec.  229.30(a)(2) and 229.31(a)(2) and the 
commentary thereto regarding requirements for qualified returned 
substitute checks). An original check generally has a blank position 
44 for forward collection. Because a reconverting bank must encode 
position 44 of a substitute check's forward collection MICR line 
with a ``4,'' the reconverting bank must vary any character that 
appeared in position 44 of the forward-collection MICR line of the 
original check. A bank that misencodes or fails to encode position 
44 at the time it attempts to create a substitute check has failed 
to create a substitute check. A bank that receives a properly-
encoded substitute check may further encode that item but does so 
subject to the encoding warranties in Regulation CC and the U.C.C.
    8. A substitute check's MICR line could contain information in 
addition to the information required at the time the substitute 
check is created. For example, if the amount field of the original 
check was not encoded and the substitute check therefore did not, 
when created, have an encoded amount field, the MICR line of the 
substitute check later could be amount-encoded.
    9. A bank may receive a substitute check that contains a MICR-
line variation but nonetheless meets the MICR-line replication 
requirements of Sec.  229.2(aaa)(2) because that variation is 
permitted by ANS X9.100-140. If such a substitute check contains a 
MICR-line error, a bank that receives it may, but is not required 
to, repair that error. Such a repair must be made in accordance with 
ANS X9.100-140 for repairing a MICR line, which generally allows a 
bank to correct an error by applying a strip that may or may not 
contain information in all fields encoded on the check's MICR line. 
A bank's repair of a MICR-line error on a substitute check is 
subject to the encoding warranties in Regulation CC and the U.C.C.
    10. A substitute check must conform to all the generally 
applicable industry standards for substitute checks set forth in ANS 
X9.100-140, which incorporates other industry standards by 
reference. Thus, multiple substitute check images contained on the 
same page of an account statement are not substitute checks.

BBB. 229.2(bbb) Sufficient Copy and Copy

    1. A copy must be a paper reproduction of a check. An electronic 
image therefore is not a copy or a sufficient copy. However, if a 
customer has agreed to receive such information electronically, a 
bank that is required to provide an original check or sufficient 
copy may satisfy that requirement by providing an electronic image 
in accordance with Sec.  229.58 and the commentary thereto.
    2. A bank under Sec.  229.53(b)(3) may limit its liability for 
an indemnity claim and under Sec. Sec.  229.54(e)(2) and 
229.55(c)(2) may respond to an expedited recredit claim by providing 
the claimant with a copy of a check that accurately represents all 
of the information on the front and back of the original check as of 
the time the original check was truncated or that otherwise is 
sufficient to determine the validity of the claim against the bank.

Examples.

    a. A copy of an original check that accurately represents all 
the information on

[[Page 47320]]

the front and back of the original check as of the time of 
truncation would constitute a sufficient copy if that copy resolved 
the claim. For example, if resolution of the claim required accurate 
payment and indorsement information, an accurate copy of the front 
and back of a legible original check (including but not limited to a 
substitute check) would be a sufficient copy.
    b. A copy of the original check that does not accurately 
represent all the information on both the front and back of the 
original check also could be a sufficient copy if such copy 
contained all the information necessary to determine the validity of 
the relevant claim. For instance, if a consumer received a 
substitute check that contained a blurry image of a legible original 
check, the consumer might seek an expedited recredit because his or 
her account was charged for $1,000, but he or she believed that the 
check was written for only $100. If the amount that appeared on the 
front of the original check was legible, an accurate copy of only 
the front of the original check that showed the amount of the check 
would be sufficient to determine whether or not the consumer's claim 
regarding the amount of the check was valid.

CCC. 229.2(ccc) Transfer and Consideration

    1. Under Sec. Sec.  229.52 and 229.53, a bank is responsible for 
the warranties and indemnity when it transfers, presents, or returns 
a substitute check (or a paper or electronic representation thereof) 
for consideration. Drawers and other nonbank persons that receive 
checks from a bank are not transferees that receive consideration as 
those terms are defined in the U.C.C. However, the Check 21 Act 
clearly contemplates that such nonbank persons that receive 
substitute checks (or representations thereof) from a bank will 
receive the warranties and indemnity from all previous banks that 
handled the check. To ensure that these parties are covered by the 
substitute check warranties and indemnity in the manner contemplated 
by the Check 21 Act, Sec.  229.2(ccc) incorporates the U.C.C. 
definitions of the term transfer and consideration by reference and 
expands those definitions to cover a broader range of situations. 
Delivering a check to a nonbank that is acting on behalf of a bank 
(such as a third-party check processor or presentment point) is a 
transfer of the check to that bank.

Examples.

    a. A paying bank pays a substitute check and then provides that 
paid substitute check (or a representation thereof) to a drawer with 
a periodic statement. Under the expanded definitions, the paying 
bank thereby transfers the substitute check (or representation 
thereof) to the drawer for consideration and makes the substitute 
check warranties described in Sec.  229.52. A drawer that suffers a 
loss due to receipt of a substitute check may have warranty, 
indemnity, and, if the drawer is a consumer, expedited recredit 
rights under the Check 21 Act and subpart D. A drawer that suffers a 
loss due to receipt of a paper or electronic representation of a 
substitute check would receive the substitute check warranties but 
would not have indemnity or expedited recredit rights.
    b. The expanded definitions also operate such that a paying bank 
that pays an original check (or a representation thereof) and then 
creates a substitute check to provide to the drawer with a periodic 
statement transfers the substitute check for consideration and 
thereby provides the warranties and indemnity.
    c. The expanded definitions ensure that a bank that receives a 
returned check in any form and then provides a substitute check to 
the depositor gives the substitute check warranties and indemnity to 
the depositor.
    d. The expanded definitions apply to substitute checks 
representing original checks that are not drawn on deposit accounts, 
such as checks used to access a credit card or a home equity line of 
credit.

DDD. 229.2(ddd) Truncate

    1. Truncate means to remove the original check from the forward 
collection or return process and to send in lieu of the original 
check either a substitute check or, by agreement, information 
relating to the original check. Truncation does not include removal 
of a substitute check from the check collection or return process.

EEE. 229.2(eee) Truncating Bank

    1. A bank is a truncating bank if it truncates an original check 
or if it is the first bank to transfer, present, or return another 
form of an original check that was truncated by a person that is not 
a bank.

Example.

    a. A bank's customer that is a nonbank business receives a check 
for payment and deposits either a substitute check or an electronic 
representation of the original check with its depositary bank 
instead of the original check. That depositary bank is the 
truncating bank when it transfers, presents, or returns the 
substitute check or electronic representation in lieu of the 
original check. That bank also would be the reconverting bank if it 
were the first bank to transfer, present, or return a substitute 
check that it received from (or created from the information given 
by) its nonbank customer (see Sec.  229.2(yy) and the commentary 
thereto).
    2. A truncating bank does not make the subpart D warranties and 
indemnity unless it also is the reconverting bank. Therefore, a bank 
that truncates the original check and sends an electronic file to a 
collecting bank does not provide subpart D protections to the 
recipient of that electronic item. However, a recipient of an 
electronic item may protect itself against losses associated with 
that item by agreement with the truncating bank.

* * * * *

0
39. In appendix E, paragraph IV.D.6.e. is amended by adding new 
sentences between the second and third sentences to read as follows:

    IV. * * *
    D. * * *
    6. * * *
    e. * * * Such notice need not be posted at each teller window, 
but the notice must be posted in a place where consumers seeking to 
make deposits are likely to see it before making their deposits. For 
example, the notice might be posted at the point where the line 
forms for teller service in the lobby. The notice is not required at 
any drive-through teller windows nor is it required at night 
depository locations, or at locations where consumer deposits are 
not accepted. * * *

* * * * *

0
40. In appendix E, paragraph VII.H.1.a., revise the third sentence and 
add a new fifth sentence to read as follows:

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

* * * * *

0
41. In appendix E, paragraph IX.A.1., remove the third and fourth 
sentences and add new sentences in their place to read as follows:

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

* * * * *

0
42. In appendix E, paragraph IX.A., add a new paragraph 4. to read as 
follows:

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


0
43. In appendix E, add a new sentence at the end of paragraph XVI.A.7. 
to read as follows:

    XVI. * * *
    A. * * *

[[Page 47321]]

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

* * * * *

0
44. In appendix E, revise paragraphs XVI.C.1.a. and XVI.D.1. to read as 
follows:

    XVI. * * *
    C. * * *
    1. * * *

    a. A paying bank may have a courier that leaves after midnight 
(or after any other applicable deadline) to deliver its forward-
collection checks. This paragraph removes the constraint of the 
midnight deadline for returned checks if the returned check reaches 
the receiving bank on or before the receiving bank's next banking 
day following the otherwise applicable deadline by the earlier of 
the close of that banking day or a cutoff hour of 2 p.m. or later 
set by the receiving bank under U.C.C. 4-108. The extension also 
applies if the check reaches the bank to which it is sent later than 
the time described in the previous sentence if highly expeditious 
means of transportation are used. For example, a West Coast paying 
bank may use this further extension to ship a returned check by air 
courier directly to an East Coast returning bank even if the check 
arrives after the returning bank's cutoff hour. This paragraph 
applies to the extension of all midnight deadlines except Saturday 
midnight deadlines (see paragraph XVI.C.1.b of this appendix).
* * * * *
    D. * * *
    1. The reason for the return must be clearly indicated. A check 
is identified as a returned check if the front of that check 
indicates the reason for return, even though it does not 
specifically state that the check is a returned check. A reason such 
as ``Refer to Maker'' is permissible in appropriate cases. If the 
returned check is a substitute check, the reason for return must be 
placed within the image of the original check that appears on the 
front of the substitute check so that the information is retained on 
any subsequent substitute check. If the paying bank places the 
returned check in a carrier envelope, the carrier envelope should 
indicate that it is a returned check but need not repeat the reason 
for return stated on the check if it in fact appears on the check.

* * * * *

0
45. In appendix E, add a new sentence at the end of paragraph 
XVII.A.7.a. to read as follows:

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

* * * * *

0
46. In appendix E, add a new paragraph XIX.B.3. to read as follows:

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


0
47. In appendix E, paragraph XIX.D.1., add 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).

* * * * *

0
48. In appendix E, paragraph XX.C., add new sentences at the end of 
paragraph 3. to read as follows:

    XX. * * *
    C. * * *
    3. * * * Paragraph (c)(3) applies to all MICR-line encoding on a 
substitute check.

* * * * *

0
49. In appendix E, paragraph XXI.A.1., remove the phrase ``are 
legible'' from the fourth sentence and add the phrase ``can be 
interpreted by any person'' in its place.

0
50. In appendix E, paragraph XXI.A:,
0
A. Remove paragraphs 2. through 6. and paragraph 8;
0
B. Redesignate paragraph 7. as paragraph 10. and redesignate paragraphs 
9. through 13. as paragraphs 11. through 15., respectively;
0
C. Add new paragraphs 2. through 9; and
0
D. Revise redesignated paragraph 15. by adding the phrase ``collecting 
banks and'' between the phrases ``standard for'' and ``returning 
banks'' in the first sentence and adding a new sentence at the end of 
the paragraph.
    These additions and revisions read as follows:

    XXI. * * *
    A. * * *
    2. Banks generally apply indorsements to a paper check in one of 
two ways: (1) banks print or ``spray'' indorsements onto a check 
when the check is processed through the banks'' automated check 
sorters (regardless of whether the checks are original checks or 
substitute checks), and (2) reconverting banks print or ``overlay'' 
previously applied electronic indorsements and their own 
indorsements and identifications onto a substitute check at the time 
that the substitute check is created. If a subsequent substitute 
check is created in the course of collection or return, that 
substitute check will contain, in its image of the back of the 
previous substitute check, reproductions of indorsements that were 
sprayed or overlaid onto the previous item. For purposes of the 
indorsement standard set forth in appendix D, a reproduction of a 
previously applied sprayed or overlaid indorsement contained within 
an image of a check does not constitute ``an indorsement that 
previously was applied electronically.'' To accommodate these two 
indorsement scenarios, the appendix includes two indorsement 
location specifications: one standard applies to banks spraying 
indorsements onto existing paper original checks and substitute 
checks, and another applies to reconverting banks overlaying 
indorsements that previously were applied electronically and their 
own indorsements onto substitute checks at the time the substitute 
checks are created.
    3. A bank might use check processing equipment that captures an 
image of a check prior to spraying an indorsement onto that item. If 
the bank truncates that item, it should ensure that it also applies 
an indorsement to the item electronically. A reconverting bank 
satisfies its obligation to preserve all previously applied 
indorsements by overlaying a bank's indorsement that previously was 
applied electronically onto a substitute check that the reconverting 
bank creates.
    4. The location of an indorsement applied to an original paper 
check in accordance with appendix D may shift if that check is 
truncated and later reconverted to a substitute check. If an 
indorsement applied to the original check in accordance with 
appendix D is overwritten by a subsequent indorsement applied to the 
substitute check in accordance with appendix D, then one or both of 
those indorsements could be rendered illegible. As explained in 
Sec.  229.38(d) and the commentary thereto, a reconverting bank is 
liable for losses associated with indorsements that are rendered 
illegible as a result of check substitution.
    5. To ensure that indorsements can be easily read and would 
remain legible after an image of a check is captured, the standard 
requires all indorsements applied to original checks and substitute 
checks to be printed in black ink as of January 1, 2006.
    6. The standard requires the depositary bank's indorsement to 
include (1) its nine-digit routing number set off by an arrow at 
each end of the routing number and, if the depositary bank is a 
reconverting bank with respect to the check, an asterisk outside the 
arrow at each end of the routing number to identify the bank as a 
reconverting bank; (2) the indorsement date; and (3) if the 
indorsement is applied physically, name or location information. The 
standard also permits but does not require the indorsement to 
include other identifying information. The standard requires a 
collecting bank's or returning bank's indorsement to include only

[[Page 47322]]

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

0
51. In appendix E, paragraph XXIII.A., remove the last sentence.

0
52. In appendix E, paragraph XXIV.D., revise the last sentence of 
paragraph 1., redesignate paragraphs 2. and 3. as paragraphs 3. and 4., 
respectively, and add a new paragraph 2. to read as follows:

    XXIV. * * *
    D. * * *
    1. Responsibility for back of check. * * * Accordingly, this 
provision places responsibility on the paying bank, depositary bank, 
or reconverting bank, as appropriate, for keeping the back of the 
check clear for bank indorsements during forward collection and 
return.
    2. ANS X9.100-140 provides that an image of an original check 
must be reduced in size when placed on the first substitute check 
associated with that original check. (The image thereafter would be 
constant in size on any subsequent substitute check that might be 
created.) Because of this size reduction, the location of an 
indorsement, particularly a depositary bank indorsement, applied to 
an original paper check likely will change when the first 
reconverting bank creates a substitute check that contains that 
indorsement within the image of the original paper check. If the 
indorsement was applied to the original paper check in accordance 
with appendix D's location requirements for indorsements applied to 
existing paper checks, and if the size reduction of the image causes 
the placement of the indorsement to no longer be consistent with the 
appendix's requirements, then the reconverting bank bears the 
liability for any loss that results from the shift in the placement 
of the indorsement. Such a loss could result either because the 
original indorsement applied in accordance with appendix D is 
rendered illegible by a subsequent indorsement that later is applied 
to the substitute check in accordance with appendix D, or because 
the subsequent bank cannot apply its indorsement to the substitute 
check legibly in accordance with appendix D as a result of the shift 
in the previous indorsement.

Example.

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

0
53. In appendix E, redesignate commentary XXX as commentary XXXVIII and 
add new commentaries XXX through XXXVII 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. Where the law (or a 
contract) requires production of the original check, production of a 
legally equivalent substitute check would satisfy that requirement. 
A person that receives a substitute check cannot be assessed costs 
associated with the creation of the substitute check, absent 
agreement to the contrary.

Examples.

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

[[Page 47323]]

could have an indemnity claim under Sec.  229.53 and, in the case of 
a consumer, an expedited recredit claim under Sec.  229.54.
    4. To be the legal equivalent of the original check, a 
substitute check 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 must place the legend on the substitute check 
as specified by generally applicable industry standards for 
substitute checks contained in ANS X9.100-140.
    5. In some cases, the original check used to create a substitute 
check could be forged or otherwise fraudulent. A substitute check 
created from a fraudulent original check would have the same status 
under Regulation CC and the U.C.C. as the original fraudulent check. 
For example, a substitute check of a fraudulent original check would 
not be properly payable under U.C.C. 4-401 and would be subject to 
the transfer and presentment warranties in U.C.C. 4-207 and 4-208.

B. 229.51(b) Reconverting Bank Duties

    1. As discussed in more detail in appendix D and the commentary 
to 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 before 
an image of the check was captured would be preserved through the 
image of the back of the original check that a substitute check must 
contain. Indorsements applied physically to the original check after 
an image of the original check was captured would be conveyed as 
electronic indorsements (see paragraph 3 of the commentary to Sec.  
229.35(a)). If indorsements were applied electronically after an 
image of the original check was captured or were applied 
electronically after a previous substitute check was converted to 
electronic form, the reconverting bank must apply those indorsements 
physically to the substitute check. A reconverting bank is not 
responsible for obtaining indorsements that persons that previously 
handled the check should have applied but did not apply.
    2. A reconverting bank also must identify itself as such on the 
front and back of the substitute check and must preserve on the back 
of the substitute check the identifications of any previous 
reconverting banks in accordance with appendix D. The presence on 
the back of a substitute check of indorsements that were applied by 
previous reconverting banks and identified with asterisks in 
accordance with appendix D would satisfy the requirement that the 
reconverting bank preserve the identification of previous 
reconverting banks. As discussed in more detail in the commentary to 
Sec.  229.35, the reconverting bank and truncating bank routing 
numbers on the front of a substitute check and, if the reconverting 
bank is the paying bank, the reconverting bank's routing number on 
the back of a substitute check are for identification only and are 
not indorsements or acceptances.
    3. The reconverting bank must place the routing number of the 
truncating bank surrounded by brackets on the front of the 
substitute check in accordance with appendix D and ANS X9.100-140.

Example.

    A bank's customer, which is a nonbank business, receives checks 
for payment and by agreement deposits substitute checks instead of 
the original checks with its depositary bank. The depositary bank is 
the reconverting bank with respect to the substitute checks and the 
truncating bank with respect to the original checks. In accordance 
with appendix D and with ANS X9.100-140, the bank must therefore be 
identified on the front of the substitute checks as a reconverting 
bank and as the truncating bank, and on the back of the substitute 
checks as the depositary bank and a reconverting bank.

C. 229.51(c) Applicable Law

    1. A substitute check that meets the requirements for legal 
equivalence set forth in this section is subject to any provision of 
federal or state law that applies to original checks, except to the 
extent such provision is inconsistent with the Check 21 Act or 
subpart D. A legally equivalent substitute check is subject to all 
laws that are not preempted by the Check 21 Act in the same manner 
and to the same extent as is an original check. Thus, any person 
could satisfy a law that requires production of an original check by 
producing a substitute check that is derived from the relevant 
original check and that meets the legal equivalence requirements of 
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. 4-402.

XXXI Sec.  229.52 Substitute Check Warranties

A. 229.52(a) Warranty Content and Provision

    1. The responsibility for providing the substitute check 
warranties begins with the reconverting bank. In the case of a 
substitute check created by a bank, the reconverting bank starts the 
flow of warranties when it transfers, presents, or returns a 
substitute check for which it receives consideration. A bank that 
receives a substitute check created by a nonbank starts the flow of 
warranties when it transfers, presents, or returns for consideration 
either the substitute check it received or an electronic or paper 
representation of that substitute check. To ensure that warranty 
protections flow all the way through to the ultimate recipient of a 
substitute check or paper or electronic representation thereof, any 
subsequent bank that transfers, presents, or returns for 
consideration either the substitute check or a paper or electronic 
representation of the substitute check is responsible to subsequent 
transferees for the warranties. Any warranty recipient could bring a 
claim for a breach of a substitute check warranty if it received 
either the actual substitute check or a paper or electronic 
representation of a substitute check.
    2. The substitute check warranties and indemnity are not given 
under Sec. Sec.  229.52 and 229.53 by a bank that truncates the 
original check and by agreement transfers the original check 
electronically to a subsequent bank for consideration. However, 
parties may, by agreement, allocate liabilities associated with the 
exchange of electronic check information.

Example.

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

[[Page 47324]]

    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 banks that transfer, 
present, or return a substitute check (or a paper or electronic 
representation thereof) therefore provide the warranty regardless of 
whether the ultimate demand for double payment is based on the 
original check, the substitute check, or some other electronic or 
paper representation of the substitute or original check, and 
regardless of the order in which the duplicative payment requests 
occur. This warranty is given by the banks that transfer, present, 
or return a substitute check even if the demand for duplicative 
payment results from a fraudulent substitute check about which the 
warranting bank had no knowledge.

Example.

    A nonbank depositor truncates a check and in lieu thereof sends 
an electronic version of that check to both Bank A and Bank B. Bank 
A and Bank B each uses the check information that it received 
electronically to create a substitute check, which it presents to 
Bank C for payment. Bank A and Bank B each is a reconverting bank 
that made the substitute check warranties when it presented a 
substitute check to and received payment from Bank C. Bank C could 
pursue a warranty claim for the loss it suffered as a result of the 
duplicative payment against either Bank A or Bank B.

B. 229.52(b) Warranty Recipients

    1. A reconverting bank makes the warranties to the person to 
which it transfers, presents, or returns the substitute check for 
consideration and to any subsequent recipient that receives either 
the substitute check or a paper or electronic representation derived 
from the substitute check. These subsequent recipients could include 
a subsequent collecting or returning bank, the depositary bank, the 
drawer, the drawee, the payee, the depositor, and any indorser. The 
paying bank would be included as a warranty recipient, for example 
because it would be the drawee of a check or a transferee of a check 
that is payable through it.
    2. The warranties flow with the substitute check to persons that 
receive a substitute check or a paper or electronic representation 
of a substitute check. The warranties do not flow to a person that 
receives only the original check or a representation of an original 
check that was not derived from a substitute check. However, a 
person that initially handled only the original check could become a 
warranty recipient if that person later receives a returned 
substitute check or a paper or electronic representation of a 
substitute check that was derived from that original check.

XXXII. Sec.  229.53 Substitute Check Indemnity

A. 229.53(a) Scope of Indemnity

    1. Each bank that for consideration transfers, presents, or 
returns a substitute check or a paper or electronic representation 
of a substitute check is responsible for providing the substitute 
check indemnity. The indemnity covers losses due to any subsequent 
recipient's receipt of the substitute check instead of the original 
check. The indemnity therefore covers the loss caused by receipt of 
the substitute check as well as the loss that a bank incurs because 
it pays an indemnity to another person. A bank that pays an 
indemnity would in turn have an indemnity claim regardless of 
whether it received the substitute check or a paper or electronic 
representation of the substitute check The indemnity would not apply 
to a person that handled only the original check or a paper or 
electronic version of the original check that was not derived from a 
substitute check.

Examples.

    a. A paying bank makes payment based on a substitute check that 
was derived from a fraudulent original cashier's check. The amount 
and other characteristics of the original cashier's check are such 
that, had the original check been presented instead, the paying bank 
would have inspected the original check for security features. The 
paying bank's fraud detection procedures were designed to detect the 
fraud in question and allow the bank to return the fraudulent check 
in a timely manner. However, the security features that the bank 
would have inspected were security features that did not survive the 
imaging process (see the commentary to 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 examples, the indemnity would 
not apply if the characteristics of the presented substitute check 
were such that the bank's security policies and procedures would not 
have detected the fraud even if the original had been presented. For 
example, if the check was under the threshold amount at which the 
bank subjects an item to its fraud detection procedures, the bank 
would not have inspected the item for security features regardless 
of the form of the item and accordingly would have suffered a loss 
even if it had received the original check.
    c. A paying bank makes an erroneous payment based on an 
electronic representation of a substitute check because the 
electronic cash letter accompanying the electronic item included the 
wrong amount to be charged. The paying bank would not have an 
indemnity claim associated with that payment because its loss did 
not result from receipt of an actual substitute check instead of the 
original check. However, the paying bank could protect itself from 
such losses through its agreement with the bank that sent the check 
to it electronically and may have rights under other law.
    d. A drawer has agreed with its bank that the drawer will not 
receive paid checks with periodic account statements. The drawer 
requested a copy of a paid check in order to prove payment and 
received a photocopy of a substitute check. The photocopy that the 
bank provided in response to this request was illegible, such that 
the drawer could not prove payment. Any loss that the drawer 
suffered as a result of receiving the blurry check image would not 
trigger an indemnity claim because the loss was not caused by the 
receipt of a substitute check. The drawer may, however, still have a 
warranty claim if he received a copy of a substitute check, and may 
also have rights under the U.C.C.

B. 229.53(b) Indemnity Amount

    1. If a recipient of a substitute check is making an indemnity 
claim because a bank has breached one of the substitute check 
warranties, the recipient can recover any losses proximately caused 
by that warranty breach.

Examples.

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

[[Page 47325]]

amount of the substitute check, plus interest and expenses. However, 
the indemnified person might be entitled to additional damages under 
some other provision of law.

Examples.

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

C. 229.53(c) Subrogation of Rights

    1. A bank that pays an indemnity claim is subrogated to the 
rights of the person it indemnified, to the extent of the indemnity 
it provided, so that it may attempt to recover that amount from 
another person based on an indemnity, warranty, or other claim. The 
person that the bank indemnified must comply with reasonable 
requests from the indemnifying bank for assistance with respect to 
the subrogated claim.

Example.

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

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

Examples.

    a. A consumer who received a substitute check believed that he 
or she wrote the check for $150, but the bank charged his or her 
account for $1,500. The amount on the substitute check the consumer 
received is illegible. If the substitute check contained a blurry 
image of what was a legible original check, the consumer could have 
a claim for a breach of the legal equivalence warranty in addition 
to an improper charge claim. Because the amount of the check cannot 
be determined from the substitute check provided to the consumer, 
the consumer, if acting in good faith, could assert that the 
production of the original check or a better copy of the original 
check is necessary to determine the validity of the claim. The 
consumer in this case could attempt to recover his or her losses by 
using the expedited recredit procedure. The consumer's losses 
recoverable under Sec.  229.54 could include the $1,350 he or she 
believed was incorrectly charged plus any improperly charged fees 
associated with that charge, up to $150 (plus foregone interest on 
the amount of the consumer's loss if the account was an interest-
bearing account). The consumer could recover any additional losses, 
if any, under other law, such as U.C.C. 4-401 and 4-402.
    b. A consumer received a substitute check for which his or her 
account was charged and believed that the original check from which 
the substitute was derived was a forgery. The forgery was good 
enough that analysis of the original check was necessary to verify 
whether the signature is that of the consumer. Under those 
circumstances, the consumer, if acting in good faith, could assert 
that the charge was improper, that he or she therefore had incurred 
a loss in the amount of the check (plus foregone interest if the 
account was an interest-bearing account), and that he or she needed 
the original check to determine the validity of the forgery claim. 
By contrast, if the signature on the substitute check obviously was 
forged (for example, if the forger signed a name other than that of 
the account holder) and there was no other defect with the 
substitute check, the consumer would not need the original check or 
a sufficient copy to determine the fact of the forgery and thus 
would not be able to make an expedited recredit claim under this 
section. However, the consumer would have a claim under U.C.C. 4-401 
if the item was not properly payable.

B. 229.54(b) Procedures for Making Claims

    1. The consumer must submit his or her expedited recredit claim 
to the bank within 40 calendar days of the later of the day on which 
the bank mailed or delivered, by a means agreed to by the consumer, 
(1) the periodic account statement containing information concerning 
the transaction giving rise to the claim, or (2) the substitute 
check giving rise to the claim. The mailing

[[Page 47326]]

or delivery of a substitute check could be in connection with a 
regular account statement, in response to a consumer's specific 
request for a copy of a check, or in connection with the return of a 
substitute check to the payee.
    2. Section 229.54(b) contemplates more than one possible means 
of delivering an account statement or a substitute check to the 
consumer. The time period for making a claim thus could be triggered 
by the mailed, in-person, or electronic delivery of an account 
statement or by the mailed or in-person delivery of a substitute 
check. In-person delivery would include, for example, making an 
account statement or substitute check available at the bank for the 
consumer's retrieval under an arrangement agreed to by the consumer. 
In the case of a mailed statement or substitute check, the 40-day 
period should be calculated from the postmark on the envelope. In 
the case of in-person delivery, the 40-day period should be 
calculated from the earlier of the calendar day on which delivery 
occurred or the bank first made the statement or substitute check 
available for the consumer's retrieval.
    3. A bank must extend the consumer's time for submitting a claim 
for a reasonable period if the consumer is prevented from submitting 
his or her claim within 40 days because of extenuating 
circumstances. Extenuating circumstances could include, for example, 
the extended travel or illness of the consumer.
    4. For purposes of determining the timeliness of a consumer's 
actions, a consumer's claim is considered received on the banking 
day on which the consumer's bank receives a complete claim in person 
or by telephone or on the banking day on which the consumer's bank 
receives a letter or e-mail containing a complete claim. (But see 
paragraphs 9-11 of this section for a discussion of time periods 
related to oral claims that the bank requires to be put in writing.)
    5. A consumer who makes an untimely claim would not be entitled 
to recover his or her losses using the expedited recredit procedure. 
However, he or she still could have rights under other law, such as 
a warranty or indemnity claim under subpart D, a claim for an 
improper charge to his or her account under U.C.C. 4-401, or a claim 
for wrongful dishonor under U.C.C. 4-402.
    6. A consumer's claim must include the reason why the consumer 
believes that his or her account was charged improperly or why he or 
she has a warranty claim. A charge could be improper, for example, 
if the bank charged the consumer's account for an amount different 
than the consumer believes he or she authorized or charged the 
consumer more than once for the same check, or if the check in 
question was a forgery or otherwise fraudulent.
    7. A consumer also must provide a reason why production of the 
original check or a sufficient copy is necessary to determine the 
validity of the claim identified by the consumer. For example, if 
the consumer believed that the bank charged his or her account for 
the wrong amount, the original check might be necessary to prove 
this claim if the amount of the substitute check were illegible. 
Similarly, if the consumer believed that his or her signature had 
been forged, the original check might be necessary to confirm the 
forgery if, for example, pen pressure or similar analysis were 
necessary to determine the genuineness of the signature.
    8. The information that the consumer is required to provide 
under 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.
    9. A bank may accept an expedited recredit claim in any form but 
could in its discretion require the consumer to submit the claim in 
writing. A bank that requires a recredit claim to be in writing must 
inform the consumer of that requirement and provide a location to 
which such a written claim should be sent. If the consumer attempts 
to make a claim orally, the bank must inform the consumer at that 
time of the written notice requirement. A bank that receives a 
timely oral claim and then requires the consumer to submit the claim 
in writing may require the consumer to submit the written claim 
within 10 business days of the bank's receipt of the timely oral 
claim. If the consumer's oral claim was timely and the consumer's 
written claim was received within the 10-day period for submitting 
the claim in writing, the consumer would satisfy the requirement of 
Sec.  229.54(b)(1) to submit his or her claim within 40 days, even 
if the bank received the written claim after that 40-day period.
    10. A bank may permit but may not require a consumer to submit a 
written claim electronically.
    11. If a bank requires a consumer to submit a claim in writing, 
the bank may compute time periods for the bank's action on the claim 
from the date that the bank received the written claim. Thus, if a 
consumer called the bank to make an expedited recredit claim and the 
bank required the consumer to submit the claim in writing, the time 
at which the bank must take action on the claim would be determined 
based on the date on which the bank received the written claim, not 
the date on which the consumer made the oral claim.
    12. Regardless of whether the consumer's communication with the 
bank is oral or written, a consumer complaint that does not contain 
all the elements described in Sec.  229.54(b) is not a claim for 
purposes of Sec.  229.54. If the consumer attempts to submit a claim 
but does not provide all the required information, then the bank has 
a duty to inform the consumer that the complaint does not constitute 
a claim under Sec.  229.54 and identify what information is missing.

C. 229.54(c) Action on Claims

    1. If the bank has not determined whether or not the consumer's 
claim is valid by the end of the 10th business day after the banking 
day on which the consumer submitted the claim, the bank must by that 
time recredit the consumer's account for the amount of the 
consumer's loss, up to the lesser of the amount of the substitute 
check or $2,500, plus interest if the account is an interest-bearing 
account. A bank must provide the recredit pending investigation for 
each substitute check for which the consumer submitted a claim, even 
if the consumer submitted multiple substitute check claims in the 
same communication.
    2. A bank that provides a recredit to the consumer, either 
provisionally or after determining that the consumer's claim is 
valid, may reverse the amount of the recredit if the bank later 
determines that the claim in fact was not valid. A bank that 
reverses a recredit also may reverse the amount of any interest that 
it has paid on the previously recredited amount. A bank's time for 
reversing a recredit may be limited by a statute of limitations.

D. 229.54(d) Availability of Recredit

    1. The availability of a recredit provided by a bank under 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 overdrawn during the six month period ending on the date 
the bank received the claim, or (3) the bank has reasonable cause to 
believe that the claim is fraudulent. These first two exceptions are 
meant to operate in the same manner as the corresponding new account 
and repeated overdraft exceptions in subpart B, as described in 
Sec.  229.13(a) and (d) and the commentary thereto regarding 
application of the exceptions. When a recredit amount for which a 
bank delays availability contains an interest component, that 
component also is subject to the delay because it is part of the 
amount recredited under Sec.  229.54(c)(3)(i). However, interest 
continues to accrue during the hold period.
    2. Section 229.54(d)(2) describes the maximum period of time 
that a bank may delay availability of a recredit provided under 
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) (including the interest component, if any) pending 
its investigation of a claim.

E. 229.54(e) Notices Relating to Consumer Expedited Recredit Claims

    1. A bank must notify a consumer of its action regarding a 
recredit claim no later than the business day after the banking day 
that the bank makes a recredit, determines a claim is not valid, or 
reverses a recredit, as appropriate. As provided in 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.

[[Page 47327]]

    2. A bank that denies the consumer's recredit claim must 
demonstrate to the consumer that the substitute check was properly 
charged or that the warranty claim was not valid, such as by 
explaining the reason that the substitute check charge was proper or 
the consumer's warranty claim was not valid. For example, if a 
consumer has claimed that the bank charged its account for an 
improper amount, the bank denying that claim must explain why it 
determined that the charged amount was proper.
    3. A bank denying a recredit claim also must provide the 
original check or a sufficient copy, unless the bank is providing 
the claim denial notice electronically and the consumer has agreed 
to receive that type of information electronically. In that case, 
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.
    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. However, the Board has published these models to aid 
banks' efforts to comply with Sec.  229.54(e).

F. 229.54(f) Recredit Does Not Abrogate Other Liabilities

    1. The amount that a consumer may recover under Sec.  229.54 is 
limited to the lesser of the amount of his or her loss or the amount 
of the substitute check, plus interest on that amount if his or her 
account earns interest. However, a consumer's total loss associated 
with the substitute check could exceed that amount, and the consumer 
could be entitled to additional damages under other law. For 
example, if a consumer's loss exceeded the amount of the substitute 
check plus interest and he or she had both a warranty and an 
indemnity claim with respect to the substitute check, he or she 
would be entitled to additional damages under Sec.  229.53 of this 
subpart. Similarly, if a consumer was charged bounced check fees as 
a result of an improperly charged substitute check and could not 
recover all of those fees because of the Sec.  229.54's limitation 
on recovery, he or she could attempt to recover additional amounts 
under U.C.C. 4-402.

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 
an expedited recredit to either a consumer or a bank.

Examples.

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

B. 229.55(b) Procedures for Making Claims

    1. An interbank recredit claim under this section must be 
brought within 120 calendar days of the transaction giving rise to 
the claim. For purposes of computing this period, the transaction 
giving rise to the claim is the claimant bank's settlement for the 
substitute check in question.
    2. When estimating the amount of its loss, 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 demonstrate 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, wrongfully-charged fees imposed as a 
result of the warranty breach, reasonable attorney's fees, and other 
expenses of representation.
    2. A reconverting bank also may be liable under 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. For more detailed discussion of this 
topic, see Sec.  229.38 and the accompanying commentary.

B. 229.56(b) Timeliness of Action

    1. A bank's delay beyond the time limits prescribed or permitted 
by any provision of subpart D is excused if the delay is caused by 
certain circumstances beyond the bank's control. This parallels the 
standard of U.C.C. 4-109(b).

C. 229.56(c) Jurisdiction

    1. The Check 21 Act confers subject matter jurisdiction on 
courts of competent jurisdiction and provides a time limit for civil 
actions for violations of subpart D.

D. 229.56(d) Notice of Claims

    1. This paragraph is designed to adopt the notice of claim 
provisions of U.C.C. 4-207(d) and 4-208(e), with an added provision 
that a timely 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

[[Page 47328]]

be brought within one year of the date that the cause of action 
accrues.

XXXVI. Consumer Awareness

A. 229.57(a) General Disclosure Requirement and Content

    1. A bank must provide the disclosure required by Sec.  229.57 
under two circumstances. First, each bank must provide the 
disclosure to each of its consumer customers who receives paid 
checks with his or her account statement. This requirement does not 
apply if the bank provides with the account statement something 
other than paid original checks, paid substitute checks, or a 
combination thereof. For example, this requirement would not apply 
if a bank provided with the account statement only a document that 
contained multiple check images per page. Second, a bank also must 
provide the disclosure when it (a) provides a substitute check to a 
consumer in response to that consumer's request for a check or check 
copy or (b) returns a substitute check to a consumer depositor. A 
bank must provide the disclosure each time it provides a substitute 
check to a consumer on an occasional basis, regardless of whether 
the bank previously provided the disclosure to that consumer.
    2. A bank may, but is not required to, use the model disclosure 
in appendix C-5A to satisfy the disclosure content requirements of 
this section. A bank that uses the model language is deemed to 
comply with the disclosure content requirement(s) for which it uses 
the model language, provided the information in the disclosure 
accurately describes the bank's policies and practices. A bank also 
may include in its disclosure additional information relating to 
substitute checks that is not required by this section.
    3. A bank may, by agreement or at the consumer's request, 
provide the disclosure required by this section in a language other 
than English, provided that the bank makes a complete English notice 
available at the consumer's request.

B. 229.57(b) Distribution

    1. A consumer may request a check or a copy of a check on an 
occasional basis, such as to prove that he or she made a particular 
payment. A bank that responds to the consumer's request by providing 
a substitute check must provide the required disclosure at the time 
of the consumer's request if feasible. Otherwise, the bank must 
provide the disclosure no later than the time at which the bank 
provides a substitute check in response to the consumer's request. 
It would not be feasible for a bank to provide notice to the 
consumer at the time of the request if, for example, the bank did 
not know at the time of the request whether it would provide a 
substitute check in response to that request, regardless of the form 
of the consumer's request. It also would not be feasible for a bank 
to provide notice at the time of the request if the consumer's 
request was mailed to the bank or made by telephone, even if the 
bank knew when it received the request that it would provide a 
substitute check in response. A bank's provision to the consumer of 
something other a substitute check, such as a photocopy of a check 
or a statement containing images of multiple substitute checks per 
page, does not trigger the notice requirement.
    2. A consumer who does not routinely receive paid checks might 
receive a returned substitute check. For example, a consumer 
deposits an original check that is payable to him or her into his or 
her deposit account. The paying bank returns the check unpaid and 
the depositary bank returns the check to the depositor in the form 
of a substitute check. A depositary bank that provides a returned 
substitute check to a consumer depositor must provide the substitute 
check disclosure at that time.

XXXVII. Variation by Agreement

    Section 229.60 provides that banks involved in an interbank 
expedited recredit claim under Sec.  229.55 may vary the terms of 
that section by agreement, but otherwise no person may vary the 
terms of subpart D by agreement. A bank's decision to provide more 
generous protections for consumers than this subpart requires, such 
as by providing consumers additional time to submit expedited claims 
under Sec.  229.54 under non-exigent circumstances, would not be a 
variation prohibited by Sec.  229.60.
* * * * *

0
54. In appendix E, in newly-redesignated paragraph XXXVIII., revise the 
heading and paragraph A.1. to read as follows:
* * * * *

XXXVIII. Appendix C--Model Availability Policy Disclosures, Clauses, 
and Notices; and Model Substitute Check Policy Disclosure and Notices

A. Introduction

    1. Appendix C contains model disclosure, clauses, and notices 
that may be used by banks to meet their disclosure and notice 
responsibilities under the regulation. Banks using the models 
(except models C-22 through C-25) properly will be deemed in 
compliance with the regulation's disclosure requirements.
* * * * *

0
55. In appendix E, in newly-redesignated paragraph XXXVIII.B., revise 
the heading, the first sentence of paragraphs B.1.a. and the first 
sentence of paragraph B.1.c. and add a new paragraph B.7., to read as 
follows:

    XXXVIII. * * *

B. Model Availability Policy and Substitute Check Policy 
Disclosures, Models C-1 through C-5A

    1. Models C-1 through C-5A generally.
    a. Models C-1 through C-5A are models for the availability 
policy disclosures described in 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 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 that a substitute 
check is the legal equivalent of an original check and the 
circumstances under which the consumer may make a claim for 
expedited recredit.

* * * * *

0
56. In appendix E, in newly-redesignated paragraph XXXVIII.D., revise 
the heading, the first sentence of paragraph D.1. and add new 
paragraphs D.11. through D.15. to read as follows:

    XXXVIII. * * *

D. Model Notices, Models C-12 through C-25

    1. Models C-12 through C-25 generally. Models C-12 through C-25 
provide models of the various notices required by the regulation. * 
* *
* * * * *
    11. Models C-22 through C-25 generally. Models C-22 through C-25 
provide models for the various notices required when a consumer who 
receives substitute checks makes an expedited recredit claim under 
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. 
However, the Board has published these models to aid banks' efforts 
to comply with Sec.  229.54(e).
    12. Model C-22 Valid Claim Refund Notice. A bank may use this 
model when crediting the entire amount or the remaining amount of a 
consumer's expedited recredit claim after determining that the 
consumer's claim is valid. This notice could be used when the bank 
provides the consumer a full recredit based on a valid claim 
determination within ten days of the receipt of the consumer's claim 
or when the bank recredits the remaining amount of a consumer's 
expedited recredit claim by the 45th calendar day after receiving 
the consumer's claim, as required under Sec.  229.54(e)(1).
    13. Model C-23 Provisional Refund Notice. A bank may use this 
model when providing a full or partial expedited recredit to a 
consumer pending further investigation of the consumer's claim, as 
required under Sec.  229.54(e)(1).
    14. Model C-24 Denial Notice. A bank may use this model when 
denying a claim for an expedited recredit under Sec.  229.54(e)(2).
    15. Model C-25 Reversal Notice. A bank may use this model when 
reversing an expedited recredit that was credited to a consumer's 
account under Sec.  229.54(e)(3).

* * * * *

0
57. In appendix E, remove the phrase ``the Act'' wherever it appears 
and add the phrase ``the EFA Act'' in its place.

    By order of the Board of Governors of the Federal Reserve 
System, July 27, 2004.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04-17362 Filed 8-3-04; 8:45 am]
BILLING CODE 6210-02-P