Check 21 Act

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The Check Clearing for the 21st Century Act (or Check 21 Act) is a United States federal law (public Law 108-100) enacted into law October 28, 2003 by the 108th Congress. It took effect one year later, on October 28, 2004. The law allows the recipient of a paper check to create a digital version, thereby eliminating the need for further handling of the physical document.

Consumers are most likely to see the effects of this act when they notice that certain checks are no longer being returned to them with their monthly statement even though other checks are still being returned. Another side effect of the law is that it is now legal for businesses to use a computer scanner to capture images of checks and deposit them electronically, a process known as remote deposit.

[edit] Truncation

The process of removing the paper check from its processing flow is called truncation. In truncation, both sides of the paper check are scanned to produce digital images. If a paper document is still needed, these images are inserted into specially formatted documents containing a photo-reduced copy of the original checks, some special words on the left and a new MICR line. These are called "substitute checks" or image replacement documents (IRDs).

Once a check is truncated, businesses, and banks can work with either the digital image or a print reproduction of it. Images can be exchanged between member banks, S&L's, credit unions, servicers, clearinghouses, and the Federal Reserve.

Not all banks have the ability to receive image files, so there are companies who offer the service. At the item processing center, the checks are sorted by machine according to the R/T number as presented by the MICR line, and scanned to produce a digital image. A batch file is generated and sent to the Federal Reserve Bank or presentment point for settlement or image replacement. If an IRD is needed, the transmitting bank is responsible for the cost and transportation of IRDs from the presentment point to the Federal Reserve Bank or bank.

Several banks have plans for 'corporate capture'. Retailers, such as Walmart, can convert a paper check into an ACH (Automated Clearing House) debit. This is the same thing as providing your routing/transit (RT) number to a vendor so that the retailer's bank can pull money directly from your account, rather than physically depositing the checks. This helps the retailer save money as ACH per item costs are typically much lower than check item costs. However, the liability changes from Regulation CC of the Federal Reserve to Regulation E, which provides much more protection for the account being debited.

Bank Customers may no longer be able to obtain autographs from cancelled checks endorsed by celebrity recipients. This practice may have been used by some charities to encourage donations [1] and may have also been used in other contexts as well.