Checking Out the Brave New World of Check 21
By: Source: AARP.org Date Posted: 2007-01-08 09:23:24.963430-05:00
By the National Endowment for Financial Education
Each month, retiree Coy R. sits down and balances his checkbook, ticking off each cancelled check. At year’s end, he takes the 12 months of statements and checks, and files them away in a shoebox. It’s the way he’s always handled his checking account.
This AARP member may no longer need that shoebox. A new law called the Check Clearing for the 21st Century Act—nicknamed Check 21—has taken effect and is moving check processing into the Electronic Age. Instead of shipping paper checks, banks can exchange electronic pictures of checks through the Internet. And customers of those banks won’t get their paper checks returned in monthly statements.
Check processing under Check 21 will become faster, easier, and safer through electronic transfers of checks. But it’s a big change for consumers, especially older ones who have always balanced their checkbooks with the help of their cancelled checks.
"I don’t mind saying I’m 67 and I’m a little bit set in my ways,"says Coy, who retired from the Navy as a lieutenant commander and worked in banking. "I personally like getting my cancelled checks sent to me."
Substitute Checks
If you’re among the half of Americans over 55 years old who, according to the American Bankers Association, have gotten cancelled paper checks, that may change as a result of Check 21. Your bank may continue to send you the original checks, or more likely, an image statement of checks (usually many per page), a line-item listing of your transactions, or "substitute checks."
A substitute check is a paper copy of the original. You can use substitute checks as proof of payment or for record keeping. According to the Federal Reserve, they are legally the same as your original checks if they accurately represent the information on your originals and include this statement: "This is a legal copy of your check. You can use it the same way you would use the original check." The substitute checks must depict information from both sides of each check, and they must be high-quality reproductions of the originals.
If your bank doesn’t return cancelled checks, you can request a substitute check if you need one. Banks can charge for this service, so you may want to look for an account that does not charge high fees.
Not Every Bank Moving to Check 21
By now, you should have received information from your financial institution about its plans under Check 21. If not, ask your bank for a copy of its "Check 21 disclosure."
The new process is faster, easier, and cheaper for banks—but the law doesn’t make banks adopt it. Some banks made the change immediately, some will go into it gradually, and a few may not use it at all.
Warning: Checks Clear Quickly
But young or old, people should understand the impact of the new law. Checks you write will clear your account faster under Check 21, maybe in just a day. If you’re used to "playing the float"—having a few days to beef up your account balance before checks make it to the bank for payment—that luxury is gone. To avoid overdrafts, only write a check if you have the funds in your bank account. You can check balances by phone or via the Internet, or keep an extra "cushion"of money in your account. You could consider overdraft protection, too.
Check 21 doesn’t change the way you write a check, just the way the check is handled by banks and other financial institutions. Instead of packing up millions of checks every day at banks where checks are deposited and moving them by truck, train, or plane to the banks that pay them, banks now can create and exchange electronic pictures of checks. Image exchange was allowed before, but only if the banks doing it had formal agreements.
Consumer Protections under Check 21
If you feel a little uncomfortable thinking of your check images zipping around the country in electronic form, financial officials want you to know this system is secure—and faster check payment under Check 21 may help expose fraud more quickly, too. You also have new consumer protections under Check 21 that guard against mistaken or unauthorized check payments, but these apply to substitute checks only. Talk with your bank for more details.
Check 21 also includes a special refund procedure that lets you challenge a substitute check if you believe it shouldn’t have been charged to your account. You have to make your claim to your financial institution no more than 40 days after the bank sends your account statement. Then, your institution will ask you for more information to help look into the claim. If the bank finds you’re right, it must give you a refund of the check amount, plus any interest due, within one day of making its decision.
If the investigation takes 10 days or more, the bank still must give you the check amount or $2,500, whichever is less, plus interest, while the investigation goes on. If the investigation takes 45 days, the bank must refund any remaining amount of the check plus interest. If the bank later decides against your claim, it can take back the refunds you got plus interest.
Much of this is uncharted territory, however, and it remains to be seen just how effective these consumer provisions will be.
Coy, the former naval man, notes that many of his friends and neighbors haven’t yet picked up on the new law. He even wrote an article about Check 21 for his local Military Officers Association’s newsletter to alert fellow members. "It’s going to involve all of us changing habits,"he says.
This column is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.
Note: The content areas in this material are believed to be current as of this printing, but, over time, legislative and regulatory changes, as well as new developments, may date this material.
©2005 National Endowment for Financial Education. All rights reserved.
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