H.R. 1474 (ih) To facilitate check truncation by authorizing substitute checks, to foster innovation in the check collection system without mandating receipt of checks in electronic form, and to improve the overall efficiency of the Nation's payments syst...

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        H.R.1474

                       One Hundred Eighth Congress

                                 of the

                        United States of America


                          AT THE FIRST SESSION

          Begun and held at the City of Washington on Tuesday,
           the seventh day of January, two thousand and three


                                 An Act


 
  To facilitate check truncation by authorizing substitute checks, to 
   foster innovation in the check collection system without mandating 
    receipt of checks in electronic form, and to improve the overall 
   efficiency of the Nation's payments system, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Check Clearing for 
the 21st Century Act'' or the ``Check 21 Act''.
    (b) Table of Contents.--The table of contents of this Act is as 
follows:
Sec.  1. Short title; table of contents.
Sec.  2. Findings; purposes.
Sec.  3. Definitions.
Sec.  4. General provisions governing substitute checks.
Sec.  5. Substitute check warranties.
Sec.  6. Indemnity.
Sec.  7. Expedited recredit for consumers.
Sec.  8. Expedited recredit procedures for banks.
Sec.  9. Delays in an emergency.
Sec. 10. Measure of damages.
Sec. 11. Statute of limitations and notice of claim.
Sec. 12. Consumer awareness.
Sec. 13. Effect on other law.
Sec. 14. Variation by agreement.
Sec. 15. Regulations.
Sec. 16. Study and report on funds availability.
Sec. 17. Statistical reporting of costs and revenues for transporting 
          checks between Federal Reserve banks.
Sec. 18. Evaluation and report by the Comptroller General.
Sec. 19. Depositary services efficiency and cost reduction.
Sec. 20. Effective date.

SEC. 2. FINDINGS; PURPOSES.

    (a) Findings.--The Congress finds as follows:
        (1) In the Expedited Funds Availability Act, enacted on August 
    10, 1987, the Congress directed the Board of Governors of the 
    Federal Reserve System to consider establishing regulations 
    requiring Federal reserve banks and depository institutions to 
    provide for check truncation, in order to improve the check 
    processing system.
        (2) In that same Act, the Congress--
            (A) provided the Board of Governors of the Federal Reserve 
        System with full authority to regulate all aspects of the 
        payment system, including the receipt, payment, collection, and 
        clearing of checks, and related functions of the payment system 
        pertaining to checks; and
            (B) directed that the exercise of such authority by the 
        Board superseded any State law, including the Uniform 
        Commercial Code, as in effect in any State.
        (3) Check truncation is no less desirable in 2003 for both 
    financial service customers and the financial services industry, to 
    reduce costs, improve efficiency in check collections, and expedite 
    funds availability for customers than it was over 15 years ago when 
    Congress first directed the Board to consider establishing such a 
    process.
    (b) Purposes.--The purposes of this Act are as follows:
        (1) To facilitate check truncation by authorizing substitute 
    checks.
        (2) To foster innovation in the check collection system without 
    mandating receipt of checks in electronic form.
        (3) To improve the overall efficiency of the Nation's payments 
    system.

SEC. 3. DEFINITIONS.

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

SEC. 4. GENERAL PROVISIONS GOVERNING SUBSTITUTE CHECKS.

    (a) No Agreement Required.--A person may deposit, present, or send 
for collection or return a substitute check without an agreement with 
the recipient, so long as a bank has made the warranties in section 5 
with respect to such substitute check.
    (b) Legal Equivalence.--A substitute check shall be the legal 
equivalent of the original check for all purposes, including any 
provision of any Federal or State law, and for all persons if the 
substitute check--
        (1) accurately represents all of the information on the front 
    and back of the original check as of the time the original check 
    was truncated; and
        (2) bears the legend: ``This is a legal copy of your check. You 
    can use it the same way you would use the original check.''.
    (c) Endorsements.--A bank shall ensure that the substitute check 
for which the bank is the reconverting bank bears all endorsements 
applied by parties that previously handled the check (whether in 
electronic form or in the form of the original paper check or a 
substitute check) for forward collection or return.
    (d) Identification of Reconverting Bank.--A bank shall identify 
itself as a reconverting bank on any substitute check for which the 
bank is a reconverting bank so as to preserve any previous reconverting 
bank identifications in conformance with generally applicable industry 
standards.
    (e) Applicable Law.--A substitute check that is the legal 
equivalent of the original check under subsection (b) shall be subject 
to any provision, including any provision relating to the protection of 
customers, of part 229 of title 12 of the Code of Federal Regulations, 
the Uniform Commercial Code, and any other applicable Federal or State 
law as if such substitute check were the original check, to the extent 
such provision of law is not inconsistent with this Act.

SEC. 5. SUBSTITUTE CHECK WARRANTIES.

    A bank that transfers, presents, or returns a substitute check and 
receives consideration for the check warrants, as a matter of law, to 
the transferee, any subsequent collecting or returning bank, the 
depositary bank, the drawee, the drawer, the payee, the depositor, and 
any endorser (regardless of whether the warrantee receives the 
substitute check or another paper or electronic form of the substitute 
check or original check) that--
        (1) the substitute check meets all the requirements for legal 
    equivalence under section 4(b); and
        (2) no depositary bank, drawee, drawer, or endorser will 
    receive presentment or return of the substitute check, the original 
    check, or a copy or other paper or electronic version of the 
    substitute check or original check such that the bank, drawee, 
    drawer, or endorser will be asked to make a payment based on a 
    check that the bank, drawee, drawer, or endorser has already paid.

SEC. 6. INDEMNITY.

    (a) Indemnity.--A reconverting bank and each bank that subsequently 
transfers, presents, or returns a substitute check in any electronic or 
paper form, and receives consideration for such transfer, presentment, 
or return shall indemnify the transferee, any subsequent collecting or 
returning bank, the depositary bank, the drawee, the drawer, the payee, 
the depositor, and any endorser, up to the amount described in 
subsections (b) and (c), as applicable, to the extent of any loss 
incurred by any recipient of a substitute check if that loss occurred 
due to the receipt of a substitute check instead of the original check.
    (b) Indemnity Amount.--
        (1) Amount in event of breach of warranty.--The amount of the 
    indemnity under subsection (a) shall be the amount of any loss 
    (including costs and reasonable attorney's fees and other expenses 
    of representation) proximately caused by a breach of a warranty 
    provided under section 5.
        (2) Amount in absence of breach of warranty.--In the absence of 
    a breach of a warranty provided under section 5, the amount of the 
    indemnity under subsection (a) shall be the sum of--
            (A) the amount of any loss, up to the amount of the 
        substitute check; and
            (B) interest and expenses (including costs and reasonable 
        attorney's fees and other expenses of representation).
    (c) Comparative Negligence.--
        (1) In general.--If a loss described in subsection (a) results 
    in whole or in part from the negligence or failure to act in good 
    faith on the part of an indemnified party, then that party's 
    indemnification under this section shall be reduced in proportion 
    to the amount of negligence or bad faith attributable to that 
    party.
        (2) Rule of construction.--Nothing in this subsection reduces 
    the rights of a consumer or any other person under the Uniform 
    Commercial Code or other applicable provision of Federal or State 
    law.
    (d) Effect of Producing Original Check or Copy.--
        (1) In general.--If the indemnifying bank produces the original 
    check or a copy of the original check (including an image or a 
    substitute check) that accurately represents all of the information 
    on the front and back of the original check (as of the time the 
    original check was truncated) or is otherwise sufficient to 
    determine whether or not a claim is valid, the indemnifying bank 
    shall--
            (A) be liable under this section only for losses covered by 

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