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[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1474 Enrolled Bill (ENR)]

        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 
        the indemnity that are incurred up to the time that the 
        original check or copy is provided to the indemnified party; 
        and
            (B) have a right to the return of any funds it has paid 
        under the indemnity in excess of those losses.
        (2) Coordination of indemnity with implied warranty.--The 
    production of the original check, a substitute check, or a copy 
    under paragraph (1) by an indemnifying bank shall not absolve the 
    bank from any liability on a warranty established under this Act or 
    any other provision of law.
    (e) Subrogation of Rights.--
        (1) In general.--Each indemnifying bank shall be subrogated to 
    the rights of any indemnified party to the extent of the indemnity.
        (2) Recovery under warranty.--A bank that indemnifies a party 
    under this section may attempt to recover from another party based 
    on a warranty or other claim.
        (3) Duty of indemnified party.--Each indemnified party shall 
    have a duty to comply with all reasonable requests for assistance 
    from an indemnifying bank in connection with any claim the 
    indemnifying bank brings against a warrantor or other party related 
    to a check that forms the basis for the indemnification.

SEC. 7. EXPEDITED RECREDIT FOR CONSUMERS.

    (a) Recredit Claims.--
        (1) In general.--A consumer may make a claim for expedited 
    recredit from the bank that holds the account of the consumer with 
    respect to a substitute check, if the consumer asserts in good 
    faith that--
            (A) the bank charged the consumer's account for a 
        substitute check that was provided to the consumer;
            (B) either--
                (i) the check was not properly charged to the 
            consumer's account; or
                (ii) the consumer has a warranty claim with respect to 
            such substitute check;
            (C) the consumer suffered a resulting loss; and
            (D) the production of the original check or a better copy 
        of the original check is necessary to determine the validity of 
        any claim described in subparagraph (B).
        (2) 40-day period.--Any claim under paragraph (1) with respect 
    to a consumer account may be submitted by a consumer before the end 
    of the 40-day period beginning on the later of--
            (A) the date on which the financial institution mails or 
        delivers, by a means agreed to by the consumer, the periodic 
        statement of account for such account which contains 
        information concerning the transaction giving rise to the 
        claim; or
            (B) the date on which the substitute check is made 
        available to the consumer.
        (3) Extension under extenuating circumstances.--If the ability 
    of the consumer to submit the claim within the 40-day period under 
    paragraph (2) is delayed due to extenuating circumstances, 
    including extended travel or the illness of the consumer, the 40-
    day period shall be extended by a reasonable amount of time.
    (b) Procedures for Claims.--
        (1) In general.--To make a claim for an expedited recredit 
    under subsection (a) with respect to a substitute check, the 
    consumer shall provide to the bank that holds the account of such 
    consumer--
            (A) a description of the claim, including an explanation 
        of--
                (i) why the substitute check was not properly charged 
            to the consumer's account; or
                (ii) the warranty claim with respect to such check;
            (B) a statement that the consumer suffered a loss and an 
        estimate of the amount of the loss;
            (C) the reason why production of the original check or a 
        better copy of the original check is necessary to determine the 
        validity of the charge to the consumer's account or the 
        warranty claim; and
            (D) sufficient information to identify the substitute check 
        and to investigate the claim.
        (2) Claim in writing.--
            (A) In general.--The bank holding the consumer account that 
        is the subject of a claim by the consumer under subsection (a) 
        may, in the discretion of the bank, require the consumer to 
        submit the information required under paragraph (1) in writing.
            (B) Means of submission.--A bank that requires a submission 
        of information under subparagraph (A) may permit the consumer 
        to make the submission electronically, if the consumer has 
        agreed to communicate with the bank in that manner.
    (c) Recredit to Consumer.--
        (1) Conditions for recredit.--The bank shall recredit a 
    consumer account in accordance with paragraph (2) for the amount of 
    a substitute check that was charged against the consumer account 
    if--
            (A) a consumer submits a claim to the bank with respect to 
        that substitute check that meets the requirement of subsection 
        (b); and
            (B) the bank has not--
                (i) provided to the consumer--

                    (I) the original check; or
                    (II) 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 at which the original 
                check was truncated; and

                (ii) demonstrated to the consumer that the substitute 
            check was properly charged to the consumer account.
        (2) Timing of recredit.--
            (A) In general.--The bank shall recredit the consumer's 
        account for the amount described in paragraph (1) no later than 
        the end of the business day following the business day on which 
        the bank determines the consumer's claim is valid.
            (B) Recredit pending investigation.--If the bank has not 
        yet determined that the consumer's claim is valid before the 
        end of the 10th business day after the business day on which 
        the consumer submitted the claim, the bank shall recredit the 
        consumer's account for--
                (i) the lesser of the amount of the substitute check 
            that was charged against the consumer account, or $2,500, 
            together with interest if the account is an interest-
            bearing account, no later than the end of such 10th 
            business day; and
                (ii) the remaining amount of the substitute check that 
            was charged against the consumer account, if any, together 
            with interest if the account is an interest-bearing 
            account, not later than the 45th calendar day following the 
            business day on which the consumer submits the claim.
    (d) Availability of Recredit.--
        (1) Next business day availability.--Except as provided in 
    paragraph (2), a bank that provides a recredit to a consumer 
    account under subsection (c) shall make the recredited funds 
    available for withdrawal by the consumer by the start of the next 
    business day after the business day on which the bank recredits the 
    consumer's account under subsection (c).
        (2) Safeguard exceptions.--A bank may delay availability to a 
    consumer of a recredit provided under subsection (c)(2)(B)(i) until 
    the start of either the business day following the business day on 
    which the bank determines that the consumer's claim is valid or the 
    45th calendar day following the business day on which the consumer 
    submits a claim for such recredit in accordance with subsection 
    (b), whichever is earlier, in any of the following circumstances:
            (A) New accounts.--The claim is made during the 30-day 
        period beginning on the business day the consumer account was 
        established.
            (B) Repeated overdrafts.--Without regard to the charge that 
        is the subject of the claim for which the recredit was made--
                (i) on 6 or more business days during the 6-month 
            period ending on the date on which the consumer submits 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
                (ii) on 2 or more business days during such 6-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.
            (C) Prevention of fraud losses.--The bank has reasonable 
        cause to believe that the claim is fraudulent, based on facts 
        (other than the fact that the check in question or the consumer 
        is of a particular class) that would cause a well-grounded 
        belief in the mind of a reasonable person that the claim is 
        fraudulent.
        (3) Overdraft fees.--No bank that, in accordance with paragraph 
    (2), delays the availability of a recredit under subsection (c) to 
    any consumer account may impose any overdraft fees with respect to 
    drafts drawn by the consumer on such recredited amount before the 
    end of the 5-day period beginning on the date notice of the delay 
    in the availability of such amount is sent by the bank to the 
    consumer.
    (e) Reversal of Recredit.--A bank may reverse a recredit to a 
consumer account if the bank--
        (1) determines that a substitute check for which the bank 
    recredited a consumer account under subsection (c) was in fact 
    properly charged to the consumer account; and
        (2) notifies the consumer in accordance with subsection (f)(3).
    (f) Notice to Consumer.--
        (1) Notice if consumer claim not valid.--If a bank determines 
    that a substitute check subject to the consumer's claim was in fact 
    properly charged to the consumer's account, the bank shall send to 
    the consumer, no later than the business day following the business 
    day on which the bank makes a determination--
            (A) the original check or a copy of the original check 
        (including an image or a substitute check) that--
                (i) 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
                (ii) is otherwise sufficient to determine whether or 
            not the consumer's claim is valid; and
            (B) an explanation of the basis for the determination by 
        the bank that the substitute check was properly charged, 
        including a statement that the consumer may request copies of 
        any information or documents on which the bank relied in making 
        the determination.
        (2) Notice of recredit.--If a bank recredits a consumer account 
    under subsection (c), the bank shall send to the consumer, no later 
    than the business day following the business day on which the bank 
    makes the recredit, a notice of--
            (A) the amount of the recredit; and
            (B) the date the recredited funds will be available for 
        withdrawal.
        (3) Notice of reversal of recredit.--In addition to the notice 
    required under paragraph (1), if a bank reverses a recredited 
    amount under subsection (e), the bank shall send to the consumer, 
    no later than the business day following the business day on which 
    the bank reverses the recredit, a notice of--
            (A) the amount of the reversal; and
            (B) the date the recredit was reversed.
        (4) Mode of delivery.--A notice described in this subsection 
    shall be delivered by United States mail or by any other means 
    through which the consumer has agreed to receive account 
    information.
    (g) 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 law, such as a claim for wrongful dishonor under 
the Uniform Commercial Code, or from liability for additional damages 
under section 6 or 10.
    (h) Clarification Concerning Consumer Possession.--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.
    (i) Scope of Application.--This section shall only apply to 
customers who are consumers.

SEC. 8. EXPEDITED RECREDIT PROCEDURES FOR BANKS.

    (a) Recredit Claims.--
        (1) In general.--A bank may make a claim against an 
    indemnifying bank for expedited recredit for which that bank is 
    indemnified if--
            (A) the claimant bank (or a bank that the claimant bank has 
        indemnified) has received a claim for expedited recredit from a 
        consumer under section 7 with respect to a substitute check or 
        would have been subject to such a claim had the consumer's 
        account been charged;
            (B) the claimant bank has suffered a resulting loss or is 
        obligated to recredit a consumer account under section 7 with 
        respect to such substitute check; and
            (C) production of the original check, another substitute 
        check, or a better copy of the original check is necessary to 
        determine the validity of the charge to the customer account or 
        any warranty claim connected with such substitute check.
        (2) 120-day period.--Any claim under paragraph (1) may be 
    submitted by the claimant bank to an indemnifying bank before the 
    end of the 120-day period beginning on the date of the transaction 
    that gave rise to the claim.
    (b) Procedures for Claims.--
        (1) In general.--To make a claim under subsection (a) for an 
    expedited recredit relating to a substitute check, the claimant 
    bank shall send to the indemnifying bank--
            (A) a description of--
                (i) the claim, including an explanation of why the 
            substitute check cannot be properly charged to the consumer 
            account; or
                (ii) the warranty claim;
            (B) a statement that the claimant bank has suffered a loss 
        or is obligated to recredit the consumer's account under 
        section 7, together with an estimate of the amount of the loss 
        or recredit;
            (C) the reason why production of the original check, 
        another substitute check, or a better copy of the original 
        check is necessary to determine the validity of the charge to 
        the consumer account or the warranty claim; and
            (D) information sufficient for the indemnifying bank to 
        identify the substitute check and to investigate the claim.
        (2) Requirements relating to copies of substitute checks.--If 
    the information submitted by a claimant bank pursuant to paragraph 
    (1) in connection with a claim for an expedited recredit includes a 
    copy of any substitute check for which any such claim is made, the 
    claimant bank shall take reasonable steps to ensure that any such 
    copy cannot be--
            (A) mistaken for the legal equivalent of the check under 
        section 4(b); or
            (B) sent or handled by any bank, including the indemnifying 
        bank, as a forward collection or returned check.
        (3) Claim in writing.--
            (A) In general.--An indemnifying bank may, in the 
        discretion of the bank, require the claimant bank to submit the 
        information required by paragraph (1) in writing, including a 
        copy of the written or electronically submitted claim, if any, 
        that the consumer provided in accordance with section 7(b).
            (B) Means of submission.--An indemnifying bank that 
        requires a submission of information under subparagraph (A) may 
        permit the claimant bank to make the submission electronically, 
        if the claimant bank has agreed to communicate with the 
        indemnifying bank in that manner.
    (c) Recredit by Indemnifying Bank.--
        (1) Prompt action required.--No later than 10 business days 
    after the business day on which an indemnifying bank receives a 
    claim under subsection (a) from a claimant bank with respect to a 
    substitute check, the indemnifying bank shall--
            (A) provide, to the claimant bank, the original check (with 
        respect to such substitute check) or a copy of the original 
        check (including an image or a substitute check) that--
                (i) 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
                (ii) is otherwise sufficient to determine the bank's 
            claim is not valid; and
            (B) recredit the claimant bank for the amount of the claim 
        up to the amount of the substitute check, plus interest if 
        applicable; or
            (C) provide information to the claimant bank as to why the 
        indemnifying bank is not obligated to comply with subparagraph 
        (A) or (B).
        (2) Recredit does not abrogate other liabilities.--Providing a 
    recredit under this subsection to a claimant bank with respect to a 
    substitute check shall not absolve the indemnifying bank from 
    liability for claims brought under any other law or from additional 
    damages under section 6 or 10 with respect to such check.
        (3) Refund to indemnifying bank.--If a claimant bank reverses, 
    in accordance with section 7(e), a recredit previously made to a 
    consumer account under section 7(c), or otherwise receives a credit 
    or recredit with regard to such substitute check, the claimant bank 
    shall promptly refund to any indemnifying bank any amount 
    previously advanced by the indemnifying bank in connection with 
    such substitute check.
    (d) Production of Original Check or a Sufficient Copy Governed by 
Section 6(d).--If the indemnifying bank provides the claimant bank with 
the original check or a copy of the original check (including an image 
or a substitute check) under subsection (c)(1)(A), section 6(d) shall 
govern any right of the indemnifying bank to any repayment of any funds 
the indemnifying bank has recredited to the claimant bank pursuant to 
subsection (c).

SEC. 9. DELAYS IN AN EMERGENCY.

    A delay by a bank beyond the time limits prescribed or permitted by 
this Act shall be 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 a bank and if the bank uses such 
diligence as the circumstances require.

SEC. 10. MEASURE OF DAMAGES.

    (a) Liability.--
        (1) In general.--Except as provided in section 6, any person 
    who, in connection with a substitute check, breaches any warranty 
    under this Act or fails to comply with any requirement imposed by, 
    or regulation prescribed pursuant to, this Act with respect to any 
    other person shall be liable to such person in an amount equal to 
    the sum of--
            (A) the lesser of--
                (i) the amount of the loss suffered by the other person 
            as a result of the breach or failure; or
                (ii) 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) Offset of recredits.--The amount of damages any person 
    receives under paragraph (1), if any, shall be reduced by the 
    amount, if any, that the claimant receives and retains as a 
    recredit under section 7 or 8.
    (b) Comparative Negligence.--
        (1) In general.--If a person incurs damages that resulted in 
    whole or in part from the negligence or failure of that person to 
    act in good faith, then the amount of any liability due to that 
    person under subsection (a) shall be reduced in proportion to the 
    amount of negligence or bad faith attributable to that person.
        (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.

SEC. 11. STATUTE OF LIMITATIONS AND NOTICE OF CLAIM.

    (a) Actions Under This Act.--
        (1) In general.--An action to enforce a claim under this Act 
    may be brought in any United States district court, or in any other 
    court of competent jurisdiction, before the end of the 1-year 
    period beginning on the date the cause of action accrues.
        (2) Accrual.--A cause of action accrues as of the date the 
    injured party first learns, or by which such person reasonably 
    should have learned, of the facts and circumstances giving rise to 
    the cause of action.
    (b) Discharge of Claims.--Except as provided in subsection (c), 
unless a person gives notice of a claim to the indemnifying or 
warranting bank within 30 days after the person has reason to know of 
the claim and the identity of the indemnifying or warranting bank, the 
indemnifying or warranting bank is discharged from liability in an 
action to enforce a claim under this Act to the extent of any loss 
caused by the delay in giving notice of the claim.
    (c) Notice of Claim by Consumer.--A timely claim by a consumer 
under section 7 for expedited recredit constitutes timely notice of a 
claim by the consumer for purposes of subsection (b).

SEC. 12. CONSUMER AWARENESS.

    (a) In General.--Each bank shall provide, in accordance with 
subsection (b), a brief notice about substitute checks that describes--
        (1) how a substitute check is the legal equivalent of an 
    original check for all purposes, including any provision of any 
    Federal or State law, and for all persons, if the substitute 
    check--
            (A) accurately represents all of the information on the 
        front and back of the original check as of the time at which 
        the original check was truncated; and
            (B) bears the legend: ``This is a legal copy of your check. 
        You can use it in the same way you would use the original 
        check.''; and
        (2) the consumer recredit rights established under section 7 
    when a consumer believes in good faith that a substitute check was 
    not properly charged to the account of the consumer.
    (b) Distribution.--
        (1) Existing customers.--With respect to consumers who are 
    customers of a bank on the effective date of this Act and who 
    receive original checks or substitute checks, a bank shall provide 
    the notice described in subsection (a) to each such consumer no 
    later than the first regularly scheduled communication with the 
    consumer after the effective date of this Act.
        (2) New account holders.--A bank shall provide the notice 
    described in subsection (a) to each consumer who will receive 
    original checks or substitute checks, other than existing customers 
    referred to in paragraph (1), at the time at which the customer 
    relationship is initiated.
        (3) Mode of delivery.--A bank may send the notices required by 
    this subsection by United States mail or by any other means through 
    which the consumer has agreed to receive account information.
        (4) Consumers who request copies of checks.--Notice shall be 
    provided to each consumer of the bank that requests a copy of a 
    check and receives a substitute check, at the time of the request.
    (c) Model Language.--
        (1) In general.--Before the end of the 9-month period beginning 
    on the date of the enactment of this Act, the Board shall publish 
    model forms and clauses that a bank may use to describe each of the 
    elements required by subsection (a).
        (2) Safe harbor.--
            (A) In general.--A bank shall be treated as being in 
        compliance with the requirements of subsection (a) if the 
        bank's substitute check notice uses a model form or clause 
        published by the Board and such model form or clause accurately 
        describes the bank's policies and practices.
            (B) Deletion or rearrangement.--A bank may delete any 
        information in the model form or clause that is not required by 
        this Act or rearrange the format.
        (3) Use of model language not required.--This section shall not 
    be construed as requiring any bank to use a model form or clause 
    that the Board prepares under this subsection.

SEC. 13. EFFECT ON OTHER LAW.

     This Act shall supersede any provision of Federal or State law, 
including the Uniform Commercial Code, that is inconsistent with this 
Act, but only to the extent of the inconsistency.

SEC. 14. VARIATION BY AGREEMENT.

    (a) Section 8.--Any provision of section 8 may be varied by 
agreement of the banks involved.
    (b) No Other Provisions May Be Varied.--Except as provided in 
subsection (a), no provision of this Act may be varied by agreement of 
any person or persons.

SEC. 15. REGULATIONS.

    The Board may prescribe such regulations as the Board determines to 
be necessary to implement, prevent circumvention or evasion of, or 
facilitate compliance with the provisions of this Act.

SEC. 16. STUDY AND REPORT ON FUNDS AVAILABILITY.

    (a) Study.--In order to evaluate the implementation and the impact 
of this Act, the Board shall conduct a study of--
        (1) the percentage of total checks cleared in which the paper 
    check is not returned to the paying bank;
        (2) the extent to which banks make funds available to consumers 
    for local and nonlocal checks prior to the expiration of maximum 
    hold periods;
        (3) the length of time within which depositary banks learn of 
    the nonpayment of local and nonlocal checks;
        (4) the increase or decrease in check-related losses over the 
    study period; and
        (5) the appropriateness of the time periods and amount limits 
    applicable under sections 603 and 604 of the Expedited Funds 
    Availability Act, as in effect on the date of enactment of this 
    Act.
    (b) Report to Congress.--Before the end of the 30-month period 
beginning on the effective date of this Act, the Board shall submit a 
report to the Congress containing the results of the study conducted 
under this section, together with recommendations for legislative 
action.

SEC. 17. STATISTICAL REPORTING OF COSTS AND REVENUES FOR TRANSPORTING 
              CHECKS BETWEEN RESERVE BANKS.

    In the annual report prepared by the Board for the first full 
calendar year after the date of enactment of this Act and in each of 
the 9 subsequent annual reports by the Board, the Board shall include 
the amount of operating costs attributable to, and an estimate of the 
Federal Reserve banks' imputed revenues derived from, the 
transportation of commercial checks between Federal Reserve bank check 
processing centers.

SEC. 18. EVALUATION AND REPORT BY THE COMPTROLLER GENERAL.

    (a) Study.--During the 5-year period beginning on the date of the 
enactment of this Act, the Comptroller General of the United States 
shall evaluate the implementation and administration of this Act, 
including--
        (1) an estimate of the gains in economic efficiency made 
    possible from check truncation;
        (2) an evaluation of the benefits accruing to consumers and 
    financial institutions from reduced transportation costs, longer 
    hours for accepting deposits for credit within 1 business day, the 
    impact of fraud losses, and an estimate of consumers' share of the 
    total benefits derived from this Act; and
        (3) an assessment of consumer acceptance of the check 
    truncation process resulting from this Act, as well as any new 
    costs incurred by consumers who had their original checks returned 
    with their regular monthly statements prior to the date of 
    enactment of this Act.
    (b) Report to Congress.--Before the end of the 5-year period 
referred to in subsection (a), the Comptroller General shall submit a 
report to the Congress containing the findings and conclusions of the 
Comptroller General in connection with the evaluation conducted 
pursuant to subsection (a), together with such recommendations for 
legislative and administrative action as the Comptroller General may 
determine to be appropriate.

SEC. 19. DEPOSITARY SERVICES EFFICIENCY AND COST REDUCTION.

    (a) Findings.--The Congress finds as follows:
        (1) The Secretary of the Treasury has long compensated 
    financial institutions for various critical depositary and 
    financial agency services provided for or on behalf of the United 
    States by--
            (A) placing large balances, commonly referred to as 
        ``compensating balances'', on deposit at such institutions; and
            (B) using imputed interest on such funds to offset charges 
        for the various depositary and financial agency services 
        provided to or on behalf of the Government.
        (2) As a result of sharp declines in interest rates over the 
    last few years to record low levels, or the public debt outstanding 
    reaching the statutory debt limit, the Department of the Treasury 
    often has had to dramatically increase or decrease the size of the 
    compensating balances on deposit at these financial institutions.
        (3) The fluctuation of the compensating balances, and the 
    necessary pledging of collateral by financial institutions to 
    secure the value of compensating balances placed with those 
    institutions, have created unintended financial uncertainty for the 
    Secretary of the Treasury and for the management by financial 
    institutions of their cash and securities.
        (4) It is imperative that the process for providing financial 
    services to the Government be transparent, and provide the 
    information necessary for the Congress to effectively exercise its 
    appropriation and oversight responsibilities.
        (5) The use of direct payment for services rendered would 
    strengthen cash and debt management responsibilities of the 
    Secretary of the Treasury because the Secretary would no longer 
    need to dramatically increase or decrease the level of such 
    balances when interest rates fluctuate sharply or when the public 
    debt outstanding reaches the statutory debt limit.
        (6) An alternative to the use of compensating balances, such as 
    direct payments to financial institutions, would ensure that 
    payments to financial institutions for the services they provide 
    would be made in a more predictable manner and could result in cost 
    savings.
        (7) Limiting the use of compensating balances could result in a 
    more direct and cost-efficient method of obtaining those services 
    currently provided under compensating balance arrangements.
        (8) A transition from the use of compensating balances to 
    another compensation method must be carefully managed to prevent 
    higher-than-necessary transitional costs and enable participating 
    financial institutions to modify their planned investment of cash 
    and securities.
    (b) Authorization of Appropriations For Services Rendered by 
Depositaries and Financial Agencies of the United States.--There are 
authorized to be appropriated for fiscal years beginning after fiscal 
year 2003 to the Secretary of the Treasury such sums as may be 
necessary for reimbursing financial institutions in their capacity as 
depositaries and financial agents of the United States for all services 
required or directed by the Secretary of the Treasury, or a designee of 
the Secretary, to be performed by such financial institutions on behalf 
of the Secretary of the Treasury or another Federal agency, including 
services rendered before fiscal year 2004.
    (c) Orderly Transition.--
        (1) In general.--As appropriations authorized in subsection (b) 
    become available, the Secretary of the Treasury shall promptly 
    begin the process of phasing in the use of the appropriations to 
    pay financial institutions serving as depositaries and financial 
    agents of the United States, and transitioning from the use of 
    compensating balances to fund these services.
        (2) Post-transition use limited to extraordinary 
    circumstances.--
            (A) In general.--Following the transition to the use of the 
        appropriations authorized in subsection (b), the Secretary of 
        the Treasury may use the compensating balances to pay financial 
        institutions serving as depositaries and financial agents of 
        the United States only in extraordinary situations where the 
        Secretary determines that they are needed to ensure the fiscal 
        operations of the Government continue to function in an 
        efficient and effective manner.
            (B) Report.--Any use of compensating balances pursuant to 
        subparagraph (A) shall promptly be reported by the Secretary of 
        the Treasury to the Committee on Financial Services of the 
        House of Representatives and the Committee on Banking, Housing, 
        and Urban Affairs of the Senate.
        (3) Requirements for orderly transition.--In transitioning to 
    the use of the appropriations authorized in subsection (b), the 
    Secretary of the Treasury shall take such steps as may be 
    appropriate to--
            (A) prevent abrupt financial disruption to the functions of 
        the Department of the Treasury or to the participating 
        financial institutions; and
            (B) maintain adequate accounting and management controls to 
        ensure that payments to financial institutions for their 
        banking services provided to the Government as depositaries and 
        financial agents are accurate and that the arrangements last no 
        longer than is necessary.
        (4) Reports required.--
            (A) Annual report.--
                (i) In general.--For each fiscal year, the Secretary of 
            the Treasury shall submit a report to the Congress on the 
            use of compensating balances and on the use of 
            appropriations authorized in subsection (b) during that 
            fiscal year.
                (ii) Inclusion in budget.--The report required under 
            clause (i) may be submitted as part of the budget submitted 
            by the President under section 1105 of title 31, United 
            States Code, for the following fiscal year and if so, the 
            report shall be submitted concurrently to the Committee on 
            Financial Services of the House of Representatives and the 
            Committee on Banking, Housing, and Urban Affairs of the 
            Senate.
            (B) Final report following transition.--
                (i) In general.--Following completion of the transition 
            from the use of compensating balances to the use of the 
            appropriations authorized in subsection (b) to pay 
            financial institutions for their services as depositaries 
            and financial agents of the United States, the Secretary of 
            the Treasury shall submit a report on the transition to the 
            Committee on Financial Services of the House of 
            Representatives and the Committee on Banking, Housing, and 
            Urban Affairs of the Senate.
                (ii) Contents of report.--The report submitted under 
            clause (i) shall include a detailed analysis of--

                    (I) the cost of transition;
                    (II) the direct costs of the services being paid 
                from the appropriations authorized in subsection (b); 
                and
                    (III) the benefits realized from the use of direct 
                payment for such services, rather than the use of 
                compensating balance arrangements.

    (d) Technical Amendment.--The second undesignated paragraph of 
section 16 of the Federal Reserve Act (12 U.S.C. 412) is amended--
        (1) in the third sentence, by inserting ``or any other asset of 
    a Federal reserve bank'' before the period at the end; and
        (2) in the last sentence, by inserting ``, or are otherwise 
    held by or on behalf of,'' after ``in the vaults of''.
    (e) Effective Date.--Notwithstanding section 20, this section shall 
take effect on the date of the enactment of this Act.

SEC. 20. EFFECTIVE DATE.

    This Act shall take effect at the end of the 12-month period 
beginning on the date of the enactment of this Act, except as otherwise 
specifically provided in this Act.

                               Speaker of the House of Representatives.

                            Vice President of the United States and    
                                               President of the Senate.
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