19–010

Calendar No. 168

108TH CONGRESS REPORT " SENATE ! 1st Session 108–79

CHECK TRUNCATION ACT OF 2003

JUNE 25, 2003.—Ordered to be printed 

Mr. SHELBY, from the Committee on Banking, Housing, and Urban 

Affairs, submitted the following 

R E P O R T 

[To accompany S. 1334] 

[Including cost estimate of the Congressional Budget Office]

The Committee on Banking, Housing, and Urban Affairs, reported an original bill (S. 1334) 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, having considered the same, reports 

favorably thereon and recommends that the bill do pass. 

INTRODUCTION

On June 18, 2002, the Senate Committee on Banking, Housing, 

and Urban Affairs considered original legislation entitled ‘‘The 

Check Truncation Act of 2003’’, a bill to facilitate the use of check 

truncation and the electronic collection and return of checks. The 

Committee voted unanimously to report the bill, as amended by a 

managers’ amendment that was adopted by voice vote, to the Senate for consideration. 

PURPOSE OF THE LEGISLATION

Under current law, banks must physically present and return 

original checks to receive payment unless the bank has an agreement with another bank to do so by electronic means. The electronic process for transmitting information allows banks which 

have these voluntary agreements to stop, or truncate, the flow of 

paper checks. Some banks have such agreements and have been 

able to take advantage of electronic processing using advanced imaging technology. However, since there are over fifteen thousand 

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banks, thrifts, and credit unions, it is extremely difficult to obtain 

electronic agreements on a large scale, which has hampered the industry’s ability to achieve substantial further improvements in the 

check collection and return process. As a result, billions of checks 

continue to be either trucked or flown across the country to complete the clearing process. Given the availability of inexpensive 

electronic transmissions media, this enormous dependence on 

ground and air transportation systems makes very little sense. The 

terrorist attacks on September 11, 2001, underscored the importance of increasing flexibility in the payment system. Truncation 

could be used to make the process less expensive over the long 

term. While the bank must make an initial technology investment, 

the bank saves money on processing and transportation of paper 

checks. 

This bill is designed to facilitate check truncation without requiring banks to fully convert to an electronic process on either end of 

the clearing process. The primary change in current law is that 

banks could use electronics to streamline the check collection and 

return process even in cases in which they do not have electronic 

exchange agreements. For those banks which do not choose to use 

an electronic system, a new instrument or ‘‘substitute check’’ would 

be created from the electronic check image for delivery to that 

bank. The substitute check would be the legal equivalent of the 

original check and could be processed by receiving banks just as 

original paper checks are today. The substitute check, would be 

machine readable and would bear a magnetic-ink character (MICR) 

line. It would also include an image of the front and the back of 

the original check. The bill also imposes warranty and indemnity 

obligations, which are intended to compensate consumers, banks, 

and other processors for losses caused by the creation of the substitute check. Finally, the proposal also provides an expedited recredit provision for consumer accounts in cases where consumers 

make claims against their banks for improper charges to their accounts for substitute checks that are provided to the consumers. 

The bill would apply existing check law, including the Uniform 

Commercial Code (UCC) and the Federal Reserve Board’s Regulation CC, to substitute checks which would be legally equivalent to 

the original checks. 

The Federal Reserve Board believes that the proposed legislation 

may result in substantial payments system benefits. Banks could 

use substitute checks to collect and return checks more quickly and 

to reduce the banking industry’s reliance on the physical transportation of checks. Banks might also be able to reduce their infrastructure costs because their branch and ATM networks would no 

longer need to be tied geographically to their processing centers. 

Banks’ customers may also benefit from these infrastructure 

changes if they enable banks to offer broader deposit options, later 

cutoff hours, more timely information, and faster check collection 

and return. 

Credit unions have been using a truncation process since the 

mid-1970s. Of the checks written, credit unions process roughly 10 

percent. Of the credit unions that offer checking (share draft) accounts, 91 percent truncate checks, according to the Credit Union 

National Association (CUNA). For credit unions, generally the 

check proceeds through the clearing process to the point where it 

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is truncated or held by either the credit union or its corporate credit union or other processor. At that point, the information on the 

draft is stored electronically and printed on the member’s monthly 

statement. In some cases, electronic images of the draft are returned with the statement, but that is not required. 

HEARINGS

The Banking Committee’s action followed a hearing on the check 

truncation proposal. On April 3, 2003, the Committee heard testimony regarding the Federal Reserve Board proposal on Check 

Truncation. The witnesses testifying were Vice Chairman Roger 

Ferguson, Board of Governors of the Federal Reserve System; Ms. 

Lindsay Alexander, President and Chief Executive Officer of the 

NIH Federal Credit Union, representing the Credit Union National 

Association; Ms. Janell Mayo Duncan, Legislative and Regulatory 

Counsel from Consumers Union; and Mr. Danne Buchanan, Executive Vice President from Zions Bancorporation, representing the 

American Bankers Association, the Financial Services Roundtable, 

America’s Community Bankers, Independent Community Bankers 

of America and the Consumer Bankers Association. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title; table of contents 

The proposed Act is known as the Check Truncation Act of 2003. 

Section 2. Findings and purposes 

The purposes of this Act are 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. 

Section 3. Definitions 

This section defines the terms used in the Act including ‘‘indemnifying bank’’, ‘‘MICR line’’, ‘‘reconverting bank’’, ‘‘truncate’’ and 

‘‘substitute check’’. 

Section 4. General provisions governing substitute checks 

This section permits a person to send a substitute check without 

the agreement of the recipient and provides legal authority for fully 

negotiable substitute checks to the extent that a bank makes the 

substitute check warranties pursuant to the requirement as of Section 5. A substitute check that complies with the requirements of 

this section is the legal equivalent of the original check. Substitute 

checks will be subject to the Uniform Commercial Code, Reg. CC 

and other applicable Federal or State law. 

Section 5. Substitute check warranties 

The section creates warranties pertaining to substitute checks. A 

bank that transfers, presents or returns a substitute check and receives payment, warrants that: the check complies with the requirements for legal equivalence under Section 4 of the Act, and; 

the person that makes payment based on receipt of the substitute 

check will not receive another version of that check for payment.

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Section 6. Indemnity 

This section provides indemnities for banks or consumers who receive substitute checks. Any bank that creates a substitute check, 

and any bank that receives payment for transfer of either an electronic or paper version of that check indemnifies all subsequent 

persons who receive the substitute check and incur a loss due to 

the receipt of the substitute check instead of an original check. 

Damages are limited to the amount of the check (along with interest and attorney fees) unless the indemnifying bank breaches a 

warranty imposed under Section 5, at which point the claimant is 

entitled to receive the amount of the loss proximately caused by the 

breach. Comparative negligence can be counter-claimed to limit 

damages. 

This Act provides a comparative negligence standard for a person 

making an indemnity claim under this section or seeking damages 

under section 9. If the person’s losses resulted in whole or in part 

from that person’s own negligence or failure to act in good faith, 

then the damages due to that person are reduced in proportion to 

the amount of negligence or bad faith attributable to that person. 

These comparative negligence provisions are not intended to reduce the rights of a consumer or any other person under the UCC. 

Rather, these provisions are intended to clarify that the same principles that are currently incorporated in existing law, such as Regulation CC, the UCC, and common law, will continue to apply 

under the Act. The Congress anticipates that, in the absence of 

fraud, the comparative negligence provisions generally will not be 

applicable to consumer check users. 

Section 7. Expedited recredit for consumers 

This section provides that a consumer may make a claim for a 

recredit if he or she asserts that the bank charged the consumer’s 

account improperly or the consumer has a warranty claim with respect to the substitute check that was provided to the consumer. 

The consumer must show that he or she suffered a loss and that 

the production of the original or a better copy of the original is necessary to determine the validity of the claim. 

The consumer is required to make a claim for expedited recredit 

within 40 days after the financial institution transmits the periodic 

statement or receipt of the substitute check, whichever is later. 

Under extenuating circumstances, including extended travel or illness of the consumer, the financial institution shall extend the period for a reasonable amount of time. 

A bank must recredit a consumer’s account within one day of determining that the consumer’s claim is valid. If the bank has not 

determined the validity of the claim within 10 business days, the 

bank must recredit the lesser of the amount charged, or $2,500 

plus accrued interest, and any remaining amount must be recredited within 45 calendar days. 

A bank may delay the availability of the recredit on claims made 

on new accounts, on accounts that have repeated overdrafts, when 

a bank has a reasonable cause to believe that the claim is fraudulent, or in emergency situations. A bank that delays the availability of or reverses a recredit must notify the customer promptly. 

Notices of invalid claims, recredit and reversal of recredit must be 

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made to consumers no later than the day following the day on 

which the bank makes these determinations. 

Section 8. Expedited recredit procedures for banks 

Section 8 authorizes a bank to make a claim against an indemnifying bank for an expedited recredit if the claimant bank’s customer has made a claim for recredit; the claimant bank has suffered a loss; and production of the original check or a better copy 

of the original check is necessary to determine the validity of the 

charge. The claim must be made within 120 days of the transaction 

and the indemnifying bank has 10 business days to produce the 

original check or a better copy of the original check. The indemnifying bank must also recredit the amount to the claimant bank, 

or provide information as to why the indemnifying bank does not 

have to provide a recredit. A recredit does not abrogate other liabilities the indemnifying bank may incur. 

Section 9. Delays in an emergency 

This section permits banks to delay the time limits prescribed in 

the Act, if the payment system or telecommunications networks are 

interrupted by an emergency beyond the control of the bank, if the 

bank uses such diligence as circumstances require. 

Section 10. Measure of damages 

This section sets out that, except as provided in Section 6, damages are limited to the lesser of the amount of the check, or 

amount of loss suffered due to violation of the Act, plus interest 

and expenses. Comparative negligence applies, and this subsection 

does not affect the rights of the consumer under the UCC or other 

applicable Federal or State law.

Section 11. Statute of limitations and notice of claim 

This section requires that an action must be brought within one 

year of when the claimant learned, or should have learned, of the 

facts and circumstances giving rise to the action. Notice of claim 

must be given to the bank within 30 days of when a person has 

reason to know of the claim. A recredit claim under Section 7 constitutes notice for the purposes of this Section. 

Section 12. Consumer awareness 

The section requires that banks must provide customers that receive original checks or substitute checks with a brief informative 

notice for the first three years that the Act is in effect. This notice 

will make customers aware of the legal status of substitute checks 

and the framework for the recredit process. By three months prior 

to the effective date of this Act, the Fed will make available model 

forms of such notice that banks may use. 

Section 13. Effect on other law 

This section preempts any provision of Federal or State law only 

to the extent of the inconsistency. 

Section 14. Regulations 

This section authorizes the Federal Reserve Board to promulgate 

final regulations necessary for implementation of this Act. AlVerDate Jan 31 2003 00:37 Jun 29, 2003 Jkt 019006 PO 00000 Frm 00005 Fmt 6659 Sfmt 6602 E:\HR\OC\SR079.XXX SR079
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though the CTA gives the Board authority to adopt implementing 

regulations, the Committee recognizes that the Secretary of the 

Treasury has broad and long-standing authority to establish and 

administer the rules that govern payments disbursed by Treasury, 

including Treasury checks. The CTA does not affect the Secretary’s 

authority to regulate Treasury checks, to the extent those regulations are not inconsistent with this Act. The Treasury cannot adopt 

regulations, for example, that would condition the payment of a 

substitute Treasury check on the subsequent delivery of the original check. 

The Committee acknowledges the Department of Treasury’s concern about the legislation’s impact on its ability to continue complying with its ongoing responsibilities and court orders in the 

Cobell et al v. Norton et al case. Treasury is currently operating 

under a Court order that it retain, among other documents, original Treasury checks for the duration of the litigation unless, and 

until, relieved of that obligation by the Court. Noting that no judicial relief has yet been granted, Treasury views as problematic the 

Act’s provisions permitting banks, at their discretion, to retain only 

digital images of checks while destroying original paper checks. 

Section 15. Study and report on funds availability 

No later than 30 months following the effective date of this Act, 

the Federal Reserve will provide the Congress with an evaluation 

of the implementation and impact of this Act. The study will address issues that the Federal Reserve monitors as part of its regulatory responsibilities under the Expedited Funds Availability Act. 

Section 16. Evaluation and report by the Comptroller General 

The Comptroller General will also report on the implementation 

and administration of this Act, no later than five years after enactment. 

Section 17. Variation by agreement 

This section provides that only provisions of section 8 may be 

varied by the banks involved. That is, banks could contractually 

vary the interbank recredit provisions and only those provisions. 

Section 18. Effective date 

This Act shall become effective one year after the date of enactment. 

CHANGES IN EXISTING LAW

On June 18, 2003, the Committee unanimously approved a motion by Senator Shelby to waive the Cordon rule. Thus, in the opinion of the Committee, it is necessary to dispense with the requirement of section 12 of rule XXVI of the Standing Rules of the Senate 

in order to expedite the business of the Senate. 

REGULATORY IMPACT STATEMENT

In accordance with paragraph 11(b), rule XXVI, of the Standing 

Rules of the Senate, the Committee makes the following statement 

concerning the regulatory impact of the bill.

The Act establishes a framework which would enable banks to 

achieve many of the benefits of electronic check processing without 

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mandating that any bank receive checks in electronic form. Banks 

would be able to truncate, or stop, the flow of checks, process them 

electronically, and create machine-readable substitute checks, if 

necessary, that would be the legal equivalent of the original checks. 

Substitute checks could be processed by receiving banks just as 

original paper checks are today, thereby not significantly affecting 

the operations of banks that do not wish to participate in the electronic collection or return of checks. By permitting choice of processing method, the Act represents regulatory reform and should result in reduced costs to the financial services industry and consumers over the long term. 

Congress intends this Act to leave a bank and its customer in 

substantially the same legal and practical position regardless of 

whether or not a substitute check is used. The Act’s warranty, indemnity, and expedited recredit provisions, which provide rights to 

recipients of substitute checks in the event that they incur a loss 

due to the receipt of a substitute check instead of the original 

check, accomplish this purpose. 

The Act will improve the efficiency of the payments system by 

enabling banks to expand the use of electronics in the collection 

and return of checks, reducing the industry’s reliance on transportation to move checks across the nation. Had the provisions of this 

proposed Act been in effect when air traffic came to a standstill due 

to the terrorist attacks on September 11, 2001, banks would have 

been able to reduce the impact of the disruption in air transportation on the check collection system. Because the Act seeks to provide choice of clearing mechanism and update the clearing process, 

the Committee believes that this legislation will have a favorable 

regulatory impact. 

COST OF LEGISLATION

Section 11(b) of rule XXVI of the Standing Rules of the Senate, 

and Section 403 of the Congressional Budget Impoundment and 

Control Act, require that each committee report on a bill contain 

a statement estimating the cost of the proposed legislation. The 

Congressional Budget Office has provided the following cost estimate and estimate of costs of private-sector mandates.

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, June 24, 2003. 

Hon. RICHARD C. SHELBY,

Chairman, Committee on Banking, Housing, and Urban Affairs, 

U.S. Senate, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for the Check Truncation Act of 

2003. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contacts are Mark Booth (for revenues), Matthew Pickford (for spending), and Victoria Heid Hall and 

Greg Waring (for the state and local government impact). 

Sincerely, 

DOUGLAS HOLTZ-EAKIN, Director. 

Enclosure.

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Check Truncation Act of 2003

The Check Truncation Act of 2003 would alter the process of 

clearing checks. It would allow a depository institution that has a 

check presented to it to choose on its own to provide to the paying 

depository institution a paper copy of the check, called a ‘‘substitute check,’’ rather than the original check itself. The substitute 

check would be the legal equivalent of the original check. Under 

current law, the depository institution presented with the check 

must transmit the original check to the paying institution for settlement, unless the two institutions have entered into an agreement for transmission of a paper copy of the check or the electronic 

information from the check. In addition, the bill would require the 

Board of Governors of the Federal Reserve System and the General 

Accounting Office (GAO) to conduct studies on aspects of the checkclearing process and the implementation of this legislation. 

CBO estimates that enacting the bill would have a negligible effect on federal revenues through its effects on the Federal Reserve’s 

income and expenses from its check-processing operations and its 

expenses in producing the mandated study. The Federal Reserve 

remits its net income to the Treasury, and those payments are classified as governmental receipts, or revenues, in the federal budget. 

Any additional income or costs to the Federal Reserve, therefore, 

can affect the federal budget. By reducing the transportation costs 

associated with clearing checks, the bill would reduce the costs that 

the Federal Reserve incurs in providing check-processing services 

to depository institutions. It would change the Federal Reserve’s 

costs of processing checks in other ways, as well. However, the Federal Reserve is required by law to charge the depository institutions for its check-processing services. Based on information provided by the Board of Governors of the Federal Reserve System, 

CBO estimates that any reductions to the Federal Reserve’s costs 

of check clearing as a result of the bill would result in a nearly 

equal reduction in its income. Furthermore, CBO estimates that 

any additional expenses incurred by the Federal Reserve in order 

to produce the mandated report would be negligible. As a result, 

CBO estimates that the bill would have a negligible effect on the 

Federal Reserve’s net income and, hence, on federal revenues. 

In addition to mandating that the Federal Reserve produce a 

study, the legislation would require GAO to report on the implementation of this bill, including gains in economic efficiency and 

benefits to consumers and financial institutions made possible from 

check truncation. Based on information from GAO, CBO expects 

that new reporting requirements would cost less than $500,000, assuming the availability of appropriated funds. 

The bill provides that a substitute check would be the legal 

equivalent of the original check under any provision of federal or 

state law. It would thereby preempt state laws, including the Uniform Commercial Code, to the extent that such laws require an 

original check. Such a preemption of state law is a mandate under 

the Unfunded Mandates Reform Act (UMRA). CBO estimates that 

enacting this mandate would impose no costs on state, local, or 

tribal governments and that its cost, therefore, would not exceed 

the threshold established in UMRA ($59 million in 2003, adjusted 

for inflation). The bill contains no new private-sector mandates as 

defined in UMRA. 

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On May 30, 2003, CBO transmitted a cost estimate for H.R. 

1474, the Check Clearing for the 21st Century Act, as reported by 

the House Committee on Financial Services. CBO estimated that, 

like the Check Truncation Act of 2003, H.R. 1474 also would have 

a negligible effect on the federal budget. 

The CBO staff contacts for this estimate are Mark Booth (for federal revenues), Matthew Pickford (for federal spending), and Victoria Heid Hall and Greg Waring (for the state and local government impact). This estimate was approved by G. Thomas Woodward, Assistant Director for Tax Analysis, and Peter H. Fontaine, 

Deputy Assistant Director for Budget Analysis.

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