Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; FINDINGS; PURPOSES.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Check Clearing for the 21st Century Act’’ or the ‘‘Check
21 Act’’.
(b) 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 Sys-
tem 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, in-
cluding 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 au-
thority by the Board superseded any State law,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 today
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 estab-
lishing such a process.
(c) PURPOSES.—The purposes of this Act are as fol-
lows:
(1) To facilitate check truncation by author-
izing substitute checks.
(2) To foster innovation in the check collection
system without mandating receipt of checks in elec-
tronic form.
(3) To improve the overall efficiency of the Na-
tion’s payments system.
SEC. 2. 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 per-
son 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 Expe-
dited Funds Availability Act).
(3) BANKING TERMS.—
(A) CLAIMANT BANK.—The term ‘‘claim-
ant bank’’ means a bank that submits a claim
for recredit under section 7 to an indemnifying
bank.
(B) COLLECTING BANK.—The term ‘‘col-
lecting bank’’ means any bank handling a check
for collection except the paying bank.
(C) DEPOSITARY
BANK.—The term ‘‘de-
positary 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 trans-
ferred for deposit in an account at such
bank, even if the check is physically re-
ceived and indorsed first by another bank.
(D) PAYING
BANK.—The term ‘‘paying
bank’’ means—
(i) the bank by which a check is pay-
able, 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.
(E) RETURNING BANK.—
(i) IN GENERAL.—The term ‘‘return-
ing bank’’ means a bank (other than the
paying or depositary bank) handling a re-
turned 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 Uni-
form 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 han-
dled 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 con-
sumer account; or
(B) with respect to a check handled for re-
turn, deposits the check into, or cashes the
check against, a consumer account.
(8) CONSUMER
ACCOUNT.—The term ‘‘con-
sumer 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 ‘‘for-
ward collection’’ means the transfer by a bank of a
check to a collecting bank for settlement or the pay-
ing bank for payment.
(11) INDEMNIFYING BANK.—The term ‘‘indem-
nifying bank’’ means a bank that is providing an in-
demnity under section 5 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 num-
ber, account number, check number, check amount,
and other information, that are printed near the bot-
tom 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 com-
pany, partnership, government unit or instrumen-
tality, trust, or any other entity or organization.
(15) RECONVERTING BANK.—The term ‘‘recon-
verting 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 ‘‘sub-
stitute 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 gen-
erally applicable industry standards for sub-
stitute checks to facilitate the processing of
substitute checks;
(C) conforms, in paper stock, dimension,
and otherwise, with generally applicable indus-
try 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)(3) 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 subse-
quent 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 re-
quires otherwise, the terms not defined in this sec-
tion shall have the same meanings as in the Uniform
Commercial Code.
SEC. 3. GENERAL PROVISIONS GOVERNING SUBSTITUTE
CHECKS.
(a) NO AGREEMENT REQUIRED.—A person may de-
posit, 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 4 with respect
to such substitute check.
(b) LEGAL EQUIVALENCE.—A substitute check shall
be the legal equivalent of the original check for all pur-
poses, 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 pre-
viously 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 identi-
fications 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 provi-
sion relating to the protection of customers, of part 229
of title 12 of the Code of Federal Regulations, the Uni-
form 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 incon-
sistent with this Act.
SEC. 4. SUBSTITUTE CHECK WARRANTIES.
A bank that transfers, presents, or returns a sub-
stitute check and receives consideration for the check war-
rants, as a matter of law, to the transferee, any subse-
quent 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 require-
ments for legal equivalence under section 3(b); and
(2) no depositary bank, drawee, drawer, or en-
dorser will receive presentment or return of the sub-
stitute 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 en-
dorser has already paid.
SEC. 5. INDEMNITY.
(a) INDEMNITY.—A reconverting bank and each bank
that subsequently transfers, presents, or returns a sub-
stitute 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 appli-
cable, to the extent of any loss incurred by any recipient
of a substitute check if that loss occurred due to the re-
ceipt of a substitute check instead of the original check.
(b) INDEMNITY AMOUNT.—
(1) AMOUNT IN EVENT OF BREACH OF WAR-
RANTY.—The amount of the indemnity under sub-
section (a) shall be the amount of any loss (includ-
ing costs and reasonable attorney’s fees and other
expenses of representation) proximately caused by a
breach of a warranty provided under section 4.
(2) AMOUNT IN ABSENCE OF BREACH OF WAR-
RANTY.—In the absence of a breach of a warranty
provided under section 4, the amount of the indem-
nity 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 ex-
penses of representation).
(c) COMPARATIVE NEGLIGENCE.—If a loss described
in subsection (a) results in whole or in part from the neg-
ligence 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.
(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 other-
wise 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 in-