Two Key Changes to Fed's Final Check 21 Rule: One Good, One Not So Good

WASHINGTON – Though credit union attorneys were still digesting the 112-page final regulation the Federal Reserve Board issued late last Monday on Check 21, initial readings of it produced a mixed bag of changes for financial institutions. In the final rule, the Fed eliminated the “purported substitute checks” provision from the proposed regulation for checks with MICR line errors, which CUNA and NAFCU had strongly advocated. Instead, according to CUNA Assistant General Counsel Michelle Profit, the Fed is leaving it up to the American National Standards Institute to determine when a check with MICR line errors has legal equivalency. The regulator has said it will revisit the reg if it sees problems, she added. “It’s a great victory for the credit union movement and also the other financial institutions who did not support it,” Profit said. This is more like the current paper check world, she explained, where some items are treated as checks “even though they don’t quite meet the technical definition.” The Fed made a small but significant change in the consumer awareness disclosure included in its proposed Check 21 rule to notify checking accountholders of substitute checks and their rights. NAFCU Associate Director of Regulatory Affairs Kimberly Dewey explained that the proposal would have allowed for a one-time blanket disclosure or disclosures on a case-by-case basis. In the final rule, however, the Fed required a disclosure be included with each substitute check issued. “It is important to note that the time that a credit union would ever give a member a substituted check is very rare,” Dewey said. She explained that it is very important for credit unions to understand the difference between an official substitute check, where disclosures are required, and a copy of a substitute check, which does not require disclosures. Dewey continued, “Now, is this going to create consumer confusion? Yes.” Additionally, there is no sunset included for the disclosures, so 10 years from now when everyone knows what a substitute check is, financial institutions will still have to make the disclosures unless the rule is revisited. Also, the attorney forecast, over time substitute checks will be used less and less until they are obsolete. The Fed had also asked in the proposal if it should include provisions regarding demand drafts made without signatures to bring a recent Uniform Commercial Code decision into national law. The proposal would have made the creating institution liable for unauthorized demand drafts rather than the paying institution as is traditionally responsible. CUNA had recommended that, even though this is probably a good idea, it should be in its own separate rulemaking, Profit said. The Fed agreed. The remainder of the rule is substantially similar to what was proposed, according to the Fed. The Check Clearing for the 21st Century Act is intended to facilitate check truncation and electronic check exchange through the use of substitute checks, which bears the legal equivalence of the original. It was enacted Oct. 28, 2003 and becomes effective Oct. 28. [email protected]