Fed Releases Final Rules For Check 21

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Credit unions can move forward with their Check 21 compliance plans with confidence now that the Federal Reserve has issued its final rule and language regarding the Check Processing for the 21st Century Act.

"The final rule is substantially similar to the proposed regulation," noted Michelle Profit, assistant general counsel for CUNA. "What this means for credit unions is that they how have kind of an ad nauseum description of how expedited recrediting is going to be handled, and they can literally copy the Fed's language and use it to educate their employees and members and know that they are in compliance."

A key change in the disclosure rules is that credit unions will not be required to do blanket disclosures to all their members-but that also means that a single blanket disclosure isn't an option, either, noted Kimberly Dewey, associate director of regulatory affairs for NAFCU. For small credit unions that only have a small number of returned checks every year, the fact that they only have to disclose each time they print out a substitute check for a member is a real money saver, she suggested.

But for larger institutions that will end up returning many substitute checks, having to include a disclosure for each one could be costly, Dewey noted. Still, for most credit unions, this is probably a good thing, she suggested, given that such a high percentage of CUs truncate anyway and therefore don't return huge numbers of checks.

Additionally, disclosures are only required for actual substitute checks, not, for example, photocopies of substitute checks.

One of the changes for the better , according to Profit, which had been pushed by CUNA and others, is the elimination of the purported substitute check concept.

In the proposed rule, the Fed attempted to resolve any issues that could come up if there were any errors created in the MICR line during the process of creating a substitute check from the original document. The Fed recognized that any such errors could call into question the validity of the substitute check and wanted to put certain protections in place by establishing the purported substitute check concept, Profit explained, but CUNA and others suggested the purported substitute check could raise more issues than it resolved, and the Fed agreed and eliminated it from the reg.

Instead, the Fed is leaving this issue to be worked on by the ANSI industry group, which is working to establish standards for the industry. "That's a wise move on the Fed's part," Profit said. "An industry group will approach this from a wider angle than a regulator would. The Fed has indicated that if it starts getting feedback that [what ANSI comes up with] isn't working, the Fed will step back in."

Most of the other changes, Profit suggested, were "basically clarifications," but among them was the Fed's decision to shorten the consumer awareness notice, a move supported by CUNA, since a shortened notice is more likely to be read, used and understood by consumers than a more lengthy, unwieldy one.

In its proposed reg, the Fed had sought comment issues related to what happens when a merchant creates a demand draft that turns out to be unauthorized. The Fed was proposing holding the depository institution responsible for such demand drafts instead of the paying institution. CUNA and a number of other commenting parties suggested the Fed should handle this issue separately rather than as part of the Check 21 reg, and the Fed has agreed and a proposed rule is expected out in about a month, Profit related.

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