Check 21 Act

        [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.