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New Law Gives Electronic Check Processing a Go

The Check Clearing for the 21st Century Act, which was signed into law almost a year ago, will become effective on Oct. 28, according to the Washington law firm Lotstein Buckman LLP.

The purpose of the Check 21 Act is to facilitate check truncation by creating a new negotiable instrument, a substitute check, which would permit banks to process check information electronically. This will provide for a reduction in the costs associated with processing checks, which are expected to clear faster than they did under previous check clearing procedures, the law firm said.

According to Lotstein Buckman, the Check 21 Act will virtually eliminate the "float period" associated with most checks. The float period is the "grace period" between when you write a check and when that check is presented to your bank for payment.

Under the law, financial institutions will have the option of creating substitute checks and presenting those substitute checks electronically for immediate payment. They will be able to process mortgage payments, insurance payments and any other checks presented for payment in hours rather than days. This change in processing is expected to save financial institutions millions of dollars each year, the law firm said.

The Check 21 Act does not require financial institutions to create or accept substitute electronic checks. In an effort to provide additional protection to those financial institutions that either accept or create substitute checks, and to protect consumers against fraud or bank error, the Check 21 Act provides expedited re-credit procedures, warranties and an indemnity.

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