What You Need to Know About Check 21

Until now, a check had to physically move across the street, country, or world and then back to the bank of origination. This could take days, even weeks. Sometimes the transaction would get lost, resulting in a stop payment and the restart of the original process. On October 28, 2004, the canceled check will be supplemented by a new electronic procedure created by Check 21 called a “substitute check,” also known as an “IRD” or an “image replacement document.” The 2001 attacks gave urgency to this new legislation, as banks had to resort to slower ground transportation when planes were grounded.

What does this mean to PTAs?
PTAs should know that vendors could expedite the cashing of their organization’s checks under Check 21. With substitute checks, the last time you will see your original check is when you sign it. Soon you will receive only the substitute check as backup in your bank statement (if you currently receive canceled checks) or in response to a dispute requiring proof of payment. Neither your vendor nor your bank will be required to return your original check. Additionally, the substitute check eliminates three current practices: the float, the stop payment, and the handwriting test to detect fraud.

Practice of floating no longer exists
Since substitute checks can clear your bank the next business morning, individuals must have sufficient funds in their accounts when they write their checks. Once a vendor receives and endorses your check, the check is forwarded to a bank. The bank then can take an electronic snapshot of your check. The snapshot must be a clear picture of the entire front (including the Magnetic Ink Character Recognition information at the bottom) and back of the check (including all endorsements). The addition of a legend and necessary text, as shown in the example on page 3, completes the requirements of a substitute check. With these elements in place, it’s now a legal copy of your check that can be used the same way as an original check. This snapshot can be sent electronically to a clearinghouse or an image-exchange service, which will consolidate checks and present them in batches to banks. The next business morning, after these funds have cleared your account, they will reside in your vendor’s account. Since not everyone will begin using substitute checks immediately, you won’t know which vendors used this method to clear checks until you receive your bank statement or unless you are charged non-sufficient funds fees. The first rule of thumb: If you don’t have enough money, don’t write the check. It is best to plan your payments.

Stop payments are history
The purpose of a stop payment was to prevent a payee from cashing your check due to some later-known facts or a change of mind. With the speed of clearing a substitute check, you cannot make stop payments. Let’s face it, stop payments by phone or online are quick, but they cannot beat the clearing speed of a substitute check. The second rule of thumb: Never give a vendor full payment until you have full satisfaction.

Fraud detection is a thing of the past
Without the canceled check, how can you prove the signature was forged or the amount was changed? The old method used by handwriting experts requiring the original document is now obsolete. When you have any doubts or concerns regarding a vendor or the vendor’s ability to clear your check accurately, it’s time to find another vendor or method of payment.

If your PTA must pay a vendor by check, remember:

• Always review your PTA’s bank statement and all related materials.
• Verify all checks clearing the account for accuracy. If you have any questions, immediately ask the bank for a copy of the item. Your rights greatly improve once you receive a copy of the substitute check.
• Once you receive the information you requested, verify it against your records. If you believe something is wrong, take the necessary steps to follow up.
• Be prepared if your bank requires your follow-up to be in writing. You have 45 days from the time you received a substitute check to file any claims. Time is of the essence.

Check 21 provides advantages to vendors by increasing their cash flow with speedy check clearing. But the method of payment should be your choice. So plan both the method and timing of your payments to fit the needs of your PTA.

The information in this newsletter is presented with the understanding that National PTA does not render legal advice.