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What are the legal requirements for substitute checks?

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Also known as "image replacement documents," substitute checks are digital reproductions of original paper checks. Substitute checks are legal substitutes for the original and are often used by financial institutions to more quickly transfer check images rather than physically mail the originals.

Though substitute checks can take a digital form, not all digital versions of paper checks are legal substitute checks. For example, when you sign into your online bank account and click the "view check" link associated with a check-related transaction, the image that the bank shows you on screen is a digital reproduction of the cleared check but it is not necessarily a legal substitute check. The same is true of paper reproductions; a bank can't simply make a copy of a check and call it a substitute check.

In order to be considered legal substitutes, these image replacement documents must conform with specific legal requirements under the federal Check 21 law (Source: http://www.federalreserve.gov/paymentsystems/regcc-faq-check21.htm). These legal requirements state that:

  • The substitute check must be clearly labeled with the following text: "This is a legal copy of your check. You can use it the same way you would use the original check."
  • The substitute check must accurately represent all of the original check's information on both the front and back at the time the original check was truncated by the bank. This information includes: payor and payee names, endorsements, courtesy and legal amounts, encoding information, and more.
  • Upon truncating a paper check and converting it into a substitute check, the processor or financial institution must provide a warranty for the substitute check.
  • ASC X9 standards for capturing check images and MICR data must be followed by the entity that truncates the original paper check. ASC stands for American Standards Committee. ASC X9, Inc is an ANSI-accredited standards developing organization. ASC X9 focuses on standards that affect the financial services sector. Its four subcommittees focus on: payments (including paper and electronic checks), credit, securities, and data and information security.
  • The MICR (Magnetic Ink Character Recognition) line of the original paper check must be accurately represented on the substitute check. This ensures that the substitute check can be processed automatically using specialized check processing equipment just as the original could.

MICR data plays a key role in substitute checks. The MICR font can be read both visually and magnetically, making it the standard for check processing. According to the Troy Group, in order to create an image replacement document and accurately represent the MICR line of the original paper check, you need special MICR toner (Source: http://www.troygroup.com/cm/documents/PrintingandProtectingImageReplacementDocuments2005A.pdf). This toner produces the magnetic MICR line so that the substitute check can be read by check processing equipment.

Simply scanning a check isn't enough to create a legal substitute check. A substitute check must look and perform in a similar manner to the original and conform with all applicable Check 21 requirements. Accurate capture and representation of all information, clear labeling, compliance with warranty and ASC X9 standards, and the use of MICR toner are essential to the production of legal substitute checks.

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