Michael G. Oxley
Chairman
House Financial Services Committee
2129 Rayburn House Office Building
Washington, D.C. 20515

Dear Chairman:

The Association for Financial Professionals (AFP) attended with great interest the hearing on the Check Clearing for the 21^st Century Act, or Check 21, held by the House Subcommittee on Financial Institutions and Consumer Credit on April 8, 2003.

AFP supports the concepts underlying Check 21 and understands the benefits of replacing original checks with check images. Check 21 is intended to foster innovation in the check collection system without mandating the receipt of checks in electronic form. The legislation accomplishes this by removing the legal impediments to check truncation.

The bill defines truncation as being achieved in two ways: "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."

Check 21 permits machine-readable paper copies of checks, called substitute checks, to replace original checks in the clearing and return process. The legislation states that "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…."  However, the legislation is silent regarding legal equivalency between an electronic image of the original check and the original paper check.

When checks are truncated and digitized, either after they are paid or earlier in the collection process under an agreement between banks, companies receive only electronic images of the paid checks from their banks. They do not receive the original paper checks. However, companies receiving those images have no certainty that the electronic images are legally equivalent to the original checks.

The Congress should make clear that electronic images of the original paper checks enjoy the same legal status as the original checks. A clear statement by the Congress would help to eliminate any uncertainty that exists regarding electronic images. Without such assurance, companies are concerned that electronic images would be precluded from acceptance in court under state evidence laws. Such preclusion could bar an attempt by a payor to prove payment by the introduction of the image of a truncated check or by a payee to prove that a truncated check was returned unpaid by the payor bank. 

Legal equivalency

AFP is concerned that the Uniform Electronic Transactions Act (UETA) and the federal E-Sign Act do not definitively provide that electronic check images satisfy the various state rules of evidence in cases of contract disputes where payments are involved. Those Acts state that if a statute, regulation, or other rule of law requires the retention of a check, that requirement can be satisfied by retaining an electronic record. Both laws also state, however, that their respective terms do not apply to transactions governed by, among other things, Articles 3 and 4 of the U.C.C. on check processing.

In a payment dispute, a party may object to an electronic image of a paid, original check and claim that E-Sign may not be relied upon for its introduction since there is no law at issue which requires the retention of the check for such purposes. With a clear statement by Congress affirming the legal equivalency doctrine for electronic images of checks, bank customers would not be left to the vagaries of state laws and evidence rules as to whether images of checks provided by their banks may be used for all purposes. 

AFP represents approximately 14,000 treasury and finance professionals who, on behalf of over 5,000 corporations and other organizations, are significant participants in the nation's payments system. Organizations represented by our members are drawn generally from the Fortune 1,000 and the largest middle market companies. Many of AFP's members have direct responsibility for the disbursement, collection and reconciliation of check and electronic payments. AFP members' companies, with their high check volume, large value checks and greater exposure to fraud, have a sizable interest and significant stake in the advancement of measures to improve the efficiency and safety of the payments system.

Thank you for your attention to this matter, and for your efforts to improve the nation's payment system. AFP looks forward to working with you as the legislative process moves forward. 

Sincerely,

Alvin C. Rodack
The Ohio State University
Chairman
AFP Government Relations Committee

cc:

The Honorable Barney Frank
The Honorable Spencer Bachus
The Honorable Bernard Sanders
The Honorable Melissa A. Hart
The Honorable Harold E. Ford, Jr.
The Honorable Roger W. Ferguson, Jr.