The Honorable Richard Shelby
Chairman
Senate Banking, Housing and Urban Affairs Committee
534 Dirksen Senate Office Building
Washington, DC  20510

Dear Chairman Shelby:

As the Committee prepares to consider the "Check Truncation Act of 2003," the Association for Financial Professionals (AFP) appreciates the opportunity to share our views with you on check truncation, commonly referred to as Check 21.

AFP supports 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 proposed legislation accomplishes this by removing the legal impediments to check truncation.

Check 21 permits machine-readable paper copies of checks, called substitute checks, to replace original checks in the clearing and return process. Check 21 guarantees legal equivalence between original checks and substitute checks. However, Check 21 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. Companies receiving those images have no certainty that the electronic images are legally equivalent to the original checks.

The Senate should make it clear that electronic images of the original paper checks enjoy the same legal status as the original checks. A clear statement by the Senate 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 provide 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 the Senate 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 1000 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,

James A. Kaitz
President and CEO

cc:The Honorable Paul Sarbanes
Members of the Senate Banking Committee
The Honorable Roger W. Ferguson, Jr.