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WASHINGTON – The Federal Reserve Board called in commenters who specifically commented on the proposed “purported substitute check” provision of the rules implementing Check 21 for a discussion on how to resolve substitute checks that have errors in them. NAFCU Associate Director of Regulatory Affairs Kimberly Dewey attended the meeting last Monday, which kept coming back to the same issue: no one in the industry liked the Fed’s “purported substitute check” idea. A “purported substitute check” under the Fed’s proposal would be those electronic substitute checks that have errors in them would still meet the legal equivalency definition as far as the consumer is concerned. “At one point the Fed asked if anyone in the room or on the call wanted the purported substituted check proposal to remain and there was dead silence,” Dewey said. Financial institutions are concerned this could come back to haunt them because a “purported substitute check” is not a substitute check and liability issues could ensue, she explained. For example, years later someone could charge that funds should not have been taken from their account because the purported substitute check is not a substitute check. “Denying legal equivalency to substitute checks with MICR errors or others would increase uncertainty for both consumers and financial institutions,” Dewey added. Currently paper checks can just be repaired without much trouble and Dewey said she believes most industry representatives would like substitute checks to mirror that system. But the risk difference is that a faulty paper check, because of a typo or error in the MICR line for example, is still the legal equivalent of itself. Electronic versions raise fundamental legal issues, she said; the purported substitute check would open financial institutions to liabilities because they could not legally debit the account. “For a regulation that nobody’s required to do, it could have a large effect on the industry,” Dewey said. In the end, she said, the only consensus was that none of the industry representatives wanted the purported substitute check idea to stand.

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