Check 21 Requirements Are Only Beginning

Check 21, as with any new piece of legislation, brings to the table certain requirements to which the industry must adhere. However, according to attorney Lynne Barr -- a partner with Boston-based Goodwin Procter and chair of the firm's consumer financial services practice -- the real legal challenges associated with Check 21 are only beginning to emerge.

"I certainly wouldn't call Check 21 a nonevent," Barr says. "But it's not like SOX or the PATRIOT Act where you have an ongoing, heavy compliance burden," she opines.

"The biggest hurdle so far has been around the issue of getting compliant with disclosure requirements and explaining to my clients that there really wasn't that much to be scared of," Barr continues. Although there was a flurry of activity among her clients early on, Barr admits that things have quieted down lately. "I haven't really talked about Check 21 for months," she relates, "which is probably a good thing as far as the banks are concerned."

Barr explains that compliance concerns were addressed early in the Check 21 adoption process. "Banks had to send out the [disclosure] notices with their first periodic statement," she points out. "Beyond that, from a legal advice perspective, there wasn't too much else."

However, other issues will crop up, Barr predicts, particularly regarding image replacement documents (IRDs). "IRDs don't carry the same warranties that are associated with an imaged check," she notes. Sometimes, it is difficult for banks to understand the implications, Barr continues.

The other hurdle, according to Barr, deals with large corporate clients that want to produce their own substitute checks. "Banks have to start telling their corporate customers that they have to make good on their representations and warranties. Corporate customers have to share the risk [around substitute checks]."

Barr adds, "Over time, we will see more legal challenges to the [check processing system] and disputes around substitute checks, but we don't have the volume just yet."