CUNA Comment Letter

Check Clearing for the 21st Century Act (“Check 21”)

May 17, 2004

Ms. Jennifer J. Johnson
Secretary of the Board
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, DC 20551

Re:    Docket No. R-1176 MICR Line Issues

Dear Ms. Johnson:

The Credit Union National Association (“CUNA”) thanks the Federal Reserve Board for extending an invitation to CUNA to participate in a meeting on May 3d to discuss MICR line issues that relate to the proposed regulation implementing the Check Clearing for the 21st Century Act (“Check 21”). At the meeting, Federal Reserve staff invited participants to submit additional written comments, and CUNA appreciates the opportunity to supplement our original response. CUNA, a national trade association, represents more than 90 percent of the nation's more than 9,600 state and federal chartered credit unions.



CUNA urges the Federal Reserve Board to eliminate the concept of a “purported substitute check” for all the reasons stated in its letter dated March 11 and in its objections reiterated at the meeting on May 3rd. Instead, the Federal Reserve should provide a substitute check with legal equivalence if an unrepaired MICR read or print error created by the reconverting bank causes the MICR line on the substitute check to vary from the MICR line on the original check.

The Federal Reserve Board has expressed concern that it does not have the ability to make substitute checks with MICR errors legally equivalent to the original. CUNA believes that the Federal Reserve Board has the authority under Section 15 of the Act to interpret the definition of “substitute check” in Section 3(16) of the Act to include as a “substitute check” an item with a MICR line variation from the MICR line of the original check. Section 15 of the Act gives the Federal Reserve authority to prescribe regulations that the Board determines is necessary to “facilitate compliance with the provisions of the Act.” Providing substitute checks with misread MICR legal equivalence to original checks will facilitate compliance with the Act because it will recognize that (i) the check processing system necessarily entails a certain amount of MICR line read and print errors (even without the substitute check process), and (ii) even when such errors occur credit unions will want to process substitute checks and provide legally equivalent items to their members.

Moreover, the fact that Congress authorized the financial services industry to vary the MICR line on a legally equivalent substitute check compared to the original check by means of generally applicable industry standards in Section 3(16)(B) of the Act strongly supports a broader reading of the Federal Reserve’s legal authority with respect to the MICR line requirement. If an industry standards group can authorize banks to vary the MICR line of a substitute check, and still preserve the legal equivalency of such a check, it is reasonable to conclude that the Federal Reserve Board has authority to vary the MICR line requirement for substitute checks pursuant to its regulatory authority.

The Federal Reserve Board has a concern that providing legal equivalence to substitute checks with MICR read/print errors could have the potential of encouraging a reconverting bank to intentionally deliver to a paying bank a substitute check with a MICR line that is not a complete reproduction of the MICR line of the original check. There are measures that the Federal Reserve and the financial services industry can undertake to decrease the likelihood that there will be intentional non-compliance with the MICR line replication requirement. The Federal Reserve could, either in the Check 21 regulations or in the same day settlement rules, provide the paying bank with an optional right of “administrative” return of a non- compliant substitute check, without presentment of that check being deemed to occur at the paying bank. This return right would give the paying bank flexibility to return the non-compliant MICR substitute check without risking a claim of wrongful dishonor by its customer, and give the substitute check the legal equivalency to all parties in the check collection process.

CUNA requests that the Federal Reserve clarify that a paying bank may use the administrative return to return a substitute check with a MICR line error, or take steps to manually post the substitute check to the consumer’s account. Adopting this provision would give paying banks the flexibility to make the decisions that are in the best interests of the consumer and the financial institution. If paying banks choose to manually post the substitute check to the consumer’s account, however, they should not automatically become the reconverting bank. If they were forced to become the reconverting bank, paying banks would face additional liability for repairs. As a result, paying banks would have a major disincentive to repair MICR and they would do so less frequently making the payment system more inefficient.

Finally, CUNA requests that the Federal Reserve Board clarify in the final rule that a substitute check provided to an accountholder does not have to be printed with MICR ink to remain legally equivalent to the original check. The requirement to print these share drafts or checks in MICR ink is unnecessary because these checks will not undergo the automated processing that needs the special ink. Furthermore, financial institutions that choose to provide legally equivalent share drafts or checks to accountholders should not be required to incur the expense of using MICR ink.


CUNA commends the Federal Reserve staff for hosting a meeting on Check 21 and allowing time for supplemental comments. If you have any further questions, please contact CUNA's Senior Vice President and Associate General Counsel Mary Dunn or me at 1-800-356-9655.


Michelle Q. Profit
Assistant General Counsel