AFP Supports Liability Shift for Remotely Created Checks

AFP submitted a comment letter to the Federal Reserve supporting its proposal to shift liability for unauthorized remotely created checks from the paying bank to the depositary bank whose customer created and deposited the check. The Fed proposed the amendment to Regulation CC to deal with the increasing problem of fraudulent remotely created checks.

Remotely created checks are created when the holder of a checking account authorizes another person (typically the payee) to draw a check on the holder's account. In place of a signature, these checks bear a statement that the customer authorized the check or have the customer’s printed or typed name. Because they do not bear a signature and are not created on check stock the customer uses, remotely created checks are vulnerable to fraud.

The law generally requires the paying bank to bear the loss of an unauthorized check because it is in the best position to judge the authenticity of its customer’s signature and check. In the case of most remotely created checks, however, the depositary bank’s customer created the check.

AFP agreed with the Fed's proposal that the rule cover the accounts of non-consumers, such as businesses and other organizations, as well as consumer accounts. Businesses, as well as consumers and banks, have reported a number of fraud attempts using remotely created checks. If a loophole were to exist for remotely created checks drawn on non-consumer accounts, the frequency of fraud against these accounts would likely escalate. In addition, it is often difficult for banks processing the checks to distinguish between the two types of accounts.

AFP urged the Fed to adopt a nationwide, uniform rule on remotely created checks, rather than waiting until individual states adopt an amendment to the Uniform Commercial Code (UCC) dealing with the issue. Although the UCC was revised in 2002 to shift liability for unauthorized remotely created checks to the depositary bank, states have been slow to adopt the UCC amendment, and those that have enacted it have varied its provisions, creating uncertainty for all parties. Moreover, the UCC amendment is limited to consumer items only.

The Fed also requested comment on an alternative to its liability shift proposal that would give more time to a paying bank to return an unauthorized remotely created check. The UCC now requires a paying bank to return a check by midnight of the banking day following presentment. The Fed's alternative would extend the UCC's midnight deadline for a period of time, such as 60 days.

Because of its wide-ranging consequences on the laws of check collection and return, and its impact on finality of payment, AFP did not recommend extending the UCC midnight deadline without further study and analysis. Recognizing that costly and lengthy litigation is not an efficient procedure for recovering losses, AFP recommended instead that the Fed set forth operating procedures and a time frame for banks' payment of warranty claims among themselves.

Read AFP's comment letter to the Federal Reserve.