Are remotely created checks legal?

How does Regulation CC define a remotely created check?

Regulation CC (12 CFR part 229) is the Federal Reserve's rule on check collection and funds availability. It defines a remotely created check as a check that is not created by the paying bank and that does not bear a signature applied, or purported to be applied, by the person on whose account the check is drawn.

In practice, that's a check the payee creates from the payer's account details, with a legend in place of a signature.

What is the remotely created check warranty?

Amendments to Regulation CC that took effect on July 1, 2006 added a warranty for remotely created checks. A bank that transfers or presents one warrants that the person on whose account it is drawn authorized it, in the amount stated and to the payee stated.

So if the account holder says they never authorized a check, their bank can claim against the bank that took the deposit instead of absorbing the loss. Depositary banks usually pass that responsibility on to the business that deposited the check, through the account agreement. That's why your authorization record matters.

Do state laws apply too?

The 2002 amendments to Articles 3 and 4 of the Uniform Commercial Code, which some states have adopted, added a similar warranty for remotely created items drawn on consumer accounts. Regulation CC's warranty is broader: it applies to remotely created checks drawn on any account, including business accounts.

What does the FTC's Telemarketing Sales Rule say?

The FTC amended its Telemarketing Sales Rule in 2015, effective in 2016, to stop sellers and telemarketers from accepting remotely created checks and similar remotely created payment orders as payment in telemarketing covered by the rule.

The rule is aimed at telemarketing to consumers. Calls between businesses are largely exempt, with some exceptions. If you sell by phone, have counsel confirm how the rule applies to your calls. DraftPay is for business payers only.

Do Nacha rules apply to remotely created checks?

No. Nacha's rules govern ACH payments. A remotely created check is deposited and collected as a check, so check law and Regulation CC apply instead. Your bank's own account agreement and policies also apply.

How does DraftPay help you stay within the rules?

• Business payers only. Consumers are out of scope.
• Authorization before every draft. A draft can't be approved until the payer has authorized it online, or an owner or manager has recorded an authorization the business already holds.
• A sealed record. Who approved, the exact amount or cap, the account, the time, the terms text and how it was given, sealed so it can't be quietly edited.
• The payer stays informed. Payers get a confirmation with a link to revoke, and a notice for every draft under an ongoing authorization.
• Your bank's agreement. When you sign up, you confirm your bank accepts remotely created checks.

You're still responsible for how you use check drafts. How authorization works.