Demand draft

Demand draft

A demand draft, also known as a remotely created check or a tele-check, is a check created by a seller with a buyer's checking account number on it, but without the buyer's signature. Instead of the signature, the check has verbiage such as "authorized by depositor (the buyer), lack of endorsement guaranteed by XYZ Bank". The seller deposits the check into his or her bank account, and the check then clears out of the buyer's account.

Demand drafts are frequently used to purchase items over the phone, from telemarketers. The checks also allow consumers to pay monthly bills by having them debited automatically out of their accounts, rather than having to write a new check each month. Demand drafts are frequently used by consumers instead of credit cards, and large companies also commonly use them. Demand drafts are also a popular method for lending institutions to attempt to collect on overdue loans.

Since the only information necessary to make a demand draft is the bank account number and the routing number of the buyer's account, demand drafts entail a large potential for fraud. Banks report that demand draft fraud is becoming more common. Because the buyer has a time frame of three years or longer in which to dispute the transactions, most banks will only allow larger companies with security collateral to deposit demand drafts. Nevertheless, there is a great deal of fraud committed by using demand drafts, with some bank industry professionals alleging that demand drafts are fraudulent more often than not. Demand draft fraud is often frustrating for consumers, because unlike credit card disputes, consumers are not often given any funds back until after investigation finds that the draft was unauthorized. In addition, filing a dispute frequently requires a notarized signature, since this is the only way one bank can dispute a paper item with another bank. It is usually the individual whose bank account was used for the fraud who is held financially responsible for the loss, often because banks require the individual to prove that he or she did not authorize the demand draft. Unauthorized demand drafts create losses for the bank too, because often is it not worth the effort to actually attempt to get the money back from the other bank, and instead banks will simply pay their customers amounts up to five hundred dollars from their own funds. This encourages scammers, as they get to keep the money and are not discovered.

In 2005, the US Federal Reserve issued a proposal to shift responsibility for payment of fraudulent demand drafts from the bank that honors the check to the bank that issues it.

References

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