Trivia: Which U.S. law protects you from check fraud?

What is the name of the U.S. federal law that protects consumers from check fraud and limits your liability (for non-electronic transactions)? Submit your guess via email (see left sidebar) and wait for the answer next week. (I will update this article). The winner will be the first to provide a correct answer. Winner will get an exclusive sneak peak at our forthcoming product with a one-on-one demo by me. To learn more about the product, visit www.mytruston.com.

Answer: There is no specific U.S. federal law that limits your liability for check fraud. There are federal laws protecting consumers related to ATM/debit cards (EFTA), credit cards and other credit-based transactions (FCRA, FCBA, Truth in Lending act, etc). When you think about how easy check fraud is and how rampant it is, maybe that’s a little surprising. Here’s some facts from Frank Abagnale (yep, that guy). 1.2 million worthless checks enter the banking system each day. And according to the Nilson Report, annual check fraud losses are well over $20 billion. And check fraud is growing, not decreasing as you might think.

But, the Uniform Commercial Code (UCC) does address check fraud. That isn’t Federal law but guidelines for state laws which have been adopted, not in its entirety however, by 49 of 50 states. So the UCC is useful as a central place to research and reference. For example, the UCC clearly addresses liability related to check fraud and loss.

The UCC defines responsibilities for check issuers and paying banks under the term “ordinary care.” In sections 3–403(a) and 4–401(a), a bank can charge items against a customer’s account only if they are “properly payable” and the check is signed by an authorized person. So that protects account holders from bogus checks. But, if a signature is forged, the issuer may be liable if:

1. According to UCC 3–406, the account holder failed to exercise “ordinary care” they might be prevented from seeking any restitution from the bank—because the account holder’s own failures led to a forged or altered check. So, make it a practice to protect your checkbook and check writing materials.  Also, UCC 4–406 requires that customers reconcile their statement within a reasonable time and report unauthorized checks immediately. Typically this means within 30 days of the statements being mailed. Ouch. Check your bank statements regularly and report suspicious activity immediately.

2. Or, according to UCC 3–406(b) and 4–406(e), if both the bank and account holder did not exercise ordinary care, the check issuer’s own procedures for writing checks will be examined to determine negligence. Banks are not required to physically examine every check, so customers may be held liable for all or part of the loss, even if the bank did not review the signature (so obvious forgeries could STILL leave you holding the bag). 

Last piece of advice. When you open a checking account you might have been entering into a specific contract with your bank related to your responsibilities and liability for fraud. Banks are required to clearly state these to customers. So you might be signing something that addresses these things, like how quickly you must report suspected fraud. 

Note: In my research for this blog post, I referenced Check Fraud and Identity Theft, Volume IV, by Abagnale and Associates. Any fraud or compliance experts that find any errors or omissions, please email or comment.

Comments

[Victor Clark]

FACTA

The fair and accurate credit transactions act. Check Fraud is covered under the ID theft sumary of rights.

[Tom Fragala]

Victor, thanks for your response!

--Tom