Are Check Drafts Legal — The Rules, Risks, and Compliance!

In a digital world full of payment apps, ACH transfers, and online invoicing tools, some business owners still ask: Can I legally use check drafts to collect payments?

The short answer is yes — check drafts are legal in the United States. But like any financial tool, there are rules you need to follow to avoid legal trouble, disputes, or even fraud accusations.

Table of Contents: —

• What Is a Check Draft?
• Are Check Drafts Legal in the U.S.?
• Legal Risks of Using Check Drafts: —
• Best Practices for Compliance: —
• Penalties for Non-Compliance: —
• Conclusion: —

What Is a Check Draft?

A check draft, sometimes referred to as a remotely created check (RCC), is a check that is created by the payee (usually a business) rather than the person or company who owns the checking account.

Unlike traditional checks, check drafts:

• Don’t require the payer’s signature

• They are typically authorized over the phone or online

• Include the customer’s account and routing number

• Are deposited just like paper checks

The line where a signature normally appears includes wording like:
“Authorized by account holder – No signature required.”

Are Check Drafts Legal in the U.S.?

Yes — check drafts are legal under U.S. federal law and recognized by the Uniform Commercial Code (UCC), which governs most business and banking transactions in the country.

According to UCC §3-103 and Federal Reserve Regulation CC, remotely created checks are allowed if:

• The account holder has authorized the transaction
• The bank can identify the account from the information on the check
• The item includes language clearly stating it was authorized without a signature

However, the burden of proof falls on the business to show that proper authorization was obtained if there is a dispute.

Legal Risks of Using Check Drafts: —

While legal, check drafts do carry some risks if not handled properly. Here’s what business owners need to understand:

1. Fraud and Misuse:

Because check drafts don’t require a physical signature, they are vulnerable to misuse by bad actors. That’s why they are closely monitored by banks and sometimes subject to additional verification.

If a customer claims they didn’t authorize the payment, the business must prove the transaction was valid. Failing to do so may result in:

• Chargebacks

• Bank penalties

• Loss of merchant privileges

2. Bank Policies Vary:

While federal law permits check drafts, individual banks may have stricter policies. Some banks are cautious with RCCs due to fraud risk, and may:

• Delay deposits for manual review

• Require more documentation

• Limit the use of remote check creation tools

3. Consumer Protections and Refund Rights:

Under Regulation E and related U.S. consumer protection laws, customers have the right to dispute unauthorized payments. If you can’t show clear proof of authorization, you may be held financially responsible — even if the customer originally agreed to the payment over the phone.

Authorization: The Most Important Legal Requirement

The key to using check drafts legally and safely is getting clear, recorded authorization from the customer. Here’s what qualifies as proper authorization:

• Verbal authorization over a recorded phone call

• Written authorization via email, web form, or signed document

• Digital acknowledgment through a checkbox or electronic signature

You should always keep a copy of the authorization, whether it’s an audio file or a timestamped digital form. That way, if a dispute occurs, you have evidence to show the payment was approved.

Real-World Example: –

Let’s say you run a tutoring business, and a parent calls to pay for their child’s sessions. You collect their bank routing number and account number over the phone and use your virtual terminal to create a check draft. If you:

• Clearly explain the payment terms

• Record the phone call

• Send a confirmation email or invoice

…you’re on solid legal ground. But if the parent later claims the payment wasn’t authorized, your recorded call and documentation protect your business.

Best Practices for Compliance: —

To protect your business and your customers, follow these best practices:

Use Check Drafts Only When Appropriate:

Reserve check drafts for situations where card or ACH payments aren’t an option, such as phone orders or older customers without online access.

Always Get Explicit Authorization:

Whether verbal or written, authorization must be clear and traceable. Don’t accept vague agreements or assume verbal approval is enough without records.

Retain All Records Securely:

Save a copy of:

• The check draft you generated

• The customer’s authorization

• Any email confirmations or receipts

Keep these records for at least two years, in case of chargebacks or audits.

Use Reputable Software:

Only use check drafting software or virtual terminals that are secure, bank-approved, and compliant with federal payment standards. Avoid unverified or free tools that could put your business at risk.

Monitor for Red Flags:

Be cautious if:

• A customer’s payment history is irregular

• The account details are provided through third parties

• The customer refuses to confirm the draft in writing

• These could be signs of potential fraud or dispute.

What Do Banks and Payment Networks Say?

According to the Federal Reserve, remotely created checks are permitted but must follow strict documentation and disclosure rules. Banks often monitor accounts for unusual RCC activity and may request proof of customer authorization at any time.

Additionally, the Consumer Financial Protection Bureau (CFPB) reminds businesses that failure to maintain proper consent records can lead to penalties and enforcement actions — especially if a pattern of unauthorized check drafts is detected.

For businesses working with payment processors, it’s essential to verify that your provider supports RCCs and has proper fraud controls in place.

Penalties for Non-Compliance: —

Misusing check drafts or failing to provide authorization records can lead to:

• Financial penalties
• Civil liability from customers
• Termination of your business checking account
• In extreme cases, criminal fraud investigations

That’s why legal compliance isn’t optional — it’s a business necessity.

Conclusion: —

In the United States, check drafts are a legal and useful payment option when handled properly. They’re especially valuable for remote payments, phone-based services, and industries where collecting card or ACH payments isn’t always possible.

But legality does not mean freedom from responsibility. As a business, you must obtain clear authorization, maintain strong records, and use secure processing tools. Treat every check draft transaction with the same care and compliance you would a signed paper check or ACH agreement.