In an effort to crack down on consumer fraud, the Federal Trade Commission announced Wednesday that it will ban telemarketers from using four payment methods that are frequently abused by scam artists.
Under the new rules, telemarketers will be prohibited from accepting payment using checks or payment orders that are remotely created. Those two payment vehicles allow merchants to pull money from consumers' bank accounts without getting their signature, and are sometimes used as a backup payment method when automated clearing house transactions get rejected.
The banking industry had opposed the ban on the use of remotely created checks by telemarketers, saying there is no evidence that fraud is more prevalent with the checks than with other payment methods.
The FTC also barred telemarketers from getting paid via cash-to-cash money transfers. Those payments are offered by companies such as MoneyGram and Western Union, and are seen as susceptible to fraud because they are irreversible.
Finally, telemarketers will not be allowed to accept payments from cash reload mechanisms on prepaid cards. Scam artists have often swindled consumers by convincing them to reveal the numerical codes on those cards, and then using the codes to drain their accounts.
The prepaid card scams led Green Dot, an industry leader, to discontinue its MoneyPak card last year. The FTC said Wednesday that major prepaid card issuers have recently replaced cash reload mechanisms with a swipe reload process, and that the safer cards will not be affected by the agency's rules.
The FTC voted 3-1, along party lines, to approve the revised rules.
"Con artists like payments that are tough to trace and hard for people to reverse," Jessica Rich, director of the FTC's bureau of consumer protection, said in a press release. "The FTC's new telemarketing rules ban payment methods that scammers like, but honest telemarketers don't use."
The FTC first proposed barring telemarketers from using remotely created checks back in 2013. The idea drew flak from banking industry groups.
"We don't see the factual basis for singling out remotely created checks," David Walker, president of the Electronic Check Clearing House Organization, told American Banker in 2014.
Bankers have portrayed the FTC's crackdown on the use of remotely created checks as part of a larger effort by the authorities to draw financial institutions, which serve as gatekeepers to the U.S. payment system, deeper into the fight against consumer fraud.
"We're being threatened with a regulatory regime that attempts to foist on us the obligation to monitor all types of transactions," Richard Riese, a senior vice president at the American Bankers Association, said last year in an interview. "All of this is predicated on a notion that the banks are a choke point for all businesses."
The Federal Reserve Bank of Atlanta also opposed the FTC's crackdown on remotely created checks, expressing concern about the potential for fragmentation in federal law, with various federal agencies taking different positions.
Maureen Ohlhausen, a Republican FTC commissioner, cast the lone vote against the agency's proposal. In a dissenting opinion, she cited the Atlanta Fed's objections.
"Although the record shows there is consumer injury from the use of novel payment methods in telemarketing fraud, it is not clear that this injury likely outweighs the countervailing benefits to consumers and completion," Ohlhausen wrote.
The FTC's decision was warmly received by consumer advocates. They point out that remotely created checks have little or no systematic fraud monitoring, unlike credit-card purchases and automated clearing house transactions.
"We applaud the FTC's action in cracking down on the use of these difficult to verify and difficult to reverse payment methods for telemarketers," Tom Feltner, director of financial services at the Consumer Federation of America, said Wednesday.
He added, "I think there's more work to be done," and noted that the FTC's rules apply only to telemarketers.
Merchants that use remotely created checks rely on their customers to turn over their bank account and routing numbers. At that point, the retailer can either initiate a withdrawal over the automated clearing house network or use a remotely created check.
Many online payday lenders use remotely created checks, and consumer advocates say that abuses in the sector are rampant.
In fact, the Consumer Financial Protection Bureau filed a lawsuit Wednesday against the online payday lender Integrity Advance LLC, which it said used remotely created checks to debit bank accounts even after borrowers stopped authorizing withdrawals.
The FTC's telemarketing rules likely would not apply to most online payday lenders, since they rely heavily on Internet advertising to attract customers, rather than phone calls. But a separate CFPB proposal seeks to limit the number of times that payday lenders can try to collect payment from a consumer's bank account.