Answer:
The rules for paper drafts are the same as they are with checks. You may only charge items to your customer's account that are "authorized". When it's a check, you can theoretically compare the signature to the signature card to determine whether it's authorized. I say "theoretically" because most checks are not sight-examined these days unless they exceed a certain threshold. With a paper draft, your customer's signature does not appear. Instead, there is a statement that your customer has approved the draft. Whether they actually have or not is something that you cannot determine without conferring with your customer, yet the midnight deadline to pay or return the item still applies.
Bottom line. No easy answers, no easy way to protect your institution against losses resulting from unauthorized drafts. Always look at a) did the customer promptly examine his bank statement and notify you of the unauthorized draft within a reasonable time; b) was the customer negligent in a manner that substantially contributed to the making of the unauthorized item?
First published on BankersOnline.com 3/4/02
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