Check Fraud and How to Prevent It

While you don't see many check writers in the grocery lines these days, checks are part of title and escrow banking. Check fraud is not new, but it has been on the rise.

Bank-reported check fraud doubled between 2021 and 2022, accounting for an estimated $815 million in losses in 2022. Checks are used less frequently, but their average value has gone up significantly. Between 2018 and 2021, check amounts went up by 27%.

3 Ways Check Fraud Impacts Title & Escrow Banking

In all of its forms, check fraud burdens banks, businesses, and individual victims. It can be particularly damaging during an escrow transaction because of the scale of the potential losses. Here are some of the ways check fraud impacts title and escrow banking.

1. Good Faith Deposit

   If a transaction is canceled quickly after the good faith deposit was put into escrow, the settlement agent may send a check to return funds to the buyer. However, if the buyer's original deposit check is returned as "Non-Sufficient Funds" and they refuse to return the funds, the settlement agent is short. By issuing a bad check for the deposit and then refusing to honor it, the buyer puts the settlement agent in a difficult position, causing direct financial loss.

2. Closing

   The rise of wire fraud has driven some title and escrow companies to revert to using cashier's checks for real estate closings. However, even cashier's checks present vulnerabilities, as skilled fraudsters can produce highly convincing counterfeits.

3. Post-Closing

The ease of mobile check deposit has introduced new vulnerabilities in the post-closing process. A buyer who receives a refund check can quickly deposit it using their smartphone, then try to cash the physical check later, leading to a double payment. While a single attempt at double withdrawal might be caught during an audit, a determined fraudster could potentially exploit this vulnerability for more substantial sums.

How Settlement Agents Can Protect Against Check Fraud

Since check fraud is such a problem in today's world, we at First American Trust encourage our clients to protect themselves. In addition to our rigorous protection measures, we recommend the following strategies:

1. Use digital payments whenever possible.
2. Perform daily and monthly reconciliation of your accounts.
3. Use Payee Positive Pay, a service we offer at First American Trust.
4. Consider implementing dual control procedures for check writing.
5. Review your accounts daily to spot any suspicious activity early.
6. Store blank checks, bank statements, and other financial documents in a locked and secure location.
7. Shred old documents that contain sensitive information, including old checks, bank statements, and escrow papers.
8. Never provide your bank account details over the phone or via email unless you initiated the contact and are certain of the recipient's identity.

5 Ways First American Trust Protects Settlement Agents

As dedicated specialists in title and escrow banking, we understand the vital importance of security and accuracy in financial transactions. We have been an FDIC member since 1985, have a Moody’s rating of A1/P1, and each of our employees is bonded and insured.

As an industry leader in fraud prevention, our goal is not just to meet the current needs of settlement agents, but to anticipate and prepare for future challenges. We have several security measures and specialty solutions to safeguard your funds and protect against fraud.

1. Advanced Check Services

   Our check services integrate advanced security features. You can access check images and electronic check deposits directly from your platform. Retrieve images of paid and deposited checks, utilize remote desktop check scanners, and send image cash letter files, thereby minimizing the risk associated with manual check handling and processing. Our system also includes duplicate check detection for up to 30 days, helping to prevent accidental or fraudulent double deposits.

2. Payee Positive Pay

   Our Payee Positive Pay service is an advanced check fraud detection system that provides an additional layer of security for your transactions. Compare checks presented for payment against a list of checks you've issued. Verify the payee's name, adding a crucial level of protection against altered, fraudulent checks. If a discrepancy is detected, the check is flagged as an exception. You're promptly notified and given the opportunity to review and make a pay/return decision through our user-friendly interface. This means you can review exceptions quickly without slowing down legitimate payments.

3. Wires

   As a title or escrow agent, you probably encourage your clients to wire funds rather than using checks to deposit and receive title and escrow funds. We offer straight-through wire transfer automation directly from your production platform, enforcing multi-party wire approval to prevent unauthorized transfers. Our system also provides real-time Fed reference numbers and complete Fedwire message details, enhancing traceability and reducing the risk of wire fraud.

4. Reconciliation Solutions

   We provide automated transmission of check issue files for positive pay and daily reconciliation files so you have accurate and secure financial records. This includes daily delivery of BAI reconciliation files that integrate with your production platform or trust accounting system.

5. Treasury Management

Our treasury management services further enhance security. The treasury management platform allows you to manage your accounts in one place with simple and secure online wires featuring dual custody. This two-factor authentication process adds an additional safeguard against unauthorized transactions.

At First American Trust, we use these comprehensive and innovative security measures to safeguard our clients.

Choose First American Trust

The title and escrow banking partner you choose will impact how well your funds are protected as well as the efficiency of your transactions. At First American Trust, we redefine banking for title and escrow companies. Our seamless integrations, exceptional customer service, and over 135 years of experience in real estate make us the preferred choice for your banking needs. Our solutions streamline your banking processes by allowing you to conduct banking activities directly within your title and escrow software system. Increase your operational efficiency and safeguard your transactions with confidence. Contact us today to discuss your banking needs. 

October Research LLC, is not affiliated with First American Trust or its affiliates.

First American Trust is a wholly owned subsidiary of First American Financial Corporation.