The Justice Department is grabbing the spotlight with Operation Choke Point, a controversial investigation that's drawing U.S. banks deeper into the fight against consumer fraud. But below the radar, another federal agency is tiptoeing in the same direction, and again drawing stiff opposition from the banking industry.

This latter dispute involves remotely created checks, a controversial payment method that allows merchants to draw on customers' bank accounts without getting their signature.

Approximately 515 million remotely created checks, or demand drafts, as they're sometimes called, were processed nationwide in 2009, according to the most recent available data from the Federal Reserve Board. Consumer groups and law-enforcement officials warn that online payday lenders, operators of pyramid schemes and others frequently use the unsigned checks to rip off unwary customers.

The Federal Trade Commission, in a proposal issued last year that has received scant media attention, floated the idea of banning the use of remotely created checks by telemarketers. Other payment methods, including debit cards, credit cards, and automated clearing house transactions, offer stronger legal protections for consumers, the FTC says.

Lobbyists for the banking industry have struck back hard, avidly defending the right of merchants to use remotely created checks. "This is clearly not a renegade payment instrument," Rob Hunter, the deputy general counsel at The Clearing House, a big-bank trade group, said in remarks at an April 12 conference in Los Angeles.

The dispute illustrates how banks – facing stepped-up pressure from both federal and state authorities over their role as a gatekeeper to the U.S. payment system – are trying to draw a line in the sand.

"We're being threatened with a regulatory regime that attempts to foist on us the obligation to monitor all types of transactions," says Richard Riese, a senior vice president at the American Bankers Association. "All of this is predicated on a notion that the banks are a choke point for all businesses."

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 it can use a remotely created check.

The merchant's decision is typically not apparent to the consumer. But that choice affects the customer's ultimate legal recourse in cases of fraud, Malini Mithal, assistant director of the FTC's division of financial practices, said in recent remarks at an American Bar Association conference in Los Angeles.

Remotely created checks have little or no systematic fraud monitoring, unlike credit card purchases and automated clearing house transactions, according to Mithal. (Last November, the group that establishes rules for the automated clearing house network proposed tightening the existing fraud-prevention rules.) Moreover, the unsigned checks are governed primarily by state laws that do not provide full recourse when unauthorized transactions are made.

The checks have been used to perpetrate scams involving bogus charities, pharmacy discount cards, useless fraud prevention services, payday loans and more, Mithal said.

Banks face potential liability in cases of fraud. In March 2010, Wachovia Bank -- which Wells Fargo acquired at the end of 2008 – entered into a deferred prosecution with the Justice Department that stemmed in part from Wachovia's relationships with third-party payment processors, which had used remotely created checks on behalf of clients in the telemarketing industry. Often those accounts were plagued by high rates of returned transactions, according to the Justice Department.

The Justice Department cited the Wachovia case in a letter supporting the FTC's proposal. And in its first settlement as part of Operation Choke Point, the Justice Department recently barred the $820 million-asset Four Oaks Bank in North Carolina from using remotely created checks in connection with online payday lending and certain other businesses.

"While most return rates for transactions run below 1%, some merchants and processors have bank accounts with return rates of 30% to 70% or higher," Michael Blume, the director of the Justice Department's consumer protection branch, wrote to the FTC. "Banks and processors sometimes unlawfully ignore return rates and other telltale signs of fraud."

But banking industry officials say there's no evidence that fraud is more prevalent among users of remotely created checks than it is with other payment methods.

"We don't see the factual basis for singling out remotely created checks," says David Walker, president and chief executive officer of the Electronic Check Clearing House Organization, a bank industry group that establishes rules for the exchange of checks, including those that are remotely created. "People write bad checks. And so that doesn't say that we should just ban checks."

His organization said in a letter to the FTC: "It would be unprecedented for a U.S. government agency to impose a permanent ban on an otherwise legal payment type for a specified use or for a class of merchants."

During the April 12 panel discussion, Rob Hunter of The Clearing House sought to counter the points made by those who advocate banning remotely created checks. He argued that banks have an incentive to credit consumer accounts when the merchant's customer disputes a particular charge, even if the bank don't have a legal responsibility to do so.

What's more, there are legitimate benefits that merchants get from using remotely created checks, as opposed to routing transactions over the automated clearing house network, according to Hunter. For example, merchants that use the checks can receive their funds on the same day that the transaction is initiated, he noted. Automated clearing house transactions typically take longer to complete.

The FTC's proposal has also met criticism from the Federal Reserve Bank of Atlanta, which operates the Fed's retail payment office. The proposed ban could easily be circumvented by fraudsters, the Atlanta Fed said in a letter to the FTC. The regional Fed bank also expressed concern about the potential for fragmentation in federal law, since various federal agencies would be taking different positions on the appropriateness of remotely created checks.

However, the Atlanta Fed stated that it shares concerns about fraud in the check system. It suggested that a more appropriate way to respond would be to require every bank to report frequently to its regulator whenever a customer deposits significant numbers of checks with an abnormally high rate of returns.

Consumer groups, meanwhile, argue that a ban on remotely created checks should go beyond just the telemarketing industry, which has shrunk in recent years as a result of the nationwide Do Not Call registry and the dwindling number of landline phones.

As the FTC proposal is written, it likely would not apply to most online payday lenders, since they rely heavily on Internet advertising to attract customers, rather than phone calls. Online payday lenders often use remotely created checks as a backup method of payment, to be used in cases where an automatic clearing house transaction gets rejected.

"We frequently see remotely created checks as a collection method for high-cost, online payday loans," says Tom Feltner, director of financial services at Consumer Federation of America. He calls remotely created checks part of a concerning pattern in which online payday lenders use "cascading payment mechanisms to enforce the payment of high-cost debt."

An FTC spokesman would not commit to a timeline for the completion of revisions to the agency's telemarketing rules.

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