When loan checks arrive by mail uninvited
By Salvatore Caputo • Bankrate.com

Imagine opening an official-looking envelope and finding an unexpected check for thousands of dollars waiting for your signature. Wouldn't you feel like you'd won a lottery? After all, who wouldn't want some extra cash to play with? If you cashed that check, though, you'd be playing a losing game.

Consumer advocates say that "live loan checks" target the most vulnerable borrowers. The checks, which started showing up in mailboxes in large numbers in 1996, are negotiable. Just endorse them, and the amount is yours. Issuers of these unsecured loans -- mostly small- to mid-sized financial firms -- say that customers appreciate the convenience of having instant access to cash.

However, live loan checks incur high-cost debt. Their typical loan amounts -- ranging from about $1,500 to $3,000 -- seem manageable, but the terms, including interest rates as high as 25 percent, are not user-friendly at all. Defaults or late payments trigger higher interest and fees or demands for immediate payment in full.

"To entice and trap"
"Live check solicitations have one purpose, and one purpose only -- to entice and trap consumers into high-cost debt that they would never accept if offered by more legitimate means," says Rep. John J. LaFalce (D-N.Y.), ranking minority member of the House Committee on Banking and Financial Services. He reopened a debate on the issue of live loan checks in June when he introduced a bill to ban them.

A similar ban was proposed two years ago, but died after the industry promised to police itself with voluntary standards, including clear disclosure of the loans' terms. That hasn't worked, LaFalce says. "These so-called protections were never uniformly implemented in live check solicitations in 1998. And they have largely disappeared from many of the live check solicitations that consumers have received this year."

The high interest rates and unfriendly terms make live loan checks among the worst deals for consumers seeking to borrow money, says Stephen Brobeck, executive director of the Washington, D.C.-based Consumer Federation of America.

Live loan checks differ from the ''convenience'' checks offered to customers through an existing credit card account. With a convenience check, the consumer chooses the amount to be borrowed -- within the established credit limit -- and that sum shows up on the next monthly statement. With a live loan check, the person solicited has no prior relationship with the firm offering it.

They also differ from the look-alike checks that arrive in mailboxes as solicitations from companies offering home equity loans or lines of credit. Those "checks" are marketing mock-ups with no value.

Close kin of banned live credit cards
Live loan checks' closest kin were live credit cards -- ready-to-use plastic that used to show up in consumers' mailboxes. The credit cards arrived ready to let you (or anyone else who might get their hands on them) rack up unsecured debt immediately.

Congress banned the practice in 1970. These days, credit card companies can send only an application that's subject to the lender's normal credit underwriting.

In other words, you can be turned down. Not so with live loan checks. "They make high-cost credit far too easy to obtain," Brobeck says. "Credit should not be that easy for anyone to obtain, considering the obligations that it represents."

"Live check solicitations target senior citizens, young families in need of credit and individuals who are already heavily in debt," LaFalce says.

In June, when he introduced the Unsolicited Loan Check Consumer Protection Act of 1999, LaFalce cited letters from constituents to illustrate the problem. One writer said his wife earned only $1,850 in 1998 and this year received a $5,000 loan check based on her "excellent credit standing."

Another letter described a young man at an entry-level job who received several live loan checks for amounts from $1,500 to $2,000. He had little credit history and little means to repay, yet the lenders saw fit to offer him thousands "just for extra cash" at 22 percent interest.

"No responsible credit underwriting was involved," LaFalce said. "Credit was offered without any debt-to-income calculation to determine if the recipient could afford additional debt."

Hazards of credit offered so freely
Among the hazards of credit offered so freely is that some consumers misunderstand the terms of the loan obligation these checks create.

Others may confuse live loan checks with other payments or reimbursements and not realize they're incurring a debt at all. Live checks must conform with the Truth-in-Lending Act and its disclosure requirements, but "the fine print is in legal language that many people can't understand," Brobeck says.

In addition to creating high-cost obligations for those who innocently cash them, live loan checks present great opportunities for fraud. "They're relatively easy for someone else to cash," Brobeck said. "We're not talking just about a professional criminal, it could be an estranged spouse or a child. You can complain and you won't be held liable for the loan but, nevertheless, it's a major mess to clean up."

LaFalce's proposal came after President Clinton weighed in on the issue at a May press conference. He called for the ban on the checks, saying they could too easily fall into the wrong hands. "Consumers should not feel they have to shred their daily mail," Clinton said.

The bottom line, consumer advocates say, is that live loan checks are a bad deal, one that Brobeck likens to allowing the liquor industry to send out samples to everyone -- underage drinkers, alcoholics and DUI offenders included. "Credit can have almost as devastating effects personally as liquor can," he says.

Salvatore Caputo is a freelance writer based in Arizona

-- Posted: Aug. 30, 1999