Will Congress move to outlaw ‘live’ checks?

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Depending on whom you ask, an unsolicited check that arrives in the mail and can be immediately converted into a high-interest loan is either a lifeline for cash-strapped households or predatory lending at its worst.

Installment lenders say that consumers who opt to cash these so-called “live” checks do so because they are in need of short-term financing and don’t have many other borrowing options because their credit is blemished. They know full well that it is not free money and that once a check is cashed or deposited into a bank or credit union account it immediately becomes a loan that has to be paid back with interest, said Bill Himpler, president-elect of at the American Financial Services Association, a trade group that represents installment lenders.

“None of this is in fine print,” Himple said. “The checks all state, in 12-point font and moving up to 18- or 24-point font, that this is a loan. You know you’re getting a loan, you know the rate, you know the [annual percentage rate] and you know the term.”

Consumer advocates argue that many consumers who receive and cash live checks don’t always know what they are getting into. The loans can carry rates ranging from 30% to over 100%, and the terms aren’t as clearly disclosed as installment lenders claim they are, said Lauren Saunders, associate director of the National Consumer Law Center.

“We’ve been getting more complaints about live checks, from both lawyers on the ground and the [Consumer Financial Protection Bureau’s] complaint database,” she said.

The view that these loans are predatory is gaining traction with lawmakers.

Sen. Tom Cotton, an Arkansas Republican, is sponsoring legislation that would prohibit lenders from sending unsolicited checks to consumers. “Many individuals don’t realize that these checks are actually high-interest loans until it’s too late,” he says. Bloomberg News

Bipartisan legislation introduced in the Senate earlier this month would ban the use of live checks —installment lenders call them “convenience checks” — for the purpose of originating short-term, small-dollar loans.

Sponsored by Sens. Doug Jones, D-Ala.; Jeff Merkley, D-Ore.; and Tom Cotton, R-Ark.; the bill is modeled after a decades-old law that bans the mailing of live credit cards, Cotton said.

“People should understand clearly when they are taking on debt,” Cotton said in a Dec. 10 news release. “But because ‘live’ checks mailed directly to consumers don’t require an application or any previous relationship with the consumer, many individuals don’t realize that these checks are actually high-interest loans until it’s too late.”

The bill was assigned to the Senate Banking Committee, but a hearing has not yet been scheduled. No similar measure has been introduced in the House, but that could change once Democrats take control of the chamber Jan. 3. Indeed, the incoming chair of the House Financial Services Committee, California Democrat Maxine Waters, has said that protecting consumers from predatory lending practices would be among her top priorities.

Live checks are not new, but installment lenders have accelerated their use of them in recent years amid what they view as heightened consumer demand.

Many banks have largely retreated from small-dollar lending due to heightened regulatory scrutiny, and installment lenders and other nonbank lenders, including many fintechs, have stepped in to fill the void, industry experts say.

Compared to some other loan products, live checks have not been a major source of consumer complaints, said Sarah Auchterlonie, a former CFPB acting deputy enforcement director. That’s because these lenders are making certain to comply with existing state laws, she said.

“I’m not sure how big of a problem this is,” said Auchterlonie, who now represents fintechs as an attorney with Brownstein Hyatt Farber Schreck. “Everybody knows that a live check with a secret loan attached to it would be considered unfair and deceptive.”

The nonbank lenders who underwrite live checks, and the banks that issue and clear them, are well aware of the regulatory trouble they would face if they engage in deceptive practices with live checks, said Andrea Mitchell, an attorney at Buckley Sandler who advises banks on regulatory matters. Banks, in particular, know the legal problems they would face if they engage in practices that could be deemed unfair or deceptive.

“Banks can still be found liable under the same theories that gave rise to Operation Choke Point,” Mitchell said, referring to an Obama-era policy that led some banks to close the accounts of payday lenders and other money-services business that could bring then unwanted scrutiny from regulators. “Their exposure is still there.”

Some of the largest companies in the business of live checks, according to company websites and regulatory filings, include Mariner Finance in Nottingham, Md., a former subsidiary of First Mariner Bank; Wallace Management in McAlester, Okla., which operates as Dixie Finance and under other trade names; and Regional Management Corp. in Greer, S.C.

Mariner and Wallace could not be reached for comment.

A Regional Management spokeswoman declined to comment, but recent regulatory filings show that it has been dramatically increasing its mailings of live checks.

In 2017, for example, it mailed 6.7 million such checks to U.S. households, or 30% more than it sent in 2016, according to a regulatory filing.

At Sept. 30, Regional Management had about $144 million in loans outstanding that were originated through convenience checks, according to its most-recent quarterly report filed with the Securities and Exchange Commission. Most such loans are for less than $2,500 and some are secured by a borrower’s “non-essential household goods” or vehicle liens.

Regional Management selects consumers to receive its live checks through a pre-screening process based on credit bureau reports or other data aggregators, the company said in its most recent annual report. Regional Management has also developed a proprietary underwriting model that analyzes “approximately 25 to 30 different attributes” of potential borrowers.

“We expect that convenience checks will continue to represent a meaningful portion of our installment loan originations in the future,” the company said.


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