Live Loan Checks:

Information on Unsolicited Consumer Loans for Preapproved Borrowers

GGD-98-176: Published: Aug 14, 1998. Publicly Released: Sep 14, 1998.

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Pursuant to a congressional request, GAO provided information on live loan checks, focusing on the: (1) characteristics of live loan checks and the major organizations that provide unsolicited loan checks; (2) volume of live loan checks in 1995, 1996, and 1997 and the expected volume in 1998; and (3) benefits and risks of live loan checks for the borrowers and lenders.

GAO noted that: (1) once cashed, live loan checks result in unsecured consumer loans; (2) bank officials GAO interviewed told it that live loan checks are aimed at the most creditworthy customers--that is, those least likely to be delinquent or in default in making loan payments; (3) according to bank officials, such loans are made at interest rates ranging from 12.9 percent to 15.9 percent, compared to an average 16 percent for credit cards; (4) Fleet Bank officials told GAO that it has sent potential borrowers live loan checks ranging from $3,000 to $10,000 based on its estimate of the borrower's ability to repay the loan; (5) the repayment terms for these loans ranged from 48 months to 60 months, and the loans were amortized; (6) Fleet officials stated that borrowers generally have used the loan amounts for expenses such as home improvements, debt consolidation, and school expenses; (7) according to bank officials GAO interviewed, at least eight financial institutions have offered live loan checks; (8) of these eight financial institutions, six were banks: Chase Manhattan, Fleet, First USA Bank, Signet Bank, BancOne Corporation, and First Chicago NBD; (9) two were nonbanks: Capital One and Beneficial Corporation; (10) First Chicago stopped offering these loans after suffering a level of losses that it considered not acceptable during a pilot program; (11) public- and private-sector officials told GAO that comprehensive data on the volume of data were not available; (12) Fleet provided GAO with quantitative data on its live loan check program; (13) between 1995 and 1997, Fleet mailed 4.35 million live loan checks; (14) of these, approximately 155,000 borrowers cashed the checks and accepted the loans; (15) Fleet made over $680 million in loans through this program; (16) Fleet officials told GAO that it experienced 68 confirmed cases of fraud, which generally involved someone other than the intended recipient cashing the check; (17) public- and private-sector officials identified benefits and risks associated with live loan checks; (18) borrowers benefit from live loan checks because these checks meet their needs for immediate access to funds at interest rates competitive with those offered by credit cards; (19) risks to the borrowers include the potential for these loans to compound problems associated with high levels of consumer borrowing; and (20) Fleet and Chase informed GAO that, while loans initiated from cashing live loan checks were a small percentage of their bank assets, the programs thus far have been profitable, with manageable risks.

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