Live Loan Checks Have Certain Characteristics

While comprehensive data on live loan checks are not available, data provided by one lender depict its loans as amortizing loans with interest rates below credit card rates. According to Fleet, borrowers receive live loan checks ranging from $3,000 to $10,000, based on the lender’s estimate of the recipient’s predicted ability to repay the loan. According to Fleet and Chase officials, interest rates on loans resulting from live loan checks have ranged from 12.9 percent to 15.9 percent. The repayment terms for these loans ranged from 48 months to 60 months and are amortized. Chase officials told us that, under their policy, a customer is to be called by a Chase bank official when the check is presented by the depository bank to Chase for payment, to ensure that the intended person actually deposited the check. Major Participants Offering Live Loan Check Programs

Public and private sector officials told us that, while there was no comprehensive list of institutions with live loan check programs, several institutions were known to have offered such programs. Nonbanks included Capital One in Falls Church, Virginia, and Beneficial Corporation in Wilmington, Delaware. First Chicago NBD had conducted test marketing of live loan checks; a First Chicago official told us that the bank discontinued the program because the level of loss in a pilot program was not acceptable. Benefits and Risks Are Associated With Live Loan Checks for Both Borrowers and Lenders

Public and private sector officials identified some benefits and risks associated with live loan checks for both borrowers and lenders. The Consumer Federation of America (CFA) told us that these loans could compound problems caused by high consumer debt. For lenders, the loans were often seen as profitable, with manageable risks. First Chicago, however, discontinued making the loans because the losses during a pilot program were “not acceptable.”

		Borrowers Experienced Benefits and Risks With Live Loan Checks

In the view of lenders, borrowers enjoyed benefits and risks comparable to those associated with conventionally marketed unsecured loans. To date, it does not appear that many potential borrowers have been exposed to the risk of fraudulently cashed loan checks. Fleet officials said that live loan checks were moderately profitable loans. With 155,000 loans accepted between 1995 and 1997, for example, Fleet reported 68 confirmed cases of fraud. Scope and Methodology

To determine the characteristics of live loan checks, we gathered information on various aspects of individual loans, as well as on the average live loan check profile and the average borrower’s profile. We obtained Fleet’s volume of live loan check lending in 1995, 1996, and 1997 and the expected volume in 1998 by interviewing Fleet officials; other lenders were not willing to provide volume data.
Why GAO Did This Study

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.

What GAO Found

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.