A bill introduced in the Senate proposes doing away with the direct mailing of live loan checks, checks already written out to pre-approved borrowers, which are actually high-interest loans.
Senator Jeff Merkley of Oregon introduced legislation on Monday, titled the Deceptive Loan Check Elimination Act. The bill calls for an amendment to the Truth in Lending Act to include language that would prohibit the practice of mailing out unsolicited checks to pre-approved consumers — so called “live loan checks” — that are actually somewhat disguised high interest loans.
“No person may extend any consumer credit,” reads the bill “unless the consumer submitted a written application for…the extension of credit before the date on which the creditor sent the check or negotiable instrument.”
Bill Also Targets Unsolicited Credit Card Offers
Senator Merkely’s bill, which was co-sponsored by fellow Democrat, Senator Sherrod Brown of Ohio, also contains provisions to curtail the practice of sending unsolicited credit card offers to consumers. “No person may issue a credit card,” reads the bill, “except in response to a request or application for such a credit card.”
According to this report, nearly one billion credit card offers were mailed, unsolicited, to consumers in the first quarter of 2011 alone. The Postal Service folks aren’t going to like that! Credit card direct mail marketing likely makes up a large chunk of their dwindling revenue.
Live Loans Are Predatory by Nature
But the live loan checks are less common than credit card offers, and much sneakier. This Get Rich Slowly story details the process, which works like this:
You’re mailed a check for $6,000 — yours, for whatever you want to spend it on! Upon cashing it, you’ve signed up for a $6,000 loan with the issuer, and hit with a $50 annual fee. The interest rate on the loan is 2.9% a month, which comes out to about 35% annually — that’s $2,100 a year on the principal. Worse yet, minimum payments on the loan are structured so that roughly 85% of the payment goes to paying interest — the companies try to lock you in an interminable cycle of debt.
American consumers will be better off without these offers showing up in their mailboxes, for sure. But one could argue that they’d be even better off knowing better than to get into a loan with a brutal 35% APR, structured in a way that will have them paying it off for decades.
The Truth in Lending Act, which the bill aims to amend, has been on the books since 1968. It created laws for issuers of consumer credit regarding disclosures of fees and rates. Senator Murkely’s bill has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.