In the wake of the ongoing economic crisis wreaking havoc across the country, states have cast a critical eye once again on lender practices that consumer advocates and attorneys general view as potentially predatory or deceptive. One such practice – the use of so-called “live checks” – has come under fire over the years as preying on vulnerable consumers who may not know that they enter into a loan agreement upon cashing such check. Some financial service providers – particularly licensed consumer finance companies who often serve as the only lender for consumers in a community – will mail the checks to former borrowers as a way to win back their business. While lenders see this as good business sense, consumer advocates argue that the checks leave consumers vulnerable to identity theft and that the consumer is on the hook for a loan simply by cashing the check.
In response to the concerns of consumer advocates, at least four states have proposed legislation to regulate the use of live checks or ban them outright. In South Carolina, debate rages over Senate Bill 132. As introduced, Senate Bill 132 imposes specific disclosure requirements on creditors that solicit consumers by use of live checks. As of mid-February, the South Carolina Senate had amended the original bill to make it an unfair trade practice for creditors to deliver unsolicited checks to consumers that obligates the consumer to repay the amount of the check plus interest and fees, in effect, banning the practice. The most current version of Senate Bill 132 expressly exempts unsolicited checks sent to consumers with whom the creditor has an existing account relationship. It is unclear whether Senate Bill 132 will pass in its current form, and some creditors are lobbying for a bill that would require specific disclosure language on the checks in lieu of the outright ban. If South Carolina enacts an outright ban, it would join a handful of other states with such bans, including Minnesota.
In Utah, Senate Bill 30 would make it a deceptive act or practice by a supplier in connection with a consumer transaction to solicit for the sale of a product or service by providing a consumer with an unsolicited check or negotiable instrument the presentment or negotiation of which obligates the consumer to purchase a product or service. The bill specifically exempts depository institutions and their affiliates, but would apply to motor vehicle dealers that use live checks in connection with their motor vehicle sales. Senate Bill 30, if adopted, should not impact live checks sent by licensed lenders to obligate consumers on a loan contract, as the Utah Consumer Sales Practices Chapter only applies to “consumer transactions,” defined to include sales, leases, assignments, award by chance, or other written or oral transfer or disposition of goods, services, or other property (but not loans).
Two other states – Indiana and Michigan – have focused their efforts to rein in live checks by hammering on the potential for identity theft. In nearly identical measures, Michigan’s Senate Bill 223 and Indiana’s cross-filed House Bill 1121 and Senate Bill 294 prohibit a person “in the conduct of trade or commerce” from soliciting a consumer who does not have an existing line of credit, or has not had or applied for a line of credit within the preceding year, through the use of an unsolicited check that includes personal identifying information other than the recipient’s name, address, and a partial, encoded, or truncated personal identifying number. The Indiana law would supplement existing Indiana law under the Indiana Uniform Consumer Credit Code that requires the language “[t]his is a solicitation for a loan. Read the enclosed disclosures before signing this agreement” to appear with the offer of the live check.
In New York, Assembly Bill 273 would ban any person from using unsolicited checks, money orders, drafts or other negotiable instruments to any person in New York, which, when redeemed, would enter such person into a loan agreement. The New York proposal renders such loan agreements void as against public policy. The New York bill would also supplement existing New York law applicable to depository institutions that mail a check to a person that, when cashed or deposited, obligates that person to repay the depository institution the amount of the proceeds of the check according to the terms mailed with the check. Currently, live checks sent by banks in New York to non-customers of the bank must advise such person that they need a form of identification to cash or deposit the check. Additional requirements also apply.
Moving forward, creditors have coalesced around a legislative strategy to regulate – but not ban – the use of live checks. Such regulation would include specific disclosure language that must appear on the face of the check. California, Missouri, New Hampshire, New Jersey, North Carolina and Washington State require such disclosures. For example, the California Finance Lenders Law requires licensed lenders to place a warning in large print on the face of the check to advise consumers that the check is an extension of credit and that the consumer will pay charges for cashing it. Consumer finance lenders have willingly indicated that they would like to see some sort of disclosures accompanying the use of the checks. Such disclosures are consistent with the American Financial Services Association’s (AFSA) Code of Ethics, a voluntary code followed by many consumer finance lenders. However, it remains to be seen what sentiment carries the day. Creditors that rely on live checks as a core part of their originations should monitor state law legislative developments on live checks closely.
Cathy Brennan is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Cathy at 410-865-5405 or by email at cbrennan@hudco.com.