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FDIC Consumer News - Fall 1997
|Keeping the Costs of "Loan
Checks" in Check
Lenders are mailing checks that enable consumers to write themselves a loan. But this convenience may come with a high price and other potential perils.
You've probably received checks in the mail from banks and other financial institutions offering you the chance to write yourself a loan, perhaps for up to $10,000 or more. For many people, a "loan check" - also known as a "convenience check" or a "live check" - is a convenient way to buy merchandise, pay bills, obtain cash or transfer a balance from one loan or credit card to another. The convenience comes from not having to leave your house or fill out a lengthy application to get the loan. But according to Pete Hirsch of the FDIC's Division of Supervision in Washington, "many consumers don't realize the potential risks of loan checks, including high costs and the possibility of the checks being used by criminals." These and other concerns have prompted recent congressional hearings as to whether unsolicited mailings of loan checks should be banned. To help you learn more about the potential risks of loan checks, FDIC Consumer News offers the following guidance.
Understand the Costs
By signing or cashing a loan check, you are agreeing to all the terms and conditions of a loan you must pay back. That's why it's important to first check the interest rate, which may range from the low-teens to as high as the mid-twenties. Loan checks also carry other expenses, including substantial fees. In addition, you may not be allowed a "grace period" - interest charges would begin accumulating as soon as you use the loan check. Because of these costs, we suggest that you thoroughly read the literature sent along with the blank checks so that you are aware of all charges. If you have any questions, contact the issuer before using these checks. Many consumers may find they're better off simply writing a standard check from their account, using a debit card or charging purchases.
Protect Against Fraud
Fraudulent use of loan checks is fast becoming a serious problem for bankers, merchants and law enforcement authorities. In general, loan checks mailed to consumers are relatively easy for thieves to identify and to steal (from mailboxes or elsewhere). The fact that most loan checks were never requested by the intended recipient means that the consumer may be unaware a check was stolen until the bills arrive.
How can you protect yourself ? The most important move is to shred any loan checks before tossing them out. That's because thieves go through trash bins - it's called "dumpster diving" - to look for blank checks as well as credit card applications and other documents. If you have doubts about the security of your incoming mail, consider renting a P.O. box or making some other arrangement.
By law, you owe nothing if a thief uses a loan check made out to you. The costs fall directly on the creditors and on the companies that cash forged checks. However, some of the costs indirectly are passed on to consumers in the form of higher interest rates on loans and higher costs for merchandise. Also, you'll probably spend time and effort proving your innocence - a hassle that consumer groups say innocent victims shouldn't have to go through over a financial product they didn't ask for in the first place.
Lenders say their anti-fraud procedures are good, and getting better. They also point out that, by law, consumers can call one of three major credit bureaus (see the article Your Wallet: A Loser's Guide) to "opt out" of many unsolicited mailings for credit, including loan checks. Even so, the House Banking Committee recently held a hearing on congressional proposals to ban the mailing of unsolicited loan checks just as it now is illegal to mail unsolicited credit cards to consumers.
So, what should you do? Here's good basic guidance recently issued by the Better Business Bureau in Denver: Don't cash a loan check until you understand the full ramifications. Review all the terms of the loan. Contact a lending officer if you have concerns. Shop around and compare interest rates. Analyze your ability to repay the loan.
We leave you with this: If you're sure you don't want loan checks, consider having your name removed from future mailings. At the very least, shred unwanted checks before disposing of them. If anyone should benefit from loan checks, it should be you not a thief. You also can find out if a bank's deposits are federally insured by calling the FDIC's Division of Compliance and Consumer Affairs toll-free (see details in the For More Information section of this newsletter) or by consulting the Institution Directory on the FDIC's Internet home page. Be aware that some legitimate banks operate on the Internet using trade names that differ from the legal name of the institution. When in doubt, your best bet is to call the FDIC.
Before purchasing goods or services over the Internet: Try to find out if anyone you know has dealt with the merchant online and ask how it went, Kopchik says. If you don't have personal references for the merchant, consider asking for guidance from your local Better Business Bureau or Chamber of Commerce. Both the U.S. Chamber of Commerce and the American Institute of Certified Public Accountants have indicated that they have plans to "certify" merchants who do business over the Internet. Some Internet service providers vouch for merchants that operate from their sites. For example, America Online will cover your maximum loss from credit card fraud ($50 per card under federal law), provided you report the fraud promptly.
Be careful using your credit card number when buying over the Internet. Most reputable merchants who accept card payments over the Internet use a system that scrambles or "encrypts" your card number so it can't be read by outsiders. The latest version of some popular Internet browser programs (such as Netscape Navigator and Microsoft Internet Explorer) may be equipped with encryption technology. Your computer screen generally will display some sort of logo (for example, a "lock and key") showing that your message is being encrypted. The major credit card associations (VISA and MasterCard) also have announced plans to start a new system they say will safely transmit credit card numbers over the Internet and verify the authenticity of merchants.
Some merchants may encourage you to pay electronically without using your credit card number. Perhaps you'll be asked to maintain an "electronic wallet" with a company (CyberCash is one) that will pay the merchant on your behalf. In other cases, companies will enable you to pay a merchant using your credit card but without transmitting the card number over the Internet.
Finally, if you think you've been victimized by a fraud, contact the Internet Fraud Watch of the National Fraud Information Center, which forwards reports of suspected crimes to federal and state authorities. Its toll-free number is 800-876-7060, and its Internet site is www.fraud.org. Or, you can report the suspected fraud directly to the appropriate federal or state agency (for example, the Securities and Exchange Commission if the company is a stockbroker).
Privacy on the Internet: As you spend time on the Internet, the various Web sites you visit may collect information about you, with or without your knowledge, regarding such things as the kinds of products you buy and the topics you find interesting. These Web sites may use this information internally or sell it to other firms or organizations. While these practices are not illegal, they may result in unwanted e-mail from unfamiliar companies or groups.
"Look to see if a Web site you are visiting discloses the company's policy about collecting and using the information it gathers," says the FDIC's Bonnette. "If it doesn't disclose its policy and you want to know more, follow up by calling or e-mailing the company." Among your other options: software from Internet service providers and computer stores that can block unwanted e-mail.
While the Internet has made it possible to bank, invest and shop from the comfort of your home, you still have to be cautious. After all, just because you "surf" the Internet you don't want a thief to "wipe out" your money.
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