Live Loan Checks: Information on Unsolicited Consumer Loans for
Preapproved Borrowers (Letter Report, 08/14/98, GAO/GGD-98-176).

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.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-98-176
     TITLE:  Live Loan Checks: Information on Unsolicited Consumer Loans 
             for Preapproved Borrowers
      DATE:  08/14/98
   SUBJECT:  Lending institutions
             Losses
             Debt
             Credit
             Financial management
             Personal loans
             Bank loans
             Negotiable instruments

             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Financial Institutions and
Regulatory Relief, Committee on Banking, Housing, and Urban Affairs,
U.S.  Senate

August 1998

LIVE LOAN CHECKS - INFORMATION ON
UNSOLICITED CONSUMER LOANS FOR
PREAPPROVED BORROWERS

GAO/GGD-98-176

Live Loan Checks

(233559)


Abbreviations
=============================================================== ABBREV

  AFSA - American Financial Services Association
  FTC - Federal Trade Commission
  OCC - Office of the Comptroller of the Currency
  CFA - Consumer Federation of America
  APR - Annual Percentage Rate

Letter
=============================================================== LETTER


B-279852

August 14, 1998

The Honorable Lauch Faircloth
Chairman, Subcommittee on Financial
 Institutions and Regulatory Relief
Committee on Banking, Housing, and Urban Affairs
United States Senate

Dear Mr.  Chairman: 

This report responds to your request that we provide information on
live loan checks.  Live loan checks are preapproved loans extended to
potential borrowers by sending them unsolicited, negotiable checks. 
When recipients sign, then subsequently cash or deposit the checks,
they obtain the loans.  Lenders preapprove recipients for these live
loan checks after assessing their creditworthiness. 

As agreed with your office, this report provides available
information concerning (1) the characteristics of live loan checks
and the major organizations that provide unsolicited loan checks; (2)
the volume of live loan checks in 1995, 1996, and 1997 and the
expected volume in 1998; and (3) the benefits and risks of live loan
checks for the borrowers and lenders.  We also agreed to provide
available information on losses associated with live loan checks. 

To compile this information, we interviewed officials representing
federal regulatory agencies, one banking association, one rating
agency, one consumer advocacy group, and three lending institutions
(lenders) offering live loan checks.  We also reviewed publicly
available information, including published reports on live loan check
issues and industry standards for live loan checks.  Limited
information exists on live loan check volume and losses
industry-wide, and we relied primarily on specific lending
institution data.  While we did not independently verify these data,
we corroborated evidence with other independent sources whenever
possible.  We conducted our work between January and June 1998. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Once cashed, live loan checks result in unsecured consumer loans.\1
Bank officials we interviewed told us 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.  According to Fleet
Bank (Fleet) and Chase Manhattan (Chase) 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.\2 Fleet officials
told us 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.  The repayment terms for these loans
ranged from 48 months to 60 months, and the loans were amortized.\3
Fleet officials stated that borrowers generally have used the loan
amounts for expenses such as home improvements, debt consolidation,
and school expenses. 

According to bank officials we interviewed, at least eight financial
institutions have offered live loan checks.  Of these eight financial
institutions, six were banks:  Chase, Fleet, First USA Bank, Signet
Bank,\4 BancOne Corporation, and First Chicago NBD.  Two were
nonbanks:\5 Capital One and Beneficial Corporation.  First Chicago
stopped offering these loans after suffering a level of losses that
it considered "not acceptable" during a pilot program. 

Public and private sector officials told us that comprehensive data
on the volume of live loan checks were not available and that no one
was tracking volume data.  One institution--Fleet--provided us with
quantitative data on its live loan check program.  Between 1995 and
1997, Fleet mailed 4.35 million live loan checks.  Of these,
approximately 155,000 borrowers cashed the checks and accepted the
loans.  Fleet made over $680 million in loans through this program. 
Fleet officials told us that it experienced 68 confirmed cases of
fraud, which generally involved someone other than the intended
recipient cashing the check. 

Public and private sector officials identified benefits and risks
associated with live loan checks for both borrower and lenders.  In
the views of these officials, 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. 
Risks to the borrowers include the potential for these loans to
compound problems associated with high levels of consumer borrowing. 
In fraud situations, losses are to be absorbed by the bank and/or the
institution honoring the check, rather than by the borrower.  A
consumer advocacy group official noted, however, that the potential
borrower may face considerable inconvenience in correcting personal
credit records after a forged endorsement occurs. 

Two lenders--Fleet and Chase--informed us 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.  They said that losses were managed by targeting the loans to
the most creditworthy borrowers.  However, one lender--First
Chicago--discontinued offering these loans after suffering losses
during a pilot program. 


--------------------
\1 Unsecured loans are not backed by collateral. 

\2 According to the Federal Reserve, as of May 7, 1998, this was the
average interest rate charged by commercial banks for credit cards. 

\3 Amortization is the reduction of a debt by periodic payments of
interest and principal on an unpaid loan balance for the life of the
loan. 

\4 On March 20, 1998, First Union Corporation purchased Signet Bank. 

\5 The U.S.  Congress defines a commercial bank as an institution
that (1) accepts deposits that the depositor has a legal right to
withdraw on demand, and (2) engages in the business of making
commercial loans.  This statutory definition is important because, by
not engaging in either of these special activities, a corporation can
own and operate an institution that otherwise operates like a bank,
without being subject to Federal Reserve regulation as a bank holding
company.  Financial institutions that fit this mold have been
referred to as nonbanks. 


   BACKGROUND
------------------------------------------------------------ Letter :2

According to the American Financial Services Association (AFSA),\6
some of its members have been issuing live loan checks since the
1980s.  Live loan checks are delivered in the mail and are
preapproved offers of credit.  Consumers are selected to receive the
loan offers if they meet certain credit criteria. 

These preapproved offers of credit are based, in part, on a
consumer's credit score.  Credit bureaus develop scores by assessing
various types of information collected from a large pool of
borrowers, including borrowers with good payment histories and others
with poor payment histories, to estimate the credit risk\7 associated
with different types of loans.  Credit scoring systems use
statistical analysis to identify and weigh the characteristics of
borrowers who have been most likely to make loan payments.  For
example, borrowers with little or no history of delinquent payments
receive higher credit scores than borrowers with many delinquent
payments.  Most widely used credit scoring systems have a range of
scores from 350 to 900.  Borrowers with higher scores are considered
more creditworthy because they are more likely to repay the loan on
time and in full than are borrowers with lower credit scores.\8


--------------------
\6 Founded in 1916, AFSA is a trade association for a wide variety of
market-funded providers of financial services to consumers and small
businesses. 

\7 Credit risk is the risk that an obligation will not be paid on a
timely basis. 

\8 Even though borrowers with higher scores could become delinquent
or default and some borrowers with lower scores could pay the loan as
required, statistics show that borrowers with higher scores are more
likely to pay the loan on time, and in full, than are borrowers with
lower scores. 


   LIVE LOAN CHECKS HAVE CERTAIN
   CHARACTERISTICS
------------------------------------------------------------ Letter :3

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 this lender,
the recipients of its live loan checks had high credit scores and
good credit histories.  Chase and Fleet officials provided us with
the materials they sent to the recipients of live loan checks.  The
materials include information disclosing that the check represents a
loan and presenting the terms and conditions of the loan.  Voluntary
industry standards also call for such disclosure. 


      AVERAGE LIVE LOAN CHECK
      PROFILE
---------------------------------------------------------- Letter :3.1

Comprehensive industry data on the average live loan check and the
borrower using this product are not available.  Fleet and Chase
officials, however, provided us with information on their live loan
check profile.  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.  Prior to
selection, recipients had demonstrated their ability to manage debt
by having satisfactory payment histories.  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.  In addition, Fleet's live loan checks generally were only
valid for 6 weeks from the date of issuance;\9 this provision is
intended to lessen the risk of using outdated credit data as a basis
for assessing a potential borrower's creditworthiness. 


--------------------
\9 According to industry standards, live loan checks can be valid for
6 months. 


      AVERAGE LIVE LOAN CHECK
      BORROWER'S PROFILE
---------------------------------------------------------- Letter :3.2

Borrowers' credit scores were used as the primary factor in
determining whether to offer a live loan check, and credit criteria
were conservative in the lender's view.  Fleet officials told us that
their borrowers had an average credit score of 730, with a minimum
cut-off of 690.  A credit score of 730, for example, implies odds of
125 to 1 against defaulting on an unsecured loan--that is, the
estimated probability of default is less than 1 percent.  The
officials said that Fleet borrowers primarily resided within the
established franchise area where the bank offers retail banking
services.\10 The borrower had a median household income of
$44,000.\11 In addition to having to meet a minimum credit score,
borrowers also were to meet minimum requirements set by proprietary
risk and bankruptcy models,\12 according to Fleet officials.  The
borrower's average debt utilization--that is, the proportion of
available credit limits actually used in unsecured debt on current
revolving credit sources--was 29 percent, which the bank believes
estimates the borrower's propensity to use credit.  Also, borrowers
had no prior record of bankruptcy, foreclosure, tax liens, or
garnishments.\13

According to AFSA, its members who offer live loan check programs
reported that borrowers extended live loan check offers are generally
between 35 and 50 years of age with income levels between $35,000 and
$55,000.\14


--------------------
\10 Fleet's franchise area comprises Maine, Connecticut, Rhode
Island, Massachusetts, New York, New Jersey, and New Hampshire. 

\11 According to Census Bureau data, the median household income in
the northeastern region of the United States was $39,368 in 1996. 

\12 These models were developed to predict bankruptcy and to further
reduce the bank's risk. 

\13 A garnishment is a court order to an employer to withhold all or
part of an employee's wages and then send the money to the court or
to a person who won a lawsuit against the employee. 

\14 According to Census Bureau data, the median household income
nationally was $35,492 in 1996. 


      DISCLOSURE WAS MADE TO
      BORROWERS OF LIVE LOAN
      CHECKS
---------------------------------------------------------- Letter :3.3

Interviews with lenders, bank regulators, and the Federal Trade
Commission (FTC), which is responsible for, among other things,
fostering free and fair business competition and preventing
monopolies and activities in restraint of trade, revealed few
complaints that live loan checks terms were not disclosed to
borrowers.  According to lenders, disclosure requirements are
intended to protect the borrower and the lender.  Office of the
Comptroller of the Currency (OCC) officials consider live loan checks
to be like any other small consumer loans in needing to meet Truth In
Lending Act\15 requirements ensuring that creditors disclose credit
terms and the cost of credit as an annual percentage rate (APR). 

We spoke with lenders about the disclosure features of their live
loan check programs.  Fleet and Chase officials provided us with
copies of their disclosure materials, which contained information
that identified the loan check as a loan and clearly specified the
interest rate and the terms and conditions of the loan.  In the
lenders' solicitation materials, for example, there were several
statements such as, "this is a check for a loan" or "loan check." The
interest rate, repayment terms, and other terms were displayed.  The
live loan checks were labeled "non-transferable" and "for deposit
only" to help ensure that the customers would take the checks
directly to their own banks for deposit.  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. 


--------------------
\15 The Truth in Lending Act, 15 U.S.C.  1601 et seq.  The act is
implemented by the Federal Reserve Board's Regulation Z, 12 CFR part
226. 


      THE INDUSTRY HAS DEVELOPED
      VOLUNTARY STANDARDS FOR LIVE
      LOAN CHECKS
---------------------------------------------------------- Letter :3.4

AFSA issued voluntary standards for live loan checks on September 17,
1997, and expanded them on October 29, 1997.  According to an AFSA
official, the voluntary standards for live loan checks are intended
to provide extra protection for consumers.  Bank officials told us
that they abide by the voluntary standards to avoid the risk of
creating a negative image of the live loan check program.  AFSA
voluntary standards are as follows: 

  -- Live loan checks sent by mail or other similar instruments
     offered by AFSA members are to be negotiable up to 6 months
     after receipt.  A lender's printed material accompanying the
     offer must advise the consumer to void and destroy the
     instrument if it is not going to be negotiated. 

  -- Live loan checks sent by mail must include the following
     disclosure:  "This is a solicitation for a loan--read the
     enclosed disclosures before signing and cashing this check."

  -- Solicitations are to be mailed in envelopes with no indication
     that a negotiable instrument is inside.  Envelopes are to be
     marked with instructions informing the Postal Service not to
     forward the item if the intended recipient is no longer at the
     address on the envelope. 

  -- In the event a live loan check-by-mail offer is stolen or
     fraudulently cashed, the intended recipient is to have no
     liability for the loan obligation. 

  -- In order to deter theft or forgery, a consumer is to be asked to
     complete a confirmation statement provided by the creditor. 


   MAJOR PARTICIPANTS OFFERING
   LIVE LOAN CHECK PROGRAMS
------------------------------------------------------------ Letter :4

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.  Banks
included Fleet in Boston, Massachusetts; Chase Manhattan Bank in New
York, New York; Signet Bank in Richmond, Virginia; First USA in
Wilmington, Delaware; and BancOne Corporation in Columbus, Ohio.\16

Nonbanks included Capital One in Falls Church, Virginia, and
Beneficial Corporation in Wilmington, Delaware.\17 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. 

Regulators and industry officials we interviewed also told us that no
comprehensive data show the volume of live loan check activity. 
These officials also believed that it would be difficult for
nonregulators to compile such industrywide information because
individual financial institutions might be reluctant to release their
proprietary data. 

Although comprehensive industry data were not available, Fleet
officials provided us with information on Fleet's live loan check
program history.  (See table 1.)



                                Table 1
                
                Fleet's Live Loan Check Program History
                 Showing the Volume of Live Loan Check
                  Activity for the period 1995 through
                               March 1998

                                      Percent of
                                       solicited                  Loan
                                       potential                amount
                         Number of     borrowers  Number of  (millions
                         live loan      who were       loan         of
                            checks         Fleet  acceptanc  dollars)\
Year                        mailed     customers         es          a
-----------------------  ---------  ------------  ---------  ---------
1995\b                      50,000           100      8,000        $30
1996\c                   2,100,000            60     94,000       $400
1997 \                   2,200,000            25     53,000       $250
1998 (through March)     1,500,000             8        N/A        N/A
======================================================================
Total                    5,850,000                 155,000\      $680\
----------------------------------------------------------------------
Legend: 

N/A = not available. 

\a These figures are estimates. 

\b Nineteen ninety-five was a test year. 

\c In 1996, most of the live loan checks were sent to Fleet
customers.  The 40 percent sent to non-Fleet customers were in the
New England area, where Fleet officials said that consumers could
recognize Fleet's name. 

Source:  Fleet Bank. 

Although a similar number of checks were mailed in 1997 as in 1996,
Fleet experienced far fewer acceptances in 1997 compared with 1996. 
Fleet officials said that the decline in acceptances occurred because
in 1997 the potential borrowers were primarily non-Fleet customers,
who were less likely to recognize Fleet's name. 


--------------------
\16 On April 13, 1998, BancOne and First Chicago NBD announced a
merger that is expected to be completed during the fourth quarter of
1998.  The new headquarters will be in Chicago. 

\17 On April 7, 1998, Household International and Beneficial
Corporation announced a merger agreement that is expected to be
completed in the third quarter of 1998. 


   BENEFITS AND RISKS ARE
   ASSOCIATED WITH LIVE LOAN
   CHECKS FOR BOTH BORROWERS AND
   LENDERS
------------------------------------------------------------ Letter :5

Public and private sector officials identified some benefits and
risks associated with live loan checks for both borrowers and
lenders.  In general, the benefit for borrowers was the ease of
obtaining the loan; the risks to a borrower were comparable to those
for other unsecured loans.  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.  However, limited data exist on the losses
associated with live loan checks.  Fraud did not appear to be a
widespread problem, although there was some concern among industry
officials about how a potential borrower might be inconvenienced by
fraud.  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
---------------------------------------------------------- Letter :5.1

In the view of lenders, borrowers enjoyed benefits and risks
comparable to those associated with conventionally marketed unsecured
loans.  Borrowers accepted unsecured live loan checks at identical or
lower interest rates than the recipient would receive at a local loan
office of the lender.  These loans had predictable, fixed monthly
repayment terms of 48 to 60 months.  According to lenders, borrowers
experience little risk beyond that normally associated with a loan
because they are protected against all liability from fraud or
misuse. 

Some public and private sector officials said that live loan checks
could potentially increase the possibility of default and bankruptcy
if the borrower misused credit by running up credit card balances. 
The executive director of CFA said that live loan checks would only
compound the problems created by the abundance of unsecured,
high-cost credit card debt.  Two lenders, however, said that there
was no evidence to show that borrowers would file for bankruptcy
quicker as a result of accepting live loan checks instead of using
credit cards. 

To date, it does not appear that many potential borrowers have been
exposed to the risk of fraudulently cashed loan checks.  Lenders we
spoke with told us that the bank does not hold a consumer responsible
if the check mailed to that consumer is deposited or forged by
another individual.  For example, Chase officials told us that, in
the event that a live loan check were stolen, the intended recipient
would not be charged if he or she signed an affidavit stating that
the check had not been cashed by him or her. 

AFSA officials said that state and federal laws shield consumers from
liability related to live loan checks and that lenders' credit
selection practices help reduce the rate of fraud.  AFSA reported
that the actual fraud on live loan checks has been extremely low,
less than one-tenth of one percent of total mailings.  AFSA believes
that its voluntary standards ensure minimum inconvenience to the
consumer in the event that a check is not cashed by the intended
consumer. 

Public and private sector officials have not seen large levels of
fraud involving live loan checks.  OCC had no reported cases of
fraudulent acts of cashing a live loan check.  Federal Reserve
officials said they do not believe that there is a significant
problem with losses associated with live loan checks.  Federal
Reserve officials noted that the primary reason for the low rate of
fraud is that rules governing check cashing practices act to deter
fraud.  The recipient's rights in the case of a forged endorsement
are generally governed by state law.  Articles 3 and 4 of the Uniform
Commercial Code have been adopted in almost every state and determine
check negotiation procedures and liability for invalid checks.  FTC
and Federal Reserve officials said that they had not received many
complaints about live loan checks that involved theft and fraud
issues over a 2-year period.  The executive director of CFA
testified, however, that the consumer may experience considerable
inconvenience if the live loan check is cashed by someone other than
the intended recipient, and believed that a consumer should not
experience any inconvenience if fraud occurs. 


      LENDERS USING LIVE LOAN
      CHECKS SAID THEY EXPERIENCED
      BENEFITS AND RISKS AND
      ABSORBED ALL FRAUDULENT
      LOSSES
---------------------------------------------------------- Letter :5.2

Fleet and Chase officials told us that their live loan check programs
met corporate profitability requirements and expanded their lines of
credit and their loan business.  According to bank officials, live
loan check programs are attractive because they enable lenders to
provide a broader range of consumer loan products. 

Lenders viewed live loan checks as a convenient means of delivering a
fixed rate, closed ended, unsecured loan product to a consumer. 
Fleet officials said that live loan checks were moderately profitable
loans.  They said that the results of these loans were provided
monthly to senior management to assess the results against
expectations.  Chase officials said that a benefit of the bank's loan
check program was that the net interest margin for live loan checks
was higher than that for mortgage lending.  Chase officials told us
that prepayment rates for live loan checks are lower than those for
mortgages.  When interest rates decline, lower payments help cash
flows remain more stable, which helps Chase to better manage its loan
portfolio.  In contrast, a decline in interest rates generally
results in a rise in prepayments of some other loans.  Chase
officials also said that, by using good underwriting practices, they
were able to manage credit risk. 

With regard to cases involving fraud, both lenders and bank
regulatory agency officials said that lenders are to absorb all
losses.  With 155,000 loans accepted between 1995 and 1997, for
example, Fleet reported 68 confirmed cases of fraud.  Generally, in
these cases, an unauthorized household member cashed the check.  In
order to prevent fraud, Fleet required that the borrower access funds
only by depositing a check into a personal bank account.  Once the
live loan check was cleared, Fleet created an installment loan for
the borrower.  To reduce the risk of fraud, Fleet's live loan check
offers were only valid for 6 weeks. 

Federal bank regulators do not have any special supervisory programs
for live loan checks.  As noted earlier, OCC officials said that they
review these loans in the same way as they do other small consumer
loans.  Fleet officials told us that monthly reports on these loans,
which are distributed to senior Fleet management, are also provided
to OCC, Fleet's regulator.  Federal Reserve examiners do not
specifically monitor live loan check activities at Federal
Reserve-regulated institutions.  As part of their safety and
soundness examinations, Federal Reserve examiners are to review risk
models or other risk management systems to assess whether banks
practice prudent behavior in their lending. 


      LITTLE DATA AVAILABLE TO
      IDENTIFY LOSSES ASSOCIATED
      WITH LIVE LOAN CHECKS
---------------------------------------------------------- Letter :5.3

Federal regulatory officials told us that industrywide live loan
check activities are not tracked specifically.  While Chase officials
believed it was too soon to estimate their losses on live loan
checks, we received data from Fleet concerning loss rates for its
live loan check program. 

In 1996 and 1997, according to Fleet officials, the bank's loss rates
on live loan checks were lower than the credit card industry national
averages.  Using year-end balances, in 1996, Fleet said, it
experienced a 1 percent loss rate compared to 5.96 percent in the
credit card industry.  In 1997, Fleet experienced a loss rate of 4.20
percent compared to 6.04 percent in the credit card industry.  Fleet
projected its 1998 live loan check losses to be similar to the credit
card industry's at 5 percent.  Fleet officials said that they had set
aside adequate reserves to cover anticipated losses.  Fleet officials
explained that the reason for the reported loss increase for live
loan checks from 1996 to 1997 is that, typically, there are not many
losses in the early years with a new loan product, and that Fleet was
more cautious in marketing live loan checks.  In the first year,
1995, Fleet marketed all of its live loan checks to its bank
customers.  According to Fleet officials, as the loans resulting from
their live loan checks begin to mature, losses could increase. 

A First Chicago official told us that the bank discontinued its live
loan check program because the level of loss was not acceptable. 
First Chicago conducted a live loan check pilot program in the summer
of 1995 to determine whether offering immediate access to funds via
checks would increase the likelihood that consumers would borrow
money.  The actual loss rate was not disclosed to us. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

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. 
To do this, we interviewed officials representing three live loan
check lending institutions, an industry association, and a rating
agency.  We also reviewed publicly available information, including
published articles that reported such characteristics.  Although we
did not independently verify these--or any--industry data, we
corroborated evidence with other independent sources whenever
possible. 

To identify the major organizations that mail live loan checks, we
interviewed public and private sector officials.  We selected
officials to talk to, in part, on the basis of information obtained
from other industry sources.  For example, we talked with officials
at Fleet and Chase.  In addition, we spoke with First Chicago
officials about whether a live loan check program existed at that
institution because officials of other banks had informed us that
this institution had cancelled its live loan check program. 
Moreover, we conducted a literature search and reviewed selected
articles that reported on live loan check lenders and their
activities.  We also spoke to officials representing federal banking
and thrift regulatory agencies. 

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.  We
attempted to identify comprehensive, industrywide data for the volume
of live loan checks by talking with officials representing an
industry association, a consumer advocacy group, a rating agency,
federal banking and thrift regulatory agencies, and two investment
banks.  In addition, we contacted officials representing another
lender to corroborate information and to obtain additional volume
data. 

To identify the benefits and risks of live loan checks for borrowers
and lenders, we interviewed officials representing federal regulatory
agencies and representatives from lending institutions, industry
associations, and one rating agency.  We reviewed articles and
studies that reported benefits and risks associated with live loan
check lending.  We interviewed public and private sector officials,
and reviewed selected federal and state regulations and laws, to gain
an understanding of lender protection laws relevant to live loan
checks.  We also spoke with banking officials about losses associated
with live loan checks. 


---------------------------------------------------------- Letter :6.1

As agreed with your office, unless you announce the contents of this
report earlier, we plan no further distribution until 30 days after
the date of this letter.  At that time, we will send copies of this
report to the Ranking Minority Member of your Subcommittee, the
Chairmen and Ranking Minority Members of other congressional
committees with jurisdiction over finanical issues, the Chairman of
the Board of Governors of the Federal Reserve System, the Comptroller
of the Currency, the Director of the Office of Thrift Supervision,
and other interested parties.  We will also make copies available to
others upon request. 

This report was prepared under the direction of James M.  McDermott,
Assistant Director, Financial Institutions and Markets Issues.  Major
contributors include Edwin J.  Lane, Evaluator-in-Charge; Mitchell B. 
Rachlis, Senior Economist; and Becky K.  Kennedy, Senior Evaluator. 
If you have any questions about this report, please call me on (202)
512-8678. 

Sincerely yours,

Susan S.  Westin
Associate Director, Financial Institutions
 and Markets Issues


*** End of document. ***