‘Instant Loans’ by Mail Stir Controversy

First, there was a telephone call out of the blue, saying a check was in the mail. “Look out for it,” the caller advised.

Two days later, it arrived--a check for a cool $2,525, ready to sign, deposit and spend.

But this was no mystery windfall from an unexpected benefactor. As the accompanying letter pointed out, the check, once endorsed, would become an “instant loan” from Beneficial California Inc., a finance company. The annual interest rate: 26.2%.

Such “unsolicited, live checks,” say state officials, are not uncommon these days, as mail marketers make it ever easier to get instant credit.

The offers particularly appeal to impulsive people, eager for quick cash and perhaps unaware there are less expensive ways of getting it.

Dale Lucas, chief examiner for the state Department of Corporations, says most of the offers in the mail are designed to narrowly skirt a state law limiting interest rates on loans under $2,500.

“I get them from finance companies and I just review them and tear them up,” he said.

By making the loan amount $2,525, Beneficial can legally charge any interest rate it wants, Lucas said. Had the company sent out a check for $2,495, it would have been limited by state law to charging about 24% interest. Efforts in the Legislature to place limits on loans over $2,500 have been unsuccessful.

The letter accompanying the Beneficial check contained a warning: “Be sure to read the Disclosure of Credit Costs, the Supplemental Loan Agreement, and the Copy of Loan Agreement and keep them for your records.”

In addition to revealing the annual interest rate of 26.2%--well above most credit card interest charges on unpaid balances--the letter said that the $2,525 would cost $3,672 to repay, in 36 monthly installments of $102.

Jairo Ospina, manager of the Panorama City office, one of Beneficial’s 1,100 outlets nationwide, said “many” unsolicited checks had gone out and “quite often” they are cashed. He said the checks go out to past Beneficial customers and to people that have good credit ratings. He referred other questions to Beneficial’s parent firm in New Jersey.

Denise Foy, an assistant vice president there, said the company would not reveal how many $2,525 checks it has been sending out, where they are concentrated, or what the rate of acceptance is.

“We consider our information proprietary,” she said, meaning that for competitive reasons the company does not answer such questions.

She emphasized that people who default on the unsecured loans would not risk losing their house or other property.

“With all our unsecured products, we have no recourse to put a lien on a home or personal property,” she said. “So in the case of nonpayment, we would first make every effort to work with the customer to obtain payment. We would send them a notice or call them.

“Eventually, if they wouldn’t pay, the customer’s credit report would be adversely affected. And then, at the end of the line, the company would either file a judgment against the individual in court or charge off the loan as uncollectable.”

“What’s built into these deals is an interest rate so high that they can afford to have quite a few people take the cash and never repay it,” said consumer advocate Harvey Rosenfield. “Dangling $2,500 in front of many people in this state is just too tempting. But this is usurious.”

Gail Hillebrand of the Consumers Union said the main thing for consumers to remember is that “finance company credit is often more expensive than bank credit.”

“Besides, credit is something that should be extended on request. You don’t want a live check floating through the postal system, going who knows where.”

The same point was made by Steven Sarinana, a Los Angeles representative of the Better Business Bureau.

“You would be liable if someone else did cash the check made out to you,” Sarinana said.

But Foy, the Beneficial spokeswoman, said the company has a policy for fairly dealing with such cases.

“In the rare event that fraud does occur, someone cashing the check other than the person in question, and we are notified, we immediately send out an affidavit to their home and all they have to do is sign that and return that to us, and they can be assured they will have no liability,” she said.

Meanwhile, a call to the Panorama City office indicated that many people may be able to secure a loan at a much lower rate than 26%, even from Beneficial.

When the caller said that 26% seemed quite high, the Beneficial employee who answered promptly replied:

“Are you a homeowner? We have equity loans for only 10.5%.”