Live Check Solicitations Under Fire
A guy walks into a bar, no wait, that’s another story…a buyer walks into your dealership with a “live check”. The check may be payable to your dealership. Do you take the check and allow the buyer to leave with a vehicle? The check looks valid. If you are a dealer in Minnesota, the answer is probably, no. In Wisconsin, on the other hand, you may take it, if it complies with a specific new Wisconsin law.
Live checks are checks that obligate consumers to buy goods and services they haven’t requested, simply by using the check. A live check may be addressed to a consumer or a particular dealership, and use of the “live check” obligates the consumer to pay back a loan or enroll in a service.
Consumer advocates deem the use of live check solicitations as predatory or deceptive. Many states have enacted legislation regulating or prohibiting the use of live check solicitations. Last month Minnesota banned the practice while Wisconsin took a different route; they decided to permit solicitations by live checks, but only after the creditor makes substantial disclosures. The Wisconsin legislation also requires the return of funds, without penalty, under certain circumstances.
Apparently the Minnesota legislature agrees with the consumer advocates. The new Minnesota law declares it a deceptive practice to solicit a Minnesota resident for the sale of a good or service by providing a live check payable to the addressee, the presentment or negotiation of which obligates the addressee to purchase a good or service. For purposes of the law, “live check” includes any negotiable check, money order, draft, or other instrument. Notably, the ban does not apply where the check recipient already has an open-end credit arrangement or business relationship with the financial institution or other lender or if the addressee has requested in writing that a live check be sent.
The Minnesota lawmaker who sponsored the legislation banning the practice called the checks deceptive and a ploy meant to trick consumers. Opponents of the bill argued that consumers were responsible for their actions and for reading the fine print. Despite opposition, the bill passed. Minnesota Governor Tim Pawlenty signed the bill on March 24th. It was determined that enforcement of the new law will be handled by the state attorney general.
Wisconsin lawmakers have also banned live check solicitations, unless a creditor complies with significant disclosure requirements. For example, under 2009 Wisconsin Act 150 (the live check law) a person may offer an extension of credit by sending out a live check, only by explaining in 24-point type that the check is a solicitation for a loan and explaining in 10-point type that by endorsing the check, the consumer has accepted the offer.
In addition, the check must be attached to a detachable disclosure statement that contains APR information in 14-point type. The lender must also make verbal disclosures to the recipient within three business days following negotiation of the check. And, in an interesting twist, consumers can return the amount borrowed without incurring a financial penalty. A lender may not take any action to damage a consumer’s credit score as a result of the return.
The live check law also imposes lender requirements where the check is cashed fraudulently. For purpose of the live check law, “check” means any check, draft, money order, travelers check, personal money order, or other instrument for the transmission or payment of money.
The Wisconsin law became effective March 25, 2010. The Department of Agriculture, Trade and Consumer Protection has the authority to bring a legal action against a violator of $100 per solicitation, except that penalties may not exceed $10,000 in a seven-day period. Now, about that guy who walked into a bar…
Nicole Frush Munro is a partner in the Maryland office of Hudson Cook, LLP. Nikki can be reached at 410-865-5430 or by email at firstname.lastname@example.org. Based on an article appearing in Basis Points, single print publication rights only to Dealer Marketing Magazine. HC# 4816-8487-5013.