Should Lenders Mail Unsolicited Checks to Potential Borrowers?

Q. My brother, who has a history of credit problems, recently got an un­requested check in the mail for $1,200. He was invited to cash it, as a loan from a company called Mariner Finance. He cashed it and signed a loan agreement at 36% interest plus processing fees. He later met with a Mariner salesman who gave him an additional loan and also sold him credit insurance. What do you think about this?

A. I consider this practice—which is apparently legal—to be predatory lending. Sending an unsolicited check to a bad credit risk is like offering a shot of whiskey to a recovering alcoholic. Sadly, the “consumer installment credit” industry—such as payday lending and auto title loans—is booming, preying on people who have few other sources of credit and charging them the maximum rate allowed by usury laws in each state.

In the mid 2000s, Wall Street money fueled the most-egregious predatory lending of the era, backing dishonest mortgage brokers who lured homeowners with shaky credit to over-borrow against their home equity. The subprime mortgages were bundled into securities that were peddled all over the world, spreading financial chaos when foreclosures soared. Timothy Geithner, President Obama’s Treasury secretary during the Great Recession, was a leading critic of predatory lending. Today, Wall Street is channeling private equity capital—from investors such as rich individuals, pensions and endowments—into subprime, unsecured consumer loans because the interest rates and potential returns are much higher than with mortgages. Your brother’s aggressive lender, Mariner Finance, is owned by a private equity fund created by the prominent Wall Street firm of Warburg Pincus, whose president is none other than Timothy Geithner. According to a July 1 exposé by Peter Whoriskey in the Washington Post, Wall Street private equity funds now control several of the largest companies in the field of high-interest payday and consumer installment lending.

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Have a money-and-ethics question you’d like answered in this column? Write to editor in chief Knight Kiplinger at ethics@kiplinger.com.