“Effective state regulation of check cashers is particularly important now that millions of consumers are moving from welfare to work,” explained Jean Ann Fox. “Most consumers leaving welfare do not have bank accounts and will now need an inexpensive means of cashing paychecks.”
Some check cashers have gone beyond simply cashing checks for a fee to loaning money on postdated checks to tide consumers over until their next payday. The check casher agrees to hold the check until the next payday when he can allow the check to be sent to the bank, redeem it by bringing in $115 in cash, or “roll” it over by paying the fee to extend the loan for another two weeks. Payday loan fees translate to triple digit annual interest rates. A consumer who doesn’t make good on the check can be threatened with criminal charges for writing bad checks.
Payday lending is a fast-growing sideline for check cashers. National Cash Advance, a Tennessee chain, opened 165 stores in less than three years. Check Into Cash, another Tennessee payday loan company founded in 1993, has locations in 20 states and reported $9.9 million in 1996 loan volume, nearly triple its 1995 loans. Consumer lawsuits, enforcement actions by state attorneys general, and hotly contested battles to legitimize exemptions from usury laws in state legislatures have tracked the growth in payday lending.
CFA surveyed 26 check cashers who advertise payday loans in Yellow Page listings. These were located in fifteen ofthe 23 cities surveyed by CFA for check cashing fees. CFA computed effective annual percentage rates for $100 payday loans on checks held seven days, with results ranging from 521% to 1820%.
“Payday loans are a transfer of wealth from the poor and the poor-risk to the predatory and the powerful,” according the CFA’s Jean Ann Fox. “America hasn’t come very far from tum-of-the-century ‘salary-buyers’ and ‘loan sharks’.”
Even some banks are involved in payday lending. For example, Eagle National Bank of Upper Darby, Pennsylvania, makes “Cash ‘Til Payday” loans through Dollar Financial Group’s national network of check cashing outlets. Eagle National Bank loans up to $200 for a maximum of 28 days for a $24 fee. A typical $100 loan for 14 days costs $12 or 313% APR.
For payday loans held 14 days, the annual interest rate ranged from 261% to 913%
Some states ban cash advance loans as violation of small loan laws or state usury caps. State laws against payday loans by check cashers or by unlicensed small loan companies have failed to prevent a national bank from making these loans through check cashers, since most state small loan acts and check casher licensing laws exempt banks and states have no control over interest rates charged by out-of-state national banks.
Other states have legitimized payday lending with restrictions, including California, Colorado, Iowa, Kansas, Louisiana, Minnesota, Nebraska, Ohio, Oklahoma, Washington and Wyoming
“CFA calls on the Comptroller ofthe Currency to take action to make sure national banks do not slip through loopholes in state laws against usurious payday loans,” Jean Ann Fox stated. “We urge states to include state banks under small loan interest rate limits and check casher payday loan prohibitions.”
The CFA report calls for an outright ban on payday loans that do not comply with state small loan rate caps or usury ceilings. Other payday loan protections recommended by CFA to state officials include a ban on paying one loan with the proceeds of another, a prohibition against threatening borrowers with bad check criminal proceedings, and treatment of unpaid loans as unsecured debts in bankruptcy filings.