Published: October 10, 2007 08:35 am            

New law affects check-cashing

View from the Bench

A federal law, which went into effect on Oct. 1, 2007, offers additional protection for military members who are targeted by predatory lending practices. Congress passed this law in response to increasing concerns about check-cashing businesses which are often clustered around military bases.

Kentucky has long been a profitable marketplace for these types of businesses.

Earlier this year, the Lexington Herald-Leader reported that every four days a payday lender opened for business in Kentucky. These operations target the needs of the financially strapped. They can be extremely profitable, but they do so by charging extraordinary amounts for their services.

In a federal case arising in Pikeville, the U.S. District Court for the Eastern District of Kentucky described the typical operation of a check-cashing business. Transactions at these types of businesses typically involve one of two types of services: (1) check-cashing services and (2) deferrals.

In a check-cashing transaction, a customer gives the business a personal check in exchange for cash. The business agrees to hold the check for a specified period, say two weeks, before presenting it to the bank for payment. On or before the date of presentment, the customer can “pick-up” the check by paying the full amount of the check. The fee for this service is typically very high, perhaps 20 percent of the face amount of the check.

In a deferral transaction, the customer is unable or unwilling to “pick up” the check by paying the full amount. The business then agrees to defer presentment of the check in exchange for additional fee, perhaps as much as an additional 10 pe.rcent of the original sum. If that deferment period expires, the business may again defer presentment of the check, for an additional sum of course.

The cost associated with these services can be enormous. A Federal Trade Commission consumer alert explains it this way. Say a customer writes the check-cashing business a $115 check in order to borrow $100 for a two-week period. If the customer redeems that check within the two weeks by paying $115, the cost to the customer is only $15. However, if the customer defers the presentment of the check by asking the lender to hold the check for additional two-week periods, the interest rate increases dramatically, in some cases the annual interest rate equals 391 percent. After only three deferrals, the customer is paying $60 to borrow $100.

These businesses are becoming increasingly commonplace, especially in Kentucky, because they fill a need. Low-income households are understandably strapped for cash, particularly at the end of a pay period. Unanticipated expenses prompt desperate measures including entering into check-cashing arrangements where customers may have to pay enormous amounts of interest. The practice of charging an illegally high interest rate is called “usury” in the law.

A recent investigative report by the New York Times detailed the experience of Peggy Truckey, a resident of Appleton, Wis., a moderately sized community with 19 payday loan or check-cashing businesses. Truckey owes four of those stores and pays over $600 a month in interest alone. Her problems started with the unexpected loss of her job. She borrowed $500 form a payday business which charged her $22 for each $100 borrowed – an annual interest rate of 572 percent.

Truckey’s case is typical. A June 2007 report entitled, “The High Cost of Being Poor: Kentucky Families Speak Out,” a survey of low-income households, reported that “[b]ecause of the absence of lower-cost, short term loans ... , nearly half of the participants had used payday lending.” Two-fifths reported using these services frequently. As one survey participant noted, the check-cashing businesses “have you in a squeeze ... they take you for a fool.”

Because check-cashing/payday loan businesses cluster around military bases, military personnel frequently incur unmanageable debts. Congress chose to act by limiting pay-day loans to active duty military personnel and their families to 36 percent APR. The constitutionality of this law has not yet been tested as it only became effective this month.

While these types of businesses have proliferated in recent years, they have always existed in some form or another. As a Kentucky court noted in 1926, “[t]he cupidity of lenders, and the willingness of borrowers to concede whatever may be demanded or to promise whatever may be exacted in order to obtain temporary relief form financial embarrassment ... have resulted in a great variety of devices to evade the usury laws. ...”

While the new federal law may offer some limited relief for active duty military personnel and their families, it seems likely that unscrupulous lenders will find some way to continue their predatory lending practices.

        

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