If a check-cashing company takes a customer's check that both know is currently no good, gives the customer cash minus a fee, and agrees to hold the check until the customer's account has money, is that a regulated loan, and can the company be criminally prosecuted under North Carolina's Consumer Finance Act and bad-check laws?

Plain-English summary

A Cumberland County Sheriff's Office attorney asked about a check-cashing company that paid a customer for a check despite both parties knowing the account lacked enough money. For a fee, the company would wait to present the check until the customer deposited sufficient funds. The AG said that transaction was, in essence, a loan: the company delivered money now in exchange for the customer's promise to repay later through the check.

The AG distinguished a check immediately negotiable at the bank. In that situation, the company could receive repayment without waiting and was providing a check-cashing service. In the question presented, the instrument was known to be presently worthless and repayment had to wait.

The opinion says the Consumer Finance Act applied if the loans were $10,000 or less and the fees exceeded the charges allowed by Chapter 24. If the transactions fell within the Act, the company would be subject to its provisions, including the penal provision in G.S. § 53-166(c). The AG also said the transactions appeared to violate G.S. § 14-107 and might violate Truth-in-Lending disclosure requirements. It did not qualify that observation about G.S. § 14-107 with a discussion of the customer's knowledge.

Currency note

The opinion analyzes the described practice and statutes as they stood in 1992. Check current lending, check-cashing, and criminal law for a present transaction.

Background and statutory framework

The quoted G.S. § 53-166(a) addresses businesses making loans of $10,000 or less and charging more than Chapter 24 permits without the license provided for in the Consumer Finance Act. Subsection (b) extends that provision to a person who tries to evade it through a device, subterfuge, or pretense. The AG first decided that the described exchange was a loan, then applied the Act's amount and fee conditions.

The opinion answers whether the described conduct may be covered and penalized. It does not determine a particular company's fee rate, adjudicate a criminal charge, or discuss later payday-lending laws or litigation.

Common questions

Why did the AG call this transaction a loan?

The company delivered money while agreeing to defer presenting a check it knew could not then be honored. The customer promised to make funds available later to cover it. The opinion treated that as money now in return for repayment later.

Does every check-cashing transaction fall under the Act?

No conclusion of that kind appears here. The AG distinguished accepting a valid check that can be negotiated immediately from the deferred-presentment transaction it examined.

When did the opinion say the Consumer Finance Act applied?

If the company made loans in the described way, the loans were $10,000 or less, and its fees exceeded the charges permitted by Chapter 24.

What did the opinion say about criminal penalties and bad checks?

If the transactions fell within the Act, the company would be subject to its penal provisions, including G.S. § 53-166(c). The AG separately said the transactions appeared to violate G.S. § 14-107 and might violate Truth-in-Lending disclosure requirements. It offered no further analysis of those two possibilities.

Source

• Landing page: https://ncdoj.gov/opinions/consumer-finance-act-check-cashing-companies-involved-in-lending-criminal-penalties/

Citations

• G.S. § 53-166
• G.S. § 53-166(c)
• G.S. § 14-107
• G.S. § 25-3-104
• Auto Supply v. Vick, 303 N.C. 30, 277 S.E.2d 360 (1981)
• Kirk Co. v. Styles, Inc., 261 N.C. 156, 134 S.E.2d 134 (1964)
• Carper v. Kanawha Banking & Trust Co., 207 S.E.2d 897 (W.Va.)

Original opinion text

Subject:

Consumer Finance Act (Art. 15, G.S. Chap. 53); Check Cashing Companies Involved in Lending; Criminal Penalties; N.C.G.S. §§ 14-107, 53-166

Requested By:

George J. Franks
Attorney at Law
Cumberland County Sheriff's Office
131 Dick Street
Fayetteville, North Carolina 28301-5793

Questions:

(1) May a check cashing company be subject to the provisions of the Consumer Finance Act if it cashes a check, and for a fee, agrees to defer presentment of the check until sufficient funds are deposited in the customer's bank account to cover the amount of the check?

(2) May check cashing companies that engage in such transactions be subject to criminal penalties?

Conclusions:

(1) Yes.

(2) Yes.

The facts on which the questions are predicated involve a situation in which a customer draws a check to a check cashing company with knowledge by both parties that there are not sufficient funds in the customer's bank account to cover the amount of the check. The company nevertheless accepts and cashes the check, and for a fee, agrees to defer presenting the check to the bank for payment until funds sufficient to cover the amount of the check are subsequently deposited in the customer's bank account.

The applicable provisions of the Consumer Finance Act are set out in G.S. § 53-166, which reads, in pertinent part:

(a) Scope. – No person shall engage in the business of lending in amounts of ten thousand dollars ($ 10,000) or less and contract for, exact, or receive, directly or indirectly, on or in connection with any such loan, any charges whether for interest, compensation, consideration, or expense, or any other purpose whatsoever, which in the aggregate are greater than permitted by Chapter 24, except as provided in and authorized by this Article, and without first having obtained a license from the Commissioner [of Banks]. . . .

(b) Evasions. – The provisions of subsection (a) of this section shall apply to any person who seeks to avoid its application by any device, subterfuge or pretense whatsoever.

The first question to be resolved is whether payment by the company of the amount of the check, less the fee charged to the customer under the circumstances described above, constitutes a loan by the company. A loan is defined as a delivery or transfer of a sum of money to another under a contract to return at some future time an equivalent amount, with or without an additional sum agreed upon for its use. Auto Supply v. Vick, 303 N.C. 30 at 39, 277 S.E.2d 360, affirmed on reh., 304 N.C. 191, 283 S.E.2d 101 (1981). It has also been defined as a contemporaneous transaction evidencing the creation of a debt to be repaid. 45 Am Jur2d, Interest and Usury § 117, (Cumulative Supplement 1991), citing Carper v. Kanawha Banking & Trust Co., 207 S.E.2d 897 (W.Va.).

A check is a negotiable instrument in the form of a draft drawn on a bank and payable on demand. G.S. § 25-3-104. It is a contract in itself, ordinarily given for a debt contracted or money borrowed, constituting an acknowledgment of indebtedness and an unconditional promise of the drawer to pay the payee or holder. By drawing and delivering a check to the payee, the drawer commits himself to pay the amount of the check in the event the drawee refuses upon presentment. Kirk Co. v. Styles, Inc., 261 N.C. 156 at 159, 134 S.E.2d 134 (1964).

When these principles are applied to the facts stated, it is our opinion that the transaction is, in essence, a loan by the check cashing company to its customer. The company accepts an instrument which it knows will not be honored and agrees to defer presentment until sufficient funds are deposited to cover it. The customer, by drawing and delivering the check, acknowledges an indebtedness in the amount of the check and unconditionally promises to pay it at the time agreed upon with the company. Thus, there is a delivery of a sum of money by the company to the customer under a contemporaneous contract by the customer to return it at some future time.

This is substantially different from the situation in which a check cashing company accepts a valid demand instrument that may be immediately negotiated, an activity not currently regulated by State law. In such case, there need be no delay in the company receiving repayment of the moneys paid to the customer; it has rendered a service upon receipt of compensation in the form of a valid instrument that is immediately negotiable. The transaction in the fact situation set out above involves payment of a sum of money pursuant to a contract to repay through an instrument that both parties know is presently worthless and cannot be negotiated until some future time.

The next questions are whether such transactions fall within the purview of the Consumer Finance Act and whether they are subject to criminal penalties. It is our opinion that the Act does apply to check cashing companies engaged in making loans in the manner described above if the amounts of the loans are $ 10,000 or less and if the fees charged by the company exceed the charges permitted under Chapter 24 of the General Statutes. If the transactions in which the company is engaged fall within the Consumer Finance Act, then the company will be subject to all provisions of the Act, including the penal provisions of G.S. § 53-166(c). It also appears that these transactions violate G.S. § 14-107, and may violate Truth-in-Lending requirements regarding disclosure.

LACY H. THORNBURG
Attorney General

Henry T. Rosser
Special Deputy Attorney General