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, George J. Franks, asked the AG about a then-emerging business model in 1992. A check-cashing company would take a customer's personal check, knowing the customer's bank account did not have enough money to cover it. The company would hand the customer cash equal to the check's face value, minus a "fee," and agree not to deposit the check until the customer told them funds were available. The customer in effect borrowed money, secured by a check that was an IOU.

The question: was this a regulated consumer loan, or was it just an unregulated check-cashing service?

Special Deputy Attorney General Henry T. Rosser concluded it was a loan, and that the practice was subject to the Consumer Finance Act (Article 15 of Chapter 53), which carries criminal penalties.

His reasoning ran in three steps.

A loan is a contemporaneous creation of a debt to be repaid. Auto Supply v. Vick, 303 N.C. 30 (1981), defines a loan 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." A check is itself a contract: by drawing and delivering the check, the customer "acknowledges an indebtedness in the amount of the check and unconditionally promises to pay it at the time agreed upon," Kirk Co. v. Styles, Inc., 261 N.C. 156 (1964). When the check-cashing company hands over cash and agrees to defer presentment, both parties have entered a contemporaneous contract: cash now, repayment later via deposit of funds to honor the check. That is a loan.

The Consumer Finance Act applies. G.S. § 53-166(a) prohibits "engag[ing] in the business of lending in amounts of ten thousand dollars ($10,000) or less and contract[ing] for, exact[ing], or receiv[ing] . . . 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" without first obtaining a license from the Commissioner of Banks. The "fee" the check-cashing company charged was "charges . . . for . . . consideration, or expense, or any other purpose whatsoever," which the statute treats as a single bundled rate. If that effective rate exceeded Chapter 24's usury cap, the company was operating outside the Act and outside its license.

Criminal penalties attach. G.S. § 53-166(c) makes a Consumer Finance Act violation a criminal offense. The transactions also implicate G.S. § 14-107, the worthless-check statute (although the AG noted that the customer's knowledge that the company knew there were no funds may complicate the worthless-check theory). Federal Truth in Lending disclosure rules may also apply.

The opinion drew a clean line between this kind of deferred-presentment transaction and ordinary check cashing. If a customer gives the company a valid check (one that the customer's bank would honor that day) in exchange for cash minus a fee, no loan is involved. The company is just performing a check-cashing service. The deferred-presentment structure is different because the check is "presently worthless and cannot be negotiated until some future time."

Anti-evasion clause. G.S. § 53-166(b) explicitly covers 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 AG cited this to anticipate creative restructuring of the deferred-presentment model.

Currency note

This opinion was issued in 1992. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. North Carolina's treatment of payday lending has evolved substantially. The General Assembly experimented with a limited payday-lending pilot program in the late 1990s, allowed it to sunset, and the NC Court of Appeals upheld an Attorney General enforcement action against payday lenders in NC v. Advance America and related cases in the mid-2000s. The current NC Consumer Finance Act has been amended (now in Article 15 of Chapter 53 with various refinements). Payday lending as a business model is now effectively prohibited in North Carolina, and that prohibition has been upheld through subsequent litigation. The 1992 opinion was a foundational document for that line of enforcement.

Background and statutory framework

The Consumer Finance Act regulates the small-loan business. Its purpose is to allow a tightly licensed industry to make loans of $10,000 or less, at rates above what Chapter 24's general usury cap allows, in exchange for substantive regulation by the Commissioner of Banks. The act is structured as a bargain: license-plus-regulation gets you access to elevated rates; unlicensed operation is a crime.

The architecture of the Act is broad on what counts as a regulated "loan" and what counts as a "charge." If the Act used a narrow technical definition (only formally documented loan instruments), evasion would be trivial. So the statute sweeps in any business of lending small dollars and counts every charge ("for interest, compensation, consideration, or expense, or any other purpose whatsoever") toward the rate. The anti-evasion clause in G.S. § 53-166(b) backstops the scope.

Deferred-presentment check cashing was a national innovation of the late 1980s and early 1990s, the precursor to modern "payday loans." The structure took advantage of consumer law's reluctance to call any single piece of the transaction a "loan." The check looked like a check; the cash looked like an advance against the check; the fee looked like a check-cashing service charge. Putting those three together separately, you got the legal coverage of three unrelated transactions. The 1992 NC opinion was an early state-level rejection of that strategy, looking at the transaction's economic substance rather than its formal labels.

The opinion's economic-substance reasoning was foundational for later NC enforcement. When the Attorney General later brought lawsuits against payday lenders operating in NC (as franchise affiliates of out-of-state lenders, sometimes through "rent-a-bank" arrangements), the legal theory traced back to this 1992 advisory: a deferred-presentment transaction is a small-dollar loan; small-dollar loans require Consumer Finance Act licensure and Chapter 24 rate compliance; fees that effectively exceed those rates are illegal.

Common questions

What was the practical impact of this opinion in 1992?

The opinion gave county prosecutors and the Commissioner of Banks a legal basis to investigate check-cashing companies that were operating deferred-presentment programs without Consumer Finance Act licenses. It was not self-executing; an actual enforcement action would require investigation of the specific company's fee structure to show that the effective rate exceeded Chapter 24's caps. But it cleared a key threshold question that had been ambiguous before: is this a loan?

Did the General Assembly later authorize payday lending in North Carolina?

Yes, briefly. In 1997, the General Assembly enacted a limited payday-lending statute that allowed licensed payday lenders to operate under specific rules (loan size limits, fee caps, no rollovers, and so on). That statute included a sunset clause. When the sunset hit in 2001, the General Assembly did not renew it, and the legal authorization expired. Several payday lenders continued operating after the sunset under various theories. The Attorney General prevailed in actions to shut them down, partly resting on the same Consumer Finance Act framework articulated in the 1992 opinion.

What about an out-of-state lender making payday loans to North Carolina customers via the internet or by mail?

The 1992 opinion did not directly address interstate operations. Subsequent NC enforcement and court decisions clarified that NC's Consumer Finance Act applies to lenders who make loans into North Carolina, regardless of where the lender is physically located. Federal-preemption defenses (such as the "rent-a-bank" theory where an out-of-state bank claims federal preemption of state usury caps) have been litigated extensively in NC and around the country.

How does this opinion interact with the worthless-check statute?

G.S. § 14-107 criminalizes drawing a check on an account where the drawer knows there are insufficient funds. The 1992 opinion suggested deferred-presentment transactions may violate this statute as well. In practice, this is a less commonly used theory because the check-cashing company knew the funds were insufficient too, which complicates the intent element. But the AG flagged it as a possibility, and prosecutors retained the option for egregious cases.

Source

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

Citations

• N.C.G.S. § 53-166 (Consumer Finance Act scope, evasions, license requirement)
• N.C.G.S. § 53-166(c) (criminal penalties)
• N.C.G.S. § 14-107 (worthless check statute)
• N.C.G.S. Ch. 24 (interest and usury limits)
• N.C.G.S. § 25-3-104 (UCC negotiable instrument)
• 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