HOUSE BILL REPORT

EHB 1283

BYRepresentatives Zellinsky, Chandler, Dellwo, Crane, Day, P. King, Schmidt, Winsley, Beck, Anderson, Nutley, Dorn, K. Wilson, Baugher, Betrozoff and Silver

Regulating check cashers and sellers.

House Committe on Financial Institutions & Insurance

Majority Report:  Do pass with amendment.  (14)

      Signed by Representatives Dellwo, Chair; Zellinsky, Vice Chair; Chandler, Ranking Republican Member; Anderson, Beck, Crane, Day, Dorn, Inslee, P. King, Nutley, Schmidt, K. Wilson and Winsley.

Minority Report:  Do not pass.  (1)

      Signed by Representative Baugher.

House Staff:John Conniff (786-7119)

AS PASSED HOUSE MARCH 15, 1989

BACKGROUND:

More than 11 companies, engaged in business in Washington, offer check cashing services. A few of these companies do business at several locations. In addition to cashing checks, many of these companies lend money and sell checks such as money orders.

Check cashing companies engaged in lending activities take advantage of the state statute governing pawn brokers and obtain an interest rate far in excess of state usury limits. The pawn broker statute authorizes loans secured by personal property. Typically, a customer will give a pawnbroker some personal property, e.g., a watch or ring, and the pawn broker will give the customer a loan that must be repaid before the property is returned. If the loan is not repaid, the pawn broker is free to sell the personal property after a certain period of time. Technically, a personal check or similar instrument constitutes personal property allowing the pawn broker to take a post-dated check and loan money secured by the check. Since the pawn broker statute defines pawn brokers as any person who makes certain loans secured by personal property, a check cashing company can claim to act as a pawn broker in order to obtain the fees authorized under the pawn broker statute. (e.g., for amounts up to $19.99 - interest at $1 a month and for amounts in excess of $126 - 3 percent a month.)  The typical transaction costs the borrower $13 for a $100 loan given for a one week period.  Such activity may already violate the pawnbroking statute to the extent that checks are not held by the pawnbroker for the required statutory time period.

Most check cashing companies that sell checks, act as an agent for a major check company such as American Express. Some check cashing companies act as agents for other companies who forward cash such as Western Union. As agents for these companies, the check cashing companies are not relying upon their own assets to pay these checks. However, some businesses whether calling themselves check cashing companies or not, issue checks drawn upon their own business account. A customer purchasing a check drawn upon a business's own account risks having the check later dishonored for insufficient funds.

No state statute specifically governs the activities of check sellers; nor does Washington regulate check cashing companies. Other states such as New York and California have regulated these companies for many years.

SUMMARY:

"Check casher or seller" and "licensee" are defined. The act applies to organizations that, for compensation, engage in the business of cashing or selling checks, drafts, money orders, or other commercial paper serving the same purpose.

The act does not apply to financial institutions or to other organizations that cash checks as a convenience, as a minor part of its business, and not for profit; to the issuance or sale of checks by companies with a net worth of more than five million dollars; or to the issuance or sale of checks by agents of companies with a net worth of more than five million dollars.

Upon application to the Supervisor, the supervisor may exempt an organization not otherwise exempt under the act from all or a part of the provisions of the act if the supervisor finds that the applicant is not primarily engaged in the business of cashing checks and such exemption would not be detrimental to the public.

Unless exempt, no check casher or seller may engage in business without first obtaining a license from the supervisor of banking. The applicant must pay a fee established by the supervisor to cover the costs of regulation.

If the applicant will sell checks, the applicant must obtain and maintain a fidelity bond for officers and employees in an amount determined by the supervisor. The applicant may deposit security in lieu of a bond.

The supervisor, after investigation, shall issue a license if the supervisor determines that the applicant is financially responsible, that the applicant appears able to conduct business in an honest, fair, and efficient manner with the trust and confidence of the public, and that the applicant has met all other requirements for licensing.

The supervisor may deny a license if the applicant or a substantial stockholder of the applicant has been convicted of a felony or had a prior license revoked in the 12 months preceding the new application.

The license must be conspicuously posted by the licensee. The license is not transferrable and remains in effect for one year.

A license may be renewed upon payment of the proper fee and upon approval according to the same standards for original issuance.

Licensees must keep and maintain such business records as required by the supervisor to fulfill the purposes of the act.

Every check cashed by a licensee must be endorsed with the stamp "licensed casher of checks."

Checks sold by a licensee must be drawn on an account in a financial institution authorized to do business in Washington.

Except for the lending activities of pawn brokers as amended in section 20, no licensee may lend money or credit unless the licensee obtains the appropriate lending license and physically separates the lending business from the check cashing operation in a manner approved by the supervisor.

No licensee may cash post-dated checks unless the check is a government or payroll check payable on the next banking day. (e.g., a check dated for a Monday may be cashed on a prior Friday.)

No check may be sold unless the licensee concurrently receives full payment for the check in cash or by check, draft, or money order believed to be valid.

No licensee may engage in false or deceptive advertising and no licensee may advertise the fact that they are regulated by the supervisor of banking.

All funds received by a licensee from the sale of checks must be maintained in a trust account in a local financial institution.

Each licensee must submit an annual financial report to the supervisor and must submit an audit report within 105 days of surrendering a license.

The supervisor may examine the books and records of licensees.

The supervisor may issue cease and desist orders in conformance with administrative procedures.

The supervisor may issue a cease and desist order to take effect upon service if the supervisor finds that a practice by a licensee may lead to insolvency or may result in substantial injury to the public.

A licensee may apply to the appropriate superior court to set aside a cease and desist order.

The supervisor may apply to a superior court for an injunction if a licensee violates or threatens to violate a cease and desist order.

If, as a result of an examination, the supervisor determines that a licensee's capital is impaired, that the licensee is conducting business in an unsafe and unsound manner, that the licensee has suspended its obligations to pay money into the trust account, or that the licensee has failed to comply with certain other regulatory or statutory requirements, the supervisor may take possession of the licensee's business until the licensee resumes business in compliance with the act or the business is liquidated as provided in the act.

The supervisor is granted the same possession and liquidation rights as exist for industrial loan companies.

The attorney general is authorized to recover a fine of not more than $100 for each violation of the act by a licensee.

A violation of the act constitutes a misdemeanor offense and is subject to the Consumer Protection Act.

The pawn broker statute is amended to exclude checks, drafts, money orders, or other commercial paper serving the same purpose from the definition of personal property. Thus, a pawn broker would be precluded from making loans secured by personal checks and similarly, check cashers would be precluded from relying upon the pawn broker statute in making similar loans.

The pawn broker statute is amended to prohibit pawn brokers from engaging in the business of cashing and selling checks unless such activity conforms to the requirements of the check cashing and selling act.

Fiscal Note:      Requested February 10, 1989.

Effective Date:This bill takes effect on January 1, 1990.

House Committee ‑ Testified For:    Mark McDonald, CheckMart.

House Committee - Testified Against:      Steve Wehrly, representing individual pawnbroker firms; and Randal Vanek, Computerized Capital, Inc.

House Committee - Testimony For:    Check cashing and selling companies should be regulated to prevent consumer abuse; however, these companies should not be prohibited from engaging in the lending business if appropriate laws are followed.  Check cashing companies should not be allowed to use the pawnbroking statute to make usurious loans.

House Committee - Testimony Against:      Pawnbrokers provide a needed service in cashing post-dated checks and should not be forced to discontinue this service if the pawnbroker complies with the pawnbroker statute. Requiring a bond for check sellers creates an unnecessary hardship on these sellers.  In addition, check sellers should not be required to establish a trust fund to hold money received from check sales.