January 24, 1992
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 transation 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 provisons 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