Pennsylvania puts a lid on high check-cashing fees
By Jan Lindsey • Bankrate.com

Pennsylvania has become the 15th state to cap the steadily climbing — and sometimes exorbitant — fees charged by check cashing stores.

The state Attorney General's Office had received report of fees as high as 25 percent, said Joe Goldberg, the department's director of the Bureau of Consumer Protection.

"It was a virtually unregulated industry in Pennsylvania,'' Goldberg said. "There were concerns that people were being taken advantage of.''

One attorney says his client was charged $1,100 to cash a $6,035 lump sum Social Security check, said Rep. W. Curtis Thomas, author of one of two regulatory bills that led to the compromise approved by legislators. That fee could not have exceeded $150.88 under the Check Cashing Licensing Act signed into law last week.

Payday loans outlawed
The new regulations set fee caps at 2.5 percent for government-issued checks, 3 percent for payroll checks and 10 percent for personal checks. It will also ban the cashing of post-dated checks, which, in effect, outlaws controversial "payday loans,'' and regulate licensing of the businesses. The state's Department of Banking will administer it.

The caps should make a dramatic difference to consumers who use the stores to negotiate government checks, Thomas said.

No one, he said, was paying less than 5 percent to cash government checks, or less than 3 percent to cash payroll checks. Ten percent is slightly higher than the average rate for cashing personal checks, but legislators had difficulty assessing the true risk to a check cashing business when it accepts such checks, Thomas said.

"Check cashing is a legitimate business that needs to be performed,'' said Jean Ann Fox, director of consumer protection for the Consumer Federation of America, an association of consumer groups in Washington. "We just believe there should be a reasonable cap on fees.''

Check-cashing stores relatively new phenomenon
Check-cashing stores began appearing in large numbers a decade ago when Pennsylvania deregulated its banking industry, Thomas said. When banks are deregulated they often start charging higher fees and closing branches, Fox said.

Last summer, Fox's association surveyed check-cashing stores in 23 cities in regulated and unregulated states. It found that government check fees had risen 37 percent during the last 10 years, while payroll fees rose 44 percent and personal fees had doubled, Fox said.

The average fee charged for cashing a paycheck was 2.34 percent, "but some places charged as much as 6 percent,'' she said.

Averages were 2.21 percent for government checks, and 9.36 percent for personal checks, she said. That makes Pennsylvania's new caps a little higher than the national average.

Industry lobbyists behind the bill
The Pennsylvania Financial Services Association, a check cashing industry organization, was involved in a portion of the negotiations that led to the final legislation.

"It's a pretty solid bill,'' association lobbyist Jonathan Bigley said. "One of the reasons we're able to agree to the bill in the final analysis is it will help rout out operators who are ripping off people.''

Thomas said it is important that consumers look for posted fees and get a receipt when doing business with a check-cashing store. Although the stores sometimes send mobile branches into Pennsylvania's rural areas on payday, he suggested that customers shop around for rates if they can.

Patrons are those who can't afford banking
About 12 million Americans have no bank or credit union account, Fox said. A large number of check-cashing store customers are low- to moderate-income people, and many of them are members of minority groups. Hispanics are represented more heavily than African Americans, she said.

"The folks who are outside the banking system should get the same level of protection that the rest of us take for granted,'' Fox said.

Fewer than half the states have taken formal steps to grant that protection.

California, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, North Carolina, Minnesota, New Jersey, New York, Ohio, Rhode Island and Tennessee regulate check-cashing stores and impose limits on their fees, she said.

The caps range from 10 percent for all forms of checks in Indiana to 1 percent for government checks and 2 percent for all other checks in Connecticut, Fox said.

Payday loans akin, more costly, than pawn shops
Kentucky, Louisiana, Maryland, Massachusetts, Virginia and Washington license check cashing businesses but do not cap fees.

As in Pennsylvania, some states have also moved to curb payday lending. The short-term, high-cost deals bear a resemblance to pawn shop transactions, but come at a higher price, Fox said.

A customer writes a check to the check-cashing store for the amount of the needed paycheck advance plus a fee, and dates the check for the next payday. When payday comes, the store gives the customer a choice: have the personal check cashed, pay in cash, or carry the debt for another pay period by paying only the fee — or interest — due, Fox said. The surcharge is due every payday until the advance is repaid, Fox said.

The most "toxic" form of consumer lending?
"Payday lending is the most toxic form of consumer lending that I've seen in a long time. It is a recipe for disaster'' for the borrower, she said.

Check cashing stores often claim that the advances are not loans. They generally tell customers of the fee, but do not inform them of what the overriding interest would be if it were calculated over a year's time, she said. The federation's survey found at least one shop charging fees that translated to an annualized interest rate of 1,800 percent, she said.

"That's like selling meat without telling the price per pound,'' she said. "Folks who are desperate enough to do business this way do not have an army of lobbyists out to protect their interest.''

-- Posted: February 27, 1998