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April 25, 1995
STATE OF MICHIGAN
DEPARTMENT OF COMMERCE
FINANCIAL INSTITUTIONS BUREAU
IN RE: REQUEST BY OAK BROOK/CASH NOW PARTNERS d/b/a CASH CONNECTION FOR A DECLARATORY RULING ON THE APPLICABILITY OF THE REGULATORY LOAN ACT OF 1963, AS AMENDED, TO CERTAIN TRANSACTIONS.
Oak Brook/Cash Now Partners d/b/a Cash Connection ("Cash Connection") is a business that operates in the greater metropolitan Detroit area. Its primary activity is cashing checks for a fee, and other ancillary services include issuance of money orders, sending and receiving Western Union money transfers, and other related services. Cash Connection has requested a ruling on a service that is a variation on its check cashing business.
In its normal check cashing business Cash Connection will cash payroll, government, and personal checks for a charge of 10% of the amount of the check. Cash Connection has inquired about an expansion of its personal check cashing operation to a service known as the "Payday Advance." The Payday Advance transaction, as described by Cash Connection, differs from the normal check cashing transaction in that there would be an oral agreement to hold a present-dated check for a period of up to 14 days. The check is held because the drawer has insufficient funds in his or her account on the day the check is exchanged for cash, but promises to have funds in his or her account on the agreed upon date, the customer's next payday, that the check will be presented for payment. For this added service an additional 5% fee would be charged. The typical transaction would be for $100.00, and would never exceed $500.00. Before making a Payday Advance, each customer would be required to complete an employment verification form, bank authorization form (customer authorizes his or her bank to disclose checking account information), and a file card containing certain personal information.
On Thursday, January 26, 1995, a letter from Cash Connection's counsel was received by the Commissioner of the Financial Institutions Bureau ("Bureau") requesting a declaratory ruling on the applicability of the Regulatory Loan Act of 1 963, as amended, MCL 493.1 et. seq.; MSA 23.667(1 ) et. seq., (hereinafter "Regulatory Loan Act") to the above-described Payday Advance transaction. More specifically, Cash Connection asked:
"Is a check cashing company which cashes a personal check for a customer and agrees to delay presentment for payment of such check to the drawer/maker's bank until the customer's next payday engaged in the making of a loan subject to the requirements of the Regulatory Loan Act of 1963 [citation omitted]."
The request for was made pursuant to section 63 of the Administrative Procedures Act of 1969, as amended, MCL 24.263; MSA 3.560(163).
At issue in this request is whether the Regulatory Loan Act is applicable to the Payday Advance transaction as described. The sections of the Act to be discussed in this ruling are:
"Sec. 1. (1) A person shall not engage in the business of making loans of money . . . in an amount . . . within the regulatory loan ceiling and charge, contract for, or receive on the loan a greater rate of interest, discount, or consideration, than the lender would be permitted by law to charge if the lender were not a licensee except as authorized by this act and without first obtaining a license from the commissioner for each location at which business is to be conducted under this act, or by obtaining a license under the consumer financial services act [citation omitted].
(2) As used in this act: . . .
(f)'Regulatory loan ceiling' means $8,000.00." MCL 493.1; MSA 23.667(1).
"Sec. 12. (6) . . . A licensee shall not take a note or evidence of indebtedness that does not accurately disclose the actual amount of the loan, the time for which it is made, and the agreed rate of charge, ...." MCL 493.12(6);MSA 23.667(12)(6)
"Sec. 13. (1) A licensee may lend money in an amount not to exceed the regulatory loan ceiling and may contract for, compute, and receive interest charges on the loan at a rate not to exceed 22% per annum on the unpaid balance . . . . . . .
(3) Charges on loans made under this act shall not be paid, deducted, or received in advance, or compounded. All charges on loans made under this act shall be computed on the unpaid principle balance or portions of the balance, shall be so expressed in every obligation signed by the borrower and shall be computed on the basis of the number of days actually elapsed." MCL 493.13(1) and (3); MSA 23.667(13)(1) and (3).
"Sec. 14. A licensee shall: (a) Deliver to the borrower a disclosure statement in compliance with regulation Z, 12 C.F.R. part 226." MCL 493.14(a); MSA 23.667(14)(a).
"Sec. 19. (1) A person and the several members, officers, directors, agents, and employees thereof, who violate or participate in the violation of section 1, 12, 13, 14, or 18 are guilty of a misdemeanor, punishable by a fine of not more than $500.00, or imprisonment for not more than 6 months, or both." MCL 493.19; MSA 23.667(19).
In addition to the Regulatory Loan Act, the general usury laws of this state, MCL 438.1 et. seq.; MSA 19.15(1) et. seq., and the Criminal Usury Act, MCL 438.41 et. seq.; MSA 19.15(51) et. seq., must be addressed to fully answer the issue raised in Cash Connection's request for a declaratory ruling. The pertinent provisions are as follows:
"Sec.1. The interest of money shall be at the rate of $5.00 upon $100.00 for a year, and at the same rate for a greater or less sum, and for a longer or shorter time, except in all cases it shall be lawful for parties to stipulate in writing for the payment of any rate of interest, not exceeding 7% per annum. . . . " MCL 438.1; MSA 19.15(1).
Sec. 1. A person is guilty of criminal usury when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding 25% at simple interest per annum or the equivalent rate for a longer or shorter period. Any person guilty of criminal usury may be imprisoned for a term not to exceed 5 years or fined not more than $10,000.00, or both." MCL 438.41; MSA 19.15(51).
III. Discussion of Law
Cash Connection asserts that a transaction in which a present-dated personal check exchanged for cash, for which a charge equaling 15% of the amount of the check is received, combined with an oral agreement not to present the check for up to 14 days, is not a loan. It is the Bureau's position that the transaction as described by Cash Connection is a means of circumventing the Regulatory Loan Act and the usury laws of this state, and that the substance of the transaction, notwithstanding its form, clearly indicates that a Payday Advance, as described, creates an obligation to repay the sum advanced, and thus is a loan.
The Payday Advance, as described, is a carefully crafted transaction designed around the nuances of Article 3 of the Uniform Commercial Code. Present dating the check and the intentional failure to enter into a written agreement are maneuvers to cloak a loan transaction in the technicalities of the law of negotiable instruments. The transaction, it seems, has been constructed as a response to the interpretations made in this and other states, and the Michigan version of the Uniform Commercial Code, MCL 440.1101 et. seq.; MSA 19.1101 et. seq., so as to take advantage of the loopholes created by precedent and the Legislature. [See footnote 1 at the end of this document.] When previous interpretations of similar transactions are noted, the reasons why present-dated checks are received and the agreement to hold the check is not memorialized in a writing become more clear.
If the check were post-dated until the customer's next payday then the transaction would, under common interpretation, be considered an extension of credit. See, Cash Now Three, supra; In re: Balknap Inc, 909 F.2d 879 (6th Cir. 1990), and Production, SA v. H20 Specialties, 1994 U.S. Dist. LEXIS 16073 (N. Dist. III., Filed Nov. 9, 1994). Thus, what seems to be the most reasonable means to accomplish the transaction -- post-dating the check -- cannot be done because it clearly would be considered a loan and thus subject to the Regulatory Loan Act. Further, if the agreement not to present the check were to be in writing, it may be construed as a written modification of the check transforming it into a note and thus rendering the transaction a loan. See, People v. Breckenridge, 81 Mich. App. 6, 14; 263 N.W.2d 922 (1978)(finding an exchange of 30-day promissory notes for cash is a loan). Therefore, what seems to be the most practicable means for both parties to make such an agreement -- commit it to writing -- might erase the distinctions between order instruments and notes making the transaction, on its face, a loan.
To fully appreciate the Payday Advance transaction, provisions of the Uniform Commercial Code must be examined. A note is defined by the Michigan U.C.C. as "a promise other than a certificate of deposit." MCL 440.3104(2)(d); MSA 19.3104(2)(d), and promise is defined as "an undertaking to pay and must be more than an acknowledgment of an obligation." MCL 440.3102(1)(c); MSA 19.3102(1 )(c). A note is a promise by the maker to pay a specified sum. Bailey and Hagedorn, Brady on Bank Checks, (Seventh Edition) 11.15. The U.S. Supreme Court has stated:
"The promissory note, . . . is still, as its name implies, only a promise to pay, and does not represent the paying out or reduction of assets." Williams v. Comm'r of Internal Revenue, 429 U.S. 569 (1977).
A check is a "draft drawn on a bank and payable on demand," and a draft is an order. MCL 440.3104(2)(a) and (b); MSA 1 9.3104(2)(a) and (b). Order is defined as "a direction to pay and must be more than an authorization or request." MCL 440.3102(1)(b); MSA 19.3102(1)(b). In Williams, supra., the Court went on to state:
"A check on the other hand is a direction to the bank for immediate payment, is a medium of exchange, and has come to be treated . . . as a conditional payment of cash." Id.
It is in the distinction between a check and a note that Cash Connection has attempted to circumvent a finding that a loan exists.
Cash Connection framed its position in the request for this ruling that the Payday Advance, as described, is not a loan by stating:
"According to the U.C.C., the holder of a negotiable instrument may opt to negotiate it on or after its date. It has been held that any check negotiated by a holder within 30 days of its date is deemed to be negotiated within a reasonable time (UCC 3-304(3)(c)). Therefore, if Cash Connection elects to hold a check for less than 30 days, it is operating within the context of the U.C.C. regarding negotiable instruments. The act of holding a check for later deposit on payday, when maximum funds are available at the drawer bank, does not disqualify an instrument as a check and does not change its essence to a note." Cash Connection Itr., Jan. 23, 1995.
The nature of the instrument, however, is not the issue for which this declaratory ruling was requested. Cash Connection has requested a ruling on whether the transaction described above is "the making of a loan subject to the requirements of the Regulatory Loan Act of 1963." Id. In Wilcox v. Moore, 354 Mich. 499; 93 N.W.2d 288 (1958) There is a policy in this state enunciated by the Michigan Supreme Court, that when examining what may be a usurious loan:
"There is no need at this late date in the law of Usury (see Leviticus 25: 3537; Deuteronomy 23: 19, 20; Saint Chrysostom's Fifth Homily on the Gospel of Saint Matthew; CL 1948, Section 438.52[Stat Ann Section 19.121] to discuss its rationale. Suffice to say that its purpose is to protect the necessitous borrower from extortion. In the accomplishment of this purpose a court must look squarely at the real nature of the transaction, thus avoiding so far as lies within its power, the betrayal of justice by the cloak of words, the contrivances of form, or the paper tigers of the crafty. We are interested not in form or color but in nature and substance." Id. at 504.
Thus, when examining a transaction that may be a loan, policy dictates that the substance of the transaction be given deference over its form. See, People v. Lee, 447 Mich. 552; 526 N.W.2d 882 (1994); Boyd v. Layher, 170 Mich. App. 93; 427 N.W.2d 593 (1988), People v. Breckenridge, supra., Paul v US Mutual, 150 Mich. App. 773; N.W.2d (1986); Farley v Fischer, 137 Mich. App 668; N.W.2d (1984); Cullins v. Magic Mortgage, Inc., 23 Mich. App. 251; 178 N.W.2d 532 (1970).
A. Is the Payday Advance a Loan?
The term "loan" is nowhere defined in the Regulatory Loan Act. Thus, to answer the question posed by Cash Connection it is a word that demands interpretation. Construing the Act is no different than any other statute. One must attempt to give effect to the intent of the Legislature as expressed in the statute. See, Dussia v. Monroe Co. Employees Retirement System, 386 Mich. 244, 248; 191 N.W.2d 307 (1971). Where the "language used is clear and the meaning of the word chosen is unambiguous, a common-sense reading of the provision will suffice, and no interpretation is necessary." Karl v. Bryant Air Conditioning, 416 Mich. 558, 567; 331 N.W.2d 456 (1982)(citations omitted). Undefined words are given meaning as "understood in common language, taking into consideration the text and subject matter relative to which they are employed." Stocin v. C R Wilson Body Co., 205 Mich. 1, 4; 171 N.W. 352 (1919).
Recently, in People v Lee, supra., the Michigan Supreme Court defined the word "loan" as it is used in the Criminal Usury Act, supra. The Bureau believes that the court's definition is controlling in this ruling in that the Criminal Usury Act and the general usury laws, supra., encompass the same subject matter and are to be considered in par; materia. See, Detroit v. Michigan Bell, 374 Mich. 543; 132 N.W.2d 660 (1965). The Regulatory Loan Act is a usury statute as well because it provides an exemption from the general usury laws by authorizing a licensee to charge a rate of interest that would otherwise be usurious. In an effort to effectuate the purpose of the legislature, the word "loan" must have the same meaning in all three statutes and they should be construed as a system. People v Lawerence, 54 Mich. App. 13; 219 N.W.2d 802 (1974).
In People v Lee the court stated, "[w]here a statute does not define one of its terms it is customary to look to the dictionary for a definition. supra. at 558 (citing Energetics v. Whitmill, 442 Mich. 38;497 N.W.2d 497 (1993)). The Random House Dictionary of the English Language (Second Edition Unabridged) defines loan as:
"1. the act of lending; . . . 2. something lent or furnished on condition of being returned, esp. a sum of money lent at interest."
Lend is defined as:
"1. to grant the use of (something) on condition that it or its equivalent be returned.
2. to give (money) on condition that it is returned and that interest is paid for its temporary use."(emphasis added).
Similarly, Black's Law Dictionary (Sixth Edition) defines loan as:
"A lending. Delivery by one party to and receipt by another party of a sum of money upon agreement, express or implied, to repay it with or without interest."(emphasis added).
Further, the Sixth Circuit Court of Appeals, in keeping with the form-over-substance analysis when examining a possible loan transaction recently stated:
"While this Circuit has not defined the term 'loan' other circuits have adopted the following definition:
[A] contract whereby, in substance one party transfers to the other a sum of money which the other agrees to repay absolutely, together with such additional sums as may be agreed upon for its use. If such be the intent of the parties, the transaction will be considered a loan without regard to its form." In re: Weiner Merchant, 958 F.2d 738, 740 (6th Cir.1992)(citations omitted)(emphasis added).
Finally, 45 Am Jur 2d, Interest and Usury, Section 117, p. 102 defines loan, in pertinent part, as:
"an advancement of money . . . whereby the person to whom the advancement is made binds himself to repay it at some future time together with such other sum as may be agreed upon for the use of the money ...." Id. (emphasis added).
The Lee, court concluded that common definitions such as those above "clearly indicate that a loan only occurs when there is an obligation to repay. [See footnote 2 at the end of this document.] Supra., at 558.
Therefore, in light of the courts instruction to look squarely at the substance and nature of the transaction at issue and not its form, there is clearly an obligation on the part of the customer to repay the cash sum advanced together with an agreed upon additional charge of 15% (10% to cash the check and 5% to hold the check for later presentment) on the date agreed upon by the parties, and thus it is a loan as that term is used under the Regulatory Loan Act. As the Michigan Court of Appeals so succinctly stated in holding the substance of a transaction revealed a usurious loan rather than a land contract,"if something walks like a duck, quacks like a duck and swims, covering it with chicken feathers will not make it into a chicken." Boyd v. Layher, supra. at 99 (quoting the Circuit Court's conclusion).
Next then, must be a determination as to whether such a loan is the type intended to be regulated by the Legislature when it enacted the Regulatory Loan Act.
B. Is the Payday Advance Loan Covered by the Regulatory Loan Act of 1963?
The Regulatory Loan Act is applicable to loans of $8000.00 or less, and for which interest is charged at a greater rate than allowed by law. MCL 493.1(1 )and (2)(f); MSA 23.667(1) and (2)(f). Cash Connection has related that the typical transaction would involve amounts of $100.00 or less, and would not exceed $500.00. Clearly, these loan amounts are within the loan ceiling as set by the Legislature.
The word "interest" is not defined in any of the usury laws and thus the same common usage analysis as employed above becomes necessary. Interest is defined in Webster's Seventh New Collegiate Dictionary as:
"3a: a charge for borrowed money generally a percentage of the amount borrowed."
Black's Law Dictionary (Sixth Edition) defines interest as:
"[T]he compensation allowed by law or fixed by the parties for the use or forbearance of borrowed money [citation omitted]. Basic cost of borrowing money .... Cost of using credit or funds of another."
With regard to interest the Michigan Supreme Court has stated:
"Interest is compensation allowed by law or fixed by the respective parties for the use or forbearance of money, 'a charge for the loan or forbearance of money,' or a sum paid for the use of money, or for the delay in payment of money." Town & Country Dodge v Mich. Dept. of Treasury, 420 Mich. 226, 242; 362 N.W.2d 618 (1985)(quoting from Balch v. Detroit Trust Co., 312 Mich. 145, 152; 20 N.W.2d 136 (1945))(other citations omitted).
Cash Connection has indicated that a charge of 5%, in addition to the normal 10% of the amount of a check exchanged for cash, would be for an agreement to not present the check for payment for a period of time up to 14 days. This 5% fee is clearly a "sum paid for . . . the delay in payment of money" id., and is therefore considered interest as used in the Act.
The remaining issue is whether the interest charged in a Payday Advance, as described, is at a rate that is permitted by law if the lender is not a licensee. The general usury laws allow "a rate of $5.00 upon $100.00 for a year," unless the parties stipulate in writing to a higher amount that does not exceed 7% per annum. MCL 438.1; MSA 19.15(1). Cash Connection has related that the Payday Advance loan would be made by oral agreement, therefore 5% per annum is the rate of interest permitted by law. As stated above the typical loan would be for $100.00 which is repaid within 14 days and upon which a fee of 15% of the loan amount is charged, 10% which is for a check cashing charge and the remainder interest. If annualized, as required by the usury laws, [See footnote 3 at the end of this document.] the effective interest rate charged on the typical Payday Advance amounts to 153.3% per annum, clearly in excess of the criminal rate as well supra., as well. [See footnote 4 at the end of this document.] As a result it is clear that the Payday Advance, as described, falls within the class of loans intended to be regulated by the Legislature when it enacted the Regulatory Loan Act. [See footnote 5 at the end of this document.]
A check cashing company which cashes a personal check for a customer and agrees to delay presentment for payment of such check to the drawer/maker's bank until the next customer's next payday is engaged in the making of a loan subject to the requirements of the Regulatory Loan Act of 1963. As such, engaging in this type of transaction without a license and full compliance with all of the provisions of the Act, would constitute a violation of the Act, as well as the general usury laws, and the Criminal Usury Act.
Patrick M. McQueen, Commissioner
Financial Institutions Bureau, Department of Commerce
DATE: April 25, 1995
1. Other states have considered the identical issue presented to the Bureau by Cash Connection and have held that such a transaction is a loan subject to state regulation. The Alabama Attorney General opined as much in an informal opinion to the State Banking Department (July 7, 1 994); see also, Commonwealth of Virginia v. Cash Now Three. Inc., Chancery No. 11-627-1 (filed June 4, 1993); Administrative Interpretation No. 3.104-9201, State of Colorado, Department of Law (1992).
2. In Lee, supra., the court held that a pawn transaction in which a watch was exchanged for cash and option to repurchase it at a later date was not a loan. Instead, the court found that a sale had occurred because title and possession had been transferred to the pawn broker, and although there was an option to repurchase there was no absolute obligation to repay. Id. at 564. In addition, the court recognized that the absence of a promissory note was evidence that there was no obligation to repay.l. at 561. The Bureau recognizes that in the present case there is no promissory note (indeed by design), but that unlike the pawn transaction there is an absolute obligation to repay evidenced not by a promissory note, but by a personal check and the parties' agreement that the check will be presented for repayment, plus interest and fees, for the amount of money advanced. Unlike the pawn transaction there is an absolute obligation to repay and thus a "loan" as the Lee court has defined that term in the context of usury, clearly exists in a Payday Advance transaction.
3. See, supra., MCL 438.1; MSA 19.15(1) and MCL 438.41; MSA 19.15(51), both statutes require that interest be computed on a "per annum" basis for purposes of determining usury compliance.
4. See, Appendix.
5. Although FIB finds that the Payday Advance, as described, is a loan within the limitations of the Regulatory Loan Act, the Bureau also recognizes that the manner in which the transaction is performed, regardless of licensure, would violate several provisions of the Act including; the 22% per annum interest rate ceiling, disclosure requirements, the prohibition on prepayment of charges, the method of computation of such charges, and the requirement that a licensee comply with Regulation Z (truth-in-lending) requirements. See, supra., sections 12, 13, and 14 of the Act.
EFFECTIVE ANNUAL RATE ON PAYCHECK ADVANCE
Mr. B obtains an advance against his paycheck from XYZ Check Cashers. Mr. B writes a $100.00 personal check to XYZ which orally agrees to hold the check for later deposit on Mr. B's next payday, 14 days later. XYZ charges Mr. B 10% for cashing the check, and an additional charge of 5% for holding the check until the agreed upon date.
Mr. B in effect, obtains an advance, after accounting for the payment of $15.00 in charges, of $85.00. That is, the amount of money which Mr. B will have the use of for 14 days is $85.00 (assuming XYZ holds the $100.00 check for 14 days).
The effective annual rate of interest charged by XYZ can be computed easily. First the nominal 14-day rate of interest is computed as follows:
Nominal 14-Day Rate (%) = ($5.00/$85.00) = 5.88%
The effective annual rate is found as follows:
Effective Annual Rate (%) = (5.88%} (365/14) = 153.3%