| 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
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
"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].
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:
(2) As used in this act: . . .
(f)'Regulatory loan ceiling' means $8,000.00." MCL 493.1; MSA
"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)
"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).
"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
III. Discussion of Law
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).
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
Lend is defined as:
"1. to grant the use of (something) on condition that
it or its equivalent be returned.
Similarly, Black's Law Dictionary (Sixth Edition) defines loan as:
2. to give (money) on condition that it is returned and
that interest is paid for its temporary use."(emphasis added).
"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:
Finally, 45 Am Jur 2d, Interest and Usury, Section 117, p. 102 defines
loan, in pertinent part, as:
[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
"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
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
"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
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%