Check-Cashing Firms Facing Curbs : Banking: The Legislature is ready to pass a bill that would cap fees. Much of the industry favors the effort to stop abuses.
California’s check-cashing firms are about to be put in check by the state for the first time in more than a decade.
A bill that would cap the fees charged by some check-cashing businesses--reported in some low-income areas to be as high as 20% of a check’s face amount--is likely to be approved soon in Sacramento, ending a period of virtual deregulation that began in 1981.
What makes this effort likely to pass where other recent proposals have failed is that it has the support of large, mainstream check-cashing chains eager to defuse growing criticism of their industry.
That criticism has been especially acute in the aftermath of the Los Angeles riots, which has focused attention on the lack of bank branches in South Los Angeles and the proliferation of check-cashing businesses, pawn shops and high-interest finance companies that have filled the void.
“Check-cashing stores are a second-class alternative to the financial services offered by a bank or thrift,” Los Angeles City Councilman Mark Ridley-Thomas said.
The legislation in Sacramento, sponsored by Assemblyman Steve Peace (D-Chula Vista), has four main clauses:
* It caps the fees charged on payroll and government checks at 2.75% of the face value or $2.50, whichever is greater.
* Fees to open a check-cashing account are capped at $7.50.
* Stores must issue receipts.
* Owners must register with the state.
To give the legislation teeth, violators would face stiff fines, and possibly felony charges. “We hope it will separate the total rip-off artist from the legitimate businessman,” Peace said.
Check-cashing stores specialize in cashing payroll and government checks, with consumers charged a wide range of fees, depending on the store they use. Larger chains typically charge the lowest rates, often less than 2% of the face amount, and make a profit by doing a large volume of business. A bank, by contrast, cashes checks for free for its customers.
More typical fees range from 3% to 5%--or $3 to $5 for a $100 check--although fees up to 10% are not unusual. Fees up to 20%, or $20 for a $100 check, have also been reported. In addition, check-cashing businesses sell money orders, wire money to foreign countries and sell lottery tickets.
Check cashing has flourished in many inner-city neighborhoods as banks have closed branches, and as immigrants--many without any banking relationship--poured into Los Angeles in the 1980s.
A study by the Los Angeles Community Reinvestment Committee, made up of bankers, public officials and community activists, shows that check-cashing operations outnumber bank and thrift branches by a 7 to 1 margin in South Central Los Angeles. And of those 19 bank branches found in the area, three were primarily serving students and workers at the University of Southern California.
A typical check-cashing customer is someone like Gennie Bias, who cashes her Social Security checks at a Nix check-cashing store near her home on 46th Street in South Los Angeles. She has a bank, but it is 20 blocks away, usually has long lines on Fridays and is not open late or on weekends. The big banks, she said, closed their branches in her neighborhood more than a decade ago.
“I find this is very convenient for me,” she said.
Ironically, check cashing was once subjected to stiff rules, but was deregulated in 1981. Despite a veto recommendation from the state Department of Consumer Affairs and the state Department of Corporations, the deregulation bill became law when then-Gov. Edmund G. Brown Jr. failed to take action on it, according to Peace’s chief of staff, David Takashima.
Since 1985, there have been four efforts, including the latest one, to again regulate check-cashing operations.
Check-cashing chains say that unlike past bills, they are behind this one, partly because they would like to end the price gouging that has given the business a bad name.
“We don’t feel this is badly needed. But there is a perception on the part of many people in the political arena that this is a terrible problem. This requires you to do business in the right way, charging fair and reasonable prices,” said Thomas Nix Jr., president of a 23-store chain that bears his family’s name.
Nix believes that much of the criticism is unfair. He argues that price gouging is rare. He further argues that bank fees, ranging from those charged to maintain an account to the cost of using an automated teller machine, can easily exceed what a customer at a check-cashing store typically spends.
Meanwhile, check-cashing firms may be on the verge of competition. Executive Vice President Donald A. Mullane said Bank of America is considering advising not-for-profit groups, such as churches, on how to set up check-cashing services.
Vice Chairman Richard C. Hartnack said Union Bank is considering testing the market by opening a pilot “express banking” office in which it would charge a small fee to cash checks and would also provide basic bank services such as checking and savings accounts. Hartnack said he believes that Union Bank, through such express banks, could sign up a large number of people as regular bank customers who either don’t have a bank or use a competitor.
But some doubt that banks will ever provide much competition.
“Banks make money on deposits and loans. They don’t see the profit in check cashing and have always turned down that business,” said Christine A. Umbertino, president of Supermail International Inc. in Sacramento, one of the state’s larger check-cashing operations.
Community activists say regulating check-cashing shops will help, but the legislation doesn’t come close to addressing the larger issue: the dearth of banking services in South Los Angeles that are needed for economic development to thrive.
“Of course, check-cashing stores provide a service, but so do loan sharks and people who charge higher interest rates and higher points on home loans because banks refuse to do business in certain neighborhoods. But that doesn’t mean it’s right,” said Gilda Haas, an official of Communities for Accountable Reinvestment, which is active in pressuring banks to do more in low-income areas.
The Flourishing Check Cashing Business
The lack of banking services in South-Central Los Angeles is shown by statistics showing that check cashing businesses outnumber bank branches by a 7-to-1 margin (boundaries defined as Pico Blvd., Santa Monica Freeway, Alameda St., 120th Street, Van Ness and Arlington Avenues).
Number of bank branches: 19
Number of check cashing businesses: 133
Source: Los Angeles Community Reinvestment Committee.
