The Ohio Department of Commerce’s Division of Financial Institutions (the Division) recently began serving “Notice(s) of Intent to Revoke Mortgage Loan Certificate of Registration & Notice of Intent to Impose a Fine” upon certain payday lending and check cashing businesses for charging a separate fee for cashing loan checks at the same location where the loan is originated. The Division argues that, in certain circumstances, this practice violates the Ohio Mortgage Loan Act (OMLA) outright and is a practice that likewise “evades” the sprit of the Act.
With some exceptions, Ohio Revised Code § 1321.57(H)(1) generally prohibits registrants under the Ohio Mortgage Loan Act (OMLA) from charging borrowers fees in addition to interest as a condition of receiving the loan. However, after making a loan to a consumer via check, many payday lenders offer the consumer a choice to cash that loan check on site for a fee.
The industry believes this practice—charging a fee for cashing the check— is permissible as long as the borrower is not required to cash the check at the institution as a condition of receiving the loan. Additionally, some companies disclose this policy in writing and obtain the borrower’s written acknowledgment. Some operate the check cashing side of the business with separate computer systems and post conspicuous statements of this policy.
Nevertheless, the Division is now contending this check cashing violates the OMLA1.
The Division is pursuing several types of penalties under the Act. These include revocation of the certificate of registration for the businesses and a fine up to $25,000. Alternatively, the Division is seeking a “cease and desist order” against the lender, arguing that charging to cash the check “tends to conceal an evasion of the OMLA.” Before imposing these penalties, the Division must hold a hearing at which a lender may appear to present its position, present evidence and examine witnesses.
The industry believes current law allows the practice of making a loan under the Act and then charging a fee to cash the check, as long as the customer is not required to pay this fee as a condition of the loan. Ohio Revised Code § 1321.57(H)(2) provides: “[1321.57(H)(1)] does not limit the rights of registrants to engage in other transactions with borrowers, provided the transactions are not a condition of the loan.”
This issue has not yet been tested in the administrative hearing process or in the courts, but given the Division’s recent regulatory action taken against registrants, that is likely to change in the near future.
Pending Legislative Changes
In addition to facing regulatory uncertainty, payday lenders and check cashers face potential legislative challenges. House Bill 209, currently pending in the House Financial Institutions, Real Estate and Securities Committee, states explicitly that “[n]o check-cashing business shall charge or receive a fee for cashing a proceeds check or money order disbursed to fund a loan made by the licensee or an affiliate of the licensee.” Violation of this new provision would incur one or more of the penalties mentioned above.
As many of these legal issues remain unsettled, lenders in this industry should study their business models and determine whether or not they believe they are in violation of the OMLA or whether they face the risk that the Division will take that position. In the meantime, we will continue to monitor the regulatory and legislative environment.