Forecast 2012: Grappling with Economic Uncertainty


By PHILLIP M. LEE

A new year has arrived on our door step, and with the turn of the calendar comes fresh hope. Will 2012 bring a more favorable business environment?

Economists advise tempering optimism with prudence. Consumers, financial institutions, and state and city governments are still struggling to right their balance sheets. The resulting financial squeeze is putting a damper on commercial activity — and that means business owners will likely encounter another challenging year.

“We are anticipating weak growth in 2012, with a gross domestic product increase of some 2.7 percent,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics, a research firm based in West Chester, Pa. (economy.com). GDP represents economic activity, or the annual total of all goods and services produced in the United States.

At first glance a 2.7 percent rise in GDP might seem pretty good, given that the annual rate for an economy in average growth mode is 2.5 percent. Yet Moody’s number can be misleading because it is calculated off a poorly performing 2011 in which growth only stumbled forward at an estimated 1.6 percent. Says Koropeckyj: “Coming out of a recession, we usually hope for well above average growth as pent-up demand is released and as businesses ramp up production and hiring.”

Koropeckyj  also cautions that her firm’s forecast could be too optimistic: “While we are still expecting a recovery in 2012,  we now believe there is a 50-50 chance of lapsing into a double dip recession during the first half of the year.”

Consumers Hold Back

Moody’s ambiguous forecast reflects the uncertainty prevalent everywhere in the economic environment. Both players on the marketing see-saw are taking breathers: Consumers are waiting for a decline in the unemployment rate and a bottoming out of the housing market before opening their wallets in appreciable numbers. And corporations are awaiting a rebound in consumer activity before bolstering work forces and investing in new property and equipment.

“Unemployment remains high and wage growth is very slow even for people who do have jobs,” points out Koropeckyj. “As a result consumer spending has not been as strong as it could be.”

And will the jobs picture improve? “The expected economic growth in 2012 is at a level which can absorb some unemployed people, but not too many,” says Koropeckyj.

“So by the end of 2012 we are expecting the unemployment rate to be around 8.8 percent, not appreciably lower than the 9.1 percent level of late 2011.”

Any improvement in the jobs picture will depend largely on policy decisions at the federal level, according to Scott Hoyt, Moody’s senior director of consumer economics.

“Under current law we will experience significant fiscal restraint next year, with the expiration of both the payroll tax holiday and extended unemployment benefits. Those are the two factors that most directly impact consumers.”

As for housing, consumers are wary of the continuing rounds of foreclosures and the high number of homes worth less than their mortgages.

“Foreclosures and housing inventory remain quite high, maintaining downward pressure on home prices,” says Koropeckyj. “We do not anticipate house prices hitting bottom until the end of 2012.” The median price for existing home sales is expected to be $166,000 in 2012, about even with the $165,000 expected for 2011, which represented a decline from the $173,000 of 2010.

Housing starts are expected to reach 610,000 in 2011, up marginally from the 580,000 of 2010. The number may hit a little over one million in 2012. To put those numbers in perspective, housing starts were averaging 1.6 million annually before the current recession which began in 2008.

Perhaps the most powerful force affecting the economy is psychological: People believe they are at the end of an era in which they could view their homes as sources of equity and as assets that would continually increase in value.

Together, the moribund state of housing and unemployment weigh heavily on consumers. “The current state of consumer confidence is consistent with a severe recession,” says Hoyt. “Consumers are very negative about the economic outlook.”

Business Sits It Out

Until consumers come out of their funk, corporations will be in no hurry to hire and expand. They are also being restrained by uncertainty about federal initiatives in areas such as the tax code, health care and financial reform, environmental and energy policy, foreign trade, and even the forthcoming presidential election.

“Given that frame of mind, it should be no surprise that no one is investing in new capital goods, or hiring,” says Michael Smeltzer, director of the Manufacturers Association of South Central Pennsylvania, a trade group whose one thousand members employ some 200,000 workers.

The fact is that most large and medium sized businesses would rather accumulate cash than launch initiatives that might not pay off in a wobbly marketplace.

“What Roosevelt said about ‘the only thing to fear is fear itself’ may have something to it,” says Walter Simson, principal of Chatham, N.J., -based Ventor Consulting (www.ventorllc.com).

“The fear in the business environment is palpable. People do not want to take dramatic action. They are afraid of a sudden drop in demand for unanticipated reasons, as happened in 2008.”

And there is enough anecdotal evidence about demand being choppy, adds Simson, that business owners are not thinking about what they should do to improve their operations. As a result, Moody’s expects spending on new plant and equipment to increase by 7.06 percent in 2012, down from the 9.61 percent of the previous year.

Hesitation to expand comes at a time, paradoxically, when credit for medium and large sized businesses is more readily available than a year ago. “Business credit is much like consumer credit,” says Hoyt. “Well qualified borrowers now have improved access.”

Smaller businesses, however, face continuing hurdles. “Our small businesses are continuing to find it difficult to find reasonable capital,” says Smeltzer. “The general machine shop — the small guy living week to week — that is where the problem is. And that’s where the jobs are created; that’s where the new ideas and the entrepreneurs start.”

Corporate profits will also experience headwind: Moody’s expects them to grow by some 3.2 percent in 2012, down from the previous year’s 3.8 percent, which was itself a decline from a robust 2010. The de-escalation, says Koropeckyj, is due to a number of factors, including higher operating costs and lower productivity growth.

What productivity increase does occur is being maintained through restrained hiring and additional labor saving machines. “Companies have found all sorts of ways to improve the way they operate with lean staffing,” says Koropeckyj. “These process enhancements will remain in place, and will in fact prevent employment from rebounding to where it was prior to the recession for many businesses, even when output does rebound.”

Labor Mismatch

Deciding to hire more people is one thing; finding the right people is another. And in this area the labor market will present a growing challenge to both consumers and businesses.

“We are beginning to be concerned about what may be a chronic labor shortage,” says Smeltzer. “The workforce is getting older, and our data tell us that as many as 5 percent of our employees could retire every year. That’s 10,000 people [out of 200,000 employees in the organization’s member companies] with a high quality work ethic and legitimate skills.”

And who will replace them? Despite high unemployment figures, business owners are having trouble finding the workers they need.

“Young people are not being trained in these skills, and a lot of the unemployed do not have the skills our businesses are looking for,” says Smeltzer. “They are not inclined to go back to school to learn the skills. They just want jobs, and the ones they qualify for are lower quality than what they were used to.”

“For decades we could just put a sign in yard for a machinist and get 20 qualified people,” says Smeltzer.

“Maybe today you get 100 applicants but none are qualified.” While employers are seeing an increase in apprenticeship programs, they are concerned about the future. “The labor mis-match is not yet a crisis but it is approaching one.”


A Look Back at FiSCA XXIII

By RICHARD B. KELSKY

FiSCA’s 2011 Conference and Expo has come and gone, and many attendees probably haven’t given it a lot of thought since jetting home. I, on the other hand, find my brain quite busy contemplating the experience, new opportunities for the coming year and FiSCA 2012.

Being an attendee, an Exhibit Hall vendor, and a workshop presenter at FiSCA (not to mention a columnist looking for his next story) can make you feel a bit schizophrenic. Since most conference goers only fall into one of the above-noted groups, I thought it would be helpful to share my Sybil-like perspective on the event.

As a workshop presenter and exhibitor, one is somewhat of an insider at least to a portion of what goes into organizing these yearly mega-events that most attendees don’t see.

When I reflect on how seamlessly the entire event ran, and the quality of each element, from registration through checkout, I felt a real respect for the FiSCA team that planned and implemented a virtually perfect convention experience.

Smooth Road

As a “working” attendee, I truly appreciated having no bumps in the road. The hotel was flawless, the Exhibit Hall management responsive and prepared, and the scheduled events – whether dining, learning or listening – went off without a hitch.

It may sound corny, but every year, when the FiSCA announcement arrives months before the actual event, I get excited. I immediately get into an “imagineering” mental state.

It starts with envisioning the event is only a couple of weeks away, and sketching out all I need to get done as though I’m already under the gun. But if you know me, you know I will never put myself in that position. Conceive, plan, implement and succeed is my process.

This year’s readiness drill was largely the same as any other year, except that I added a workshop proposal based upon one of my recent articles, “The Model Has Changed.” That created a host of new questions to answer.

How do I make the proposal compelling? What panel members will make the workshop more effective? How will we make it a “must attend” workshop? What will the PowerPoint, handouts and materials include?

It’s the Little Things

Ultimately, though, it’s those little, seemingly inconsequential details that are either meticulously considered or absent-mindedly overlooked that make or break your conference experience.

One of the first things I consider in preparing for the event is the location. Upscale or perhaps a bit more casual? For me, appropriate appearances count.

A premium venue like a JW Marriott or Ritz Carlton require your best. They mean bringing more and better clothes, dining in nicer restaurants (and making reservations) and keeping your appearance consistent with the upscale environment.

It doesn’t hurt to pack a dare-to-dream mentality, too. As a mostly symbolic gesture, wherever I go – even if it is a cold climate — I always pack a swimsuit. I feel compelled to do so, if only to satisfy the fantasy that this will be the year I finally have time to lounge poolside.

But as a vendor, if you actually spend more than a few moments at the water’s edge, you are not doing the job you came to do. The same is true for alcohol and all-niters. Drinking too much and staying up too late is a formula for failure later when responsible adults and businesspeople are looking for you at your best.

At some point, you have to ask yourself: Do I want to be seen as a professional or a drinking buddy? Very few can manage to be both.

And speaking of “too casual,” I understand the temptation to pack the AC/DC T-shirt and torn jeans. (Someone once said to me, “One can never be too rich, too thin or have too many furs.” To which I mentally responded, “One can never be too single.”)

But I also learned long ago one can never be too well-dressed for success. Just don’t ask how I get all that stuff into a carry-on.

What’s Hot, and Not

Looking past what you should be doing, its important to consider what the attendees will want to do, and where they’ll spend their time.

Their decision-making process will depend largely on whether you’re in a “resort” or a “destination” city. Do I, for instance, really believe anyone will come to the Exhibit Hall after 7 p.m. on a Saturday night? Not a chance in Vegas. But in Orlando, where lots of folks are spending Saturday night “on campus,” perhaps.

On the Big Question of what to give away at our Exhibit Hall booth, a destination can all but make your decision for you. In Florida, what could have been more appropriate than sunglasses in a parade of shades, from black to white, with hot pink, and yellow in between? That was I question that I asked and answered in seconds.

Hotness quotients don’t just drive your choice in giveaways. Each year I look over our current software suite and new product release schedule. I do so with the understanding that all successful product launches build-in time for development, release, customer education, market acceptance and expanding demand.

Bearing all that in mind, you have to ask: What product will be “hot” by the date of the show? What needs to be introduced to people so that it will be hot by the next show? Once I figure out the “What” as driven by the “When,” I formulate the marketing approach for the show: Booth display graphics, literature and promotional materials.

Then I develop a plan for the show. Our sales team discusses in advance what we’ll be featuring and make sure everyone is up on their product and demo knowledge.

In short, we make sure that the Exhibit Hall experience for attendees is the best it can be.

As the date of the meeting approaches, I don’t slack off. I continue to develop a plan and a theme.

Which customers do I expect to see? Any meetings that I want to schedule? How can I stay on the cutting edge of industry directions and products?

Be Cool, Not Cold

I address this last set of questions by looking at the Exhibit Hall like a kid in a candy shop. This is my chance to see our customers and meet many people who could become customers.

Because I philosophically hate the walls business competitors erect, I make a major effort to break them down. I visit with them in their booths, both during setup and through the days to follow.

It’s about small gestures —  just saying hello, extending a hand in friendship, offering that hand in setup help or in moving something heavy. Often I’ll suggest competitors stop by our booth to pick up some of our cool giveaways, or a spare mouse if they need one.

The message I’m sending is one I need to hear as much (or more) than anyone on the receiving end of it. Namely, that life is too short and the world too small for old-school behavior. I want us to be bigger than that.

With those outreach efforts underway, my next mission is to learn all about what’s new and exciting outside of our product area. This is when the Exhibit Hall morphs from candy store to college.

What’s the latest loan product and how is it presented? What’s new in buying precious metals? Which card offering is attracting attention? Which bankers are courting customers and being romanced right back? What’s new in the world of money transfers? Which company can tell me more about me than I can? How can our software deliver all the latest goodies to our customers?

Workshop Prep

Like everything else in life, planning and preparation is key to putting together a workshop. My workshop had numerous iterations.

First came the development not only of a subject, but also of a theme. I tested both at meetings in New York and New Jersey.

Then came the fleshing out of all the elements to be included in my syllabus as the workshop’s facilitator, followed by PowerPoint brainstorming and development.

Next came the tall order of assembling a panel with the right pedigree. I had to speak with each panelist to determine not only their interest in participating, but their individual energy level, excitement and public presentation skills, too.

Through several rounds of circulating the PowerPoint presentation, I refined the theme and look. I met with the panel members and engaged in discussions to cultivate the theme in each of them so it would flow out of them naturally at the workshop.

I decided on handouts. In my experience, when all your handouts are gone you’ve had a successful meeting.

I then conducted final meetings with the panel onsite and got comfortable with the meeting room. For each session, I arrived early, checked the equipment, presentation PC, microphones and sound quality. Again, it’s about the little things.

At every trade show and meeting I’ve attended, there are vendors who complain about everything. Exhibit Hall traffic; their booth location; their guide listing; power or internet issues; late arrival of their goods and materials; Exhibit Hall hours, and on-and-on.

Most of the time, these are related to the vendor — not the show. The simple fact is you make your own booth traffic.

You make your own relationships with other vendors at the show. You learn and grow on the show floor. You choose to engage others or sit and talk only with your co-workers. You apply early to get the booth location you want. You actually send in your order for power and Internet – and make sure it got there. You ship your goods in advance and confirm their receipt. You fill out the guide listing form and send it in twice, and you maximize everything about the show.

In short, it’s all in your control.

After all was said and done, it took me a week to recover from FiSCA XXIII. No, not from partying. It turns out that it’s much more grueling to put your all into the success of the event than trying to relive your youth.

In the end, that allowed me to score FiSCA’s latest conference a “10.” And I only had to put in an “11” effort to earn it.

My compliments to the FiSCA team. I am already looking forward to next year!

Richard Kelsky is president of TellerMetrix, Inc. a provider of POS transaction, compliance, interface, electronic deposit and marketing software to check cashers, payday lenders and retail banks. He is also a New York and Connecticut Bar member, a Polytechnic Institute of New York University and New York Law School grad, a Certified Anti-Money Laundering Specialist and a frequent lecturer on business, legal, compliance, and technology issues. He can be reached at: rkelsky@tellermetrix.com

CAUTION: Double Dip Ahead

By RICHARD B. KELSKY

Think you’re prepared to meet the challenge of increased fraud in a down economy? Guess again. Sure, you might be ready to handle most fraud coming from the other side of the glass. Fake checks and IDs. Forged endorsements and treasury duplicates. Even the extreme case of a deceased payee propped up in a chair outside your store. But stop deluding yourself. You can never really be ready for fraud coming from inside your own house.
Intuition tells me that embezzlement (often called occupational fraud and internal fraud) increases with the U.S. Misery Index, and right now that index is trending up.
The Index was created in the 1960s by an advisor to President Johnson named Arthur Okun. For July 2011 the U.S. Misery Index stood at 12.73. That figure — which is calculated by combining our current rates of unemployment (9.1 percent) and inflation (3.63 percent) — is the highest it has been since the early 1980s.
Whether it’s the Misery Index or another measure, my research showed I wasn’t alone in seeing a correlation between a bad economic climate and people behaving badly. So I thought it would be a good idea to become familiar with some statistics on internal fraud — because once you do, you’ll be much better at preventing, detecting, analyzing and dealing with it if and when it happens.
Numbers Don’t Lie
In doing my homework, I came upon two studies that were particularly helpful in understanding internal fraud. The first is The 2010 Marquet Report on Embezzlement. It analyzed the 485 largest embezzlements ($100,000+) in the United States, which just happen to be up 17 percent over the prior year.
Then there’s the ACFE 2010 Report to the Nations on Occupational Fraud and Abuse, which is based upon the results of online surveys taken of 22,927 Certified Fraud Examiners in October 2009.
While their sources may be vastly different, the studies find many common conclusions — and their differences are far fewer than one might imagine. From my perspective, both studies absolutley confirm that those in accounting and finance positions are most likely to commit internal fraud (more than two-thirds of the frauds originate with individuals working in accounting and financial departments). And the higher the position, the greater the dollars involved, with the average dollars for owner frauds outstripping employee frauds 10 to 1.
Worse for you, fraud is most prevalent in the financial services sector (which accounted for nearly 20 percent of losses in the Marquet study). In check cashing and payday lending, that’s virtually everyone in your employ.
Now for a real eye-opener: Women commit more than 60 percent of all embezzlements, although men do it on a bigger dollar scale. Moreover, the percentage of woman committing these crimes is on the rise.
While numbers for occupational fraud vary, it’s generally accepted that it accounts for nearly half a trillion dollars annually, and contributes to nearly half of all business failures. On average it is estimated to eat into revenue by 5 percent.
The average length of occupational frauds is measured in years — not days — and the average age of an embezzler is 40-something (the really big crooks are about 10 years older).
Warning Signs
The Marquet study confirms my Misery Index intuition. Even though Marquet statistics indicate most embezzlers are motivated by living a more lavish lifestyle (60 percent) rather than by financial woes, Marquet points out that “we believe that employee misconduct and internal corporate fraud will continue to be a problem as the U.S. economy struggles and unemployment hovers at levels nearing 10 percent.”
In addition to the warning sign of living a disproportionately lavish lifestyle, Marquet also found that gambling is a big driving force in internal fraud (25+ percent), followed by supporting a personal business (7 percent), personal financial issues, including family and medical (4 percent) and substance abuse (2 percent).
Interestingly, the warning sign statistics in the broader ACFE survey confirmed “lavish lifestyle/living beyond one’s means” as the No. 1 reason (43 percent of cases), but it elevated “experiencing financial difficulties” to No. 2 (36 percent of cases).
To my mind, that means the smaller the amount stolen, the greater the likelihood that some personal hardship was the rationalizing force behind the individual’s decision to commit the crime.
While the Marquet study noted that about 4+ percent of cases involved individuals with prior criminal histories, they believe the percentage is really somewhat higher (5 percent to 10 percent) because of underreporting. Despite broad differences in Marquet and ACFE survey groups, the percentages in this area are quite similar. In the ACFE study, 86 percent reported the perpetrator as never having been arrested or charged, while just 7 percent had a criminal record.
By the way, the average prison sentence for convicted major embezzlers was just under four years. In most states, embezzlement of any material magnitude is a felony.
How Big, How Long?
According to Marquet, California, Florida and New York account for nearly 40 percent of losses due to major embezzlements in the U.S.
The 10 states with the highest number of major embezzlement cases are: California, Michigan, Virginia, New York, Texas, Missouri, Pennsylvania, North Carolina, Florida and Ohio.
The 10 states with the highest losses from major embezzlement cases are: New York, Florida, Texas, California, North Carolina, Louisiana, New Jersey, Illinois, Virginia and Arizona.
The broader ACFE survey estimated the typical organization loses 5 percent of annual revenue to fraud. Its median loss was $160,000, with about 25 percent of defrauded organizations experiencing losses of at least $1 million.
Here’s one survey conclusion to keep your eye on: Small organizations are disproportionately victimized by internal fraud. And if you think you’ve discovered the only incident that occurred, better check again. The frauds reported to ACFE lasted a median of 18 months before being detected (4.5 years on average for Marquet).
According to ACFE, keeping your ears open pays off: internal fraud is much more likely to be detected by tip than by any other means. But being proactive can really help.
ACFE concludes that anti-fraud controls help reduce the cost and duration of internal fraud, and apparently more vulnerable smaller organizations can really benefit from such programs.
In fact, ACFE looked at the effects of 15 common controls on the size of loss and duration of frauds. Businesses that had controls in place had significantly lower losses and much quicker time-to-detection.
First Offenders?
According to the ACFE study, in addition to criminal history, only 8 percent of the perpetrators were administratively punished by former employers, and 10 percent had been actually terminated from their prior positions due to some suspected fraud-related activity.
With these limited risks to the perpetrators, is it any wonder why the numbers and incidents are so large?
Despite the relatively low prior criminal history, Marquet still recommends conducting background investigations to eliminate known bad actors. And understanding how your employees have behaved in past positions is certainly a solid first step.
Ultimately, though, your greatest protection lies in developing a better understanding of how your people are behaving right now.
More often than not, internal fraud goes undetected because, on some level, we really don’t want to see it. The greatest obstacle to ferreting it out is our own willful ignorance. Uncovering the ugly truth demands you regularly (but discreetly) look for the worst in those you’ve always tried to see the best in.

Dishonored Check Leads to Battle Over Attorney’s Fees

By RICHARD WEATHERINGTON

Any check casher who has had to go to court to collect on a dishonored check knows that sometimes the cost of the court action can exceed the potential loss on the dishonored check.
So recently when a check casher sued over a dishonored check, the check casher also asked the court to award it attorney’s fee.
As part of an insurance agreement, an automobile insurance company, the check’s drawer, issued a check for $1,288.64 payable to a couple and a car dealer. The couple and the car dealer endorsed the check, and the couple cashed the check at a Texas check casher, at which point the check casher became the holder of the check.
The check casher endorsed the check and deposited it with its own bank. When its bank presented the check to the insurance company’s bank for acceptance, the bank dishonored the check by refusing payment, and the check was returned to the check casher marked “Refer to Maker.”
The insurance company’s bank appeared to have dishonored the check because the signature of the car dealer’s representative was partially covered by the check casher’s stamp.
The check casher notified the insurance company of its claim and requested payment, but the company denied liability and refused to pay.
Files Suit
The check casher brought suit in justice court, asserting breach of contract on the basis of the obligation owed by the drawer of a check under the Texas version of the Uniform Commercial Code section 3.414.
The check casher further requested attorney’s fees, contending that its claim was contractual under Texas Civil Practice and Remedies Code section 38.001(8). The justice court granted the check casher a summary judgment for the amount of the check, statutory returned check fees, and attorney’s fees.
The insurance company appealed to the county court, and the check casher again was granted a summary judgment. The county court awarded the check casher damages of $1,279.98, court costs of $97, attorney’s fees of $2,995, and set postjudgment interest at 5 percent.
The insurance company appealed the attorney’s fees issue to the Texas Court of Appeals, which reversed the county court ruling on that issue, but affirmed the court’s judgment in all other respects.
The Court of Appeals concluded that section 38.001(8) did not apply to an action on a dishonored check under section 3.414 because such a claim was “purely statutory” and was not a contractural claim.
Goes to State Supreme Court
The check casher appealed to the Texas Supreme Court for review of the attorney’s fees issue. The Supreme Court agreed to determine whether a claim by a check’s holder against the drawer under section 3.414 was a contractual claim to which section 38.001(8) applied.
The Texas Supreme Court pointed out that Article 3 of the UCC establishes a comprehensive scheme governing the procedures, liabilities, and remedies pertaining to negotiable instruments, including checks.
As part of that scheme, when a bank dishonors a check, the drawer of the check is obligated to pay the amount of the check to the check’s holder according to its terms at the time it was issued.
The Supreme Court noted that Texas adheres to the American Rule for the award of attorney’s fees, under which attorney’s fees are recoverable in a suit only if permitted by statute or by contract.
The TCPRC section 38.001 is one of several statutes modifying the American Rule. That section provides, in part, that:
A person may recover reasonable attorney’s fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for: … (8) an oral or written contract.
The Texas Legislature instructs the courts to construe section 38.001 “liberally … to promote its underlying purposes.”
Two Reasons
Although Chapter 38 does not explain its “underlying purposes,” there are at least two reasons, said the court, for allowing a claimant to recover attorney’s fees on a contract suit.
First, wronged claimants may recover the full amount of their damages — including costs in having to litigate the suit — from the wrongdoer, so that they are made whole.
Second, a party with a small but valid contract claim is more likely to risk bringing suit because the claimant may recover attorney’s fees if successful, even if the potential amount of attorney’s fees are greater than the amount of the contract.
Section 38.001’s establishment of a one-way fee shift means that a claimant does not risk having to pay the company’s attorney’s fees if the suit is unsuccessful.
To recover attorney’s fees under section 38.001, a claimant must meet several prerequisites. The claimant must: (1) plead and prevail on a claim for which attorney’s fees are permitted under section 38.001, (2) be represented by an attorney, (3) present the claim to the opposing party, and (4) demonstrate that the opposing party did not tender payment within 30 days after the claim was presented.
Some Exclusions
In addition, Chapter 38 excludes various types of contracts from its reach — specifically, certain contracts issued by insurers. Here, the check casher was represented by an attorney, presented its claim to the insurance company, and established that the company did not tender payment within 30 days.
Further, noted the court, the check casher was not suing on an excluded insurance contract. Thus, the court said its sole inquiry in determining if the check casher could collect attorney’s fees was whether its suit was a claim on a contract to which section 38.001(8) applied.
As a threshold matter, said the court, it must decide whether a check is a contract. The court noted that it was settled law that a check — as a type of negotiable instrument — is a formal contract, a rule established not only in treatises but also in the common law of Texas and other states.
Obligation to Pay
A negotiable instrument is “an unconditional promise or order to pay a fixed amount of money,” a definition that fits squarely within the meaning of a contract as “a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.”
The drawer of a check has a clear obligation to pay the holder of a dishonored check under section UCC 3.414.
The court noted that the parties disputed whether a claim by an endorsee holder of a check against a drawer under section 3.414 was a contractual claim. The insurance company contended that although a suit by a payee against a check’s drawer was undoubtably contractual in nature, a suit by a holder like the check casher was merely a statutory claim inasmuch as the holder and drawer never entered into a contract with each other.
The premise for the insurance company’s distinction was that a drawer (as the person writing the check) and a payee (as the person named as the recipient of the check) were both parties to the contract, whereas a holder is not identified anywhere within the four corners of the check and must instead seek relief under section 3.414 rather than the common law of contracts.
Different Decisions
Whether a suit on a check is contractual, thus allowing for the recovery of attorney’s fees under section 38.001(8), has recently divided the Texas courts of appeals.
The courts of appeals that had examined the issue held that such a suit was contractual in nature. But in 2005, the Dallas Court of Appeals held that a claim under section 3.414 was statutory rather than contractual, and thus the holder was not entitled to attorney’s fees under section 38.001(8).
In reaching this ruling, the Dallas Appeals Court concluded that a check did not meet the requirements for the formation of a contract under the common law.
The court further distinguished previous court of appeals’ opinions that had approved section 38.001(8) attorney’s fees for claims on checks, observing that the case before it involved an ordinary, rather than a cashier’s check, and the claimant had sued the drawer rather than the payee.
The insurance company implicitly conceded that some of the reasoning in the 2005 case was flawed, specifically (1) the court’s rationale that a formal contract must meet the same formation requirements as a simple contract in order to be considered a contract, and (2) the court’s attempt to distinguish a cashier’s check from an ordinary check.
However, the insurance company continued to argue that a suit by a holder against a drawer under section 3.414 lacks a contractual basis, although on grounds that the holder is not explicitly identified within the four corners of the check.
Supreme Court Disagrees
The Supreme Court said it disagreed and concluded that a suit on a check under section 3.414 was a suit on a contract, whether it was brought by a holder or a payee.
Contrary to the insurance company’s assertion, said the court, the drawer of a check enters into a contract in which the drawer unconditionally promises to pay not only the payee, but also a subsequent holder of the instrument.
Because the check itself is the contract, it embodies the full agreement between the parties, as manifested by the drawer’s signature on the check; in signing the check, the drawer contractually obligates itself to pay the amount of the instrument to the instrument’s holder.
When a check is appropriately transferred to another person by endorsement, the transfer vests in the transferee any right of the transferor to enforce the check.
Thus, the drawer’s obligation extends not just to the payee, but also to any downstream holder of the instrument.
The crux of a claim under section 3.414 — whether brought by a payee or holder — is that the drawer possesses an obligation to pay the check according to its terms in the event the drawer’s bank dishonors the instrument.
And when a drawer does not honor that obligation, said the court, and the holder sues the drawer, the suit is on the instrument — and thus the contract — itself.
Article 3, noted the court, has identical remedies for payee and holder when the drawer for a dishonored instrument is sued, which further shows the flaws of the insurance company’s distinction.
Common Law Principle
A holder’s ability to sue on the instrument is equally a common law principle. As early as 1758, in the seminal English commercial paper case, Miller v. Race, a holder could sue and recover for the amount of a dishonored instrument.
The UCC explicitly provides that it is to be supplemented by principles of law, unless displaced by the UCC’s specific provisions. Thus, section 3.414 does not convert what is a common law contractual obligation into a purely statutory one.
As a tool of commerce, a check would be meaningless if, in the absence of a statute, a drawer was burdened with no contractual obligation to pay the amount of a dishonored check to the holder of the instrument.
Further, under the economic loss rule, this court had previously held that a claim is based in contract when the only injury is economic loss to the subject of the contract itself.
Here, the check casher’s damages were solely based on its economic loss due to the insurance company’s failure to pay the amount of the dishonored check — the fact that the check casher sued pursuant to a statutory provision did not negate the reality that its damages were based in contract.
Question of Application
The Supreme Court said that because it concluded that a holder’s suit against a drawer under section 3.414 was contractual, the remaining question was whether section 38.001(8) applied to such a suit. Section 38.001 applies to a claim for “an oral or written contract,” and a check is a formal contract.
Importantly, section 38.001(8) does not distinguish between formal contracts and other types of contracts. Section 38.001(8) does not narrow its scope to claims for breach of contract, nor differentiate between different types of contracts: it merely applies to claims on written or oral contracts. Chapter 38 provides an express exclusion for certain insurance contracts, but not for contracts involving financial instruments.
Finally, said the court, the legislature had instructed the courts to construe section 38.001 liberally, not strictly, to promote its underlying purposes.
Applying section 38.001 here would do just that — it would allow a plaintiff with a small but valid contract claim to recoup its full amount of damages, a principle in line with the UCC’s direction to “liberally” administer the remedies in the Code so that “the aggrieved party may be put in as good a position as if the other party had fully performed.”
Here, the check casher conclusively proved the insurance company’s contractual liability on the check as a matter of law, as well as its claim for attorney’s fees.
By its plain terms, the Supreme Court said that section 38.001(8) did apply to the check casher’s contract claim brought pursuant to section 3.414.
Article 3’s Statutory Scheme
The insurance company next argued that even if the plain language of section 38.001(8) applied to a holder’s claim under section 3.414, the court should decline to apply it here to avoid disrupting the statutory scheme of UCC article 3.
The company correctly contended that the resolution of this issue was governed by the intersection of the court’s opinions in three cases that concerned the propriety of importing external statutory provisions into the UCC.
The court said these three cases established the rule that it is legitimate to apply a non-UCC statutory provision to a claim brought under the UCC, so long as doing so does not “ignore the UCC itself and thwart its underlying purpose.”
The insurance company argued that applying section 38.001(8) would violate this rule, that it would disrupt article 3’s comprehensive and carefully considered allocation of responsibility among parties to banking relationships. The Supreme Court said it disagreed.
Additional Remedy
Attorney’s fees, said the court, do not dictate fault or liability; they are awarded as a remedy after a party has been determined liable on a contract claim.
Attorney’s fees under section 38.001(8) are, in essence, an additional remedy so that a prevailing plaintiff may recoup the cost of trying a case and do not generally interrupt the measure of damages for a particular claim; thus, said the court, to permit the recovery of attorney’s fees here, did not disrupt the relevant remedies provisions of the UCC.
Second, the cause of action in this case touched on provisions of the UCC that were silent about attorney’s fees.
Here, said the court, the relevant statutory provision was silent on the issue of attorney’s fees, and so to import section 38.001(8) would not disrupt any element of that provision.
Thus, to be clear, said the Supreme Court, it was not holding section 38.001(8) may always apply to a UCC contract claim.
If, for example, a provision allowed for the recovery of attorney’s fees, but in a manner more restrictive than section 38.001(8), a plaintiff could not circumvent that limitation by recovering attorney’s fees under section 38.001(8).
The question to be answered in each instance is whether allowing a plaintiff to recover attorney’s fees under section 38.001(8) would do violence to a particular UCC article’s statutory scheme.


Try at BB Gun Robbery Nets 35 to Life

By RICHARD WEATHERINGTON

Three strikes laws are designed to take career criminals off the streets. They apply even when a robber uses an unloaded BB gun in an attempt to hold up a check cashing store.
The manager of a California check cashing store arrived just before the store was scheduled to open. A man, whose first name was Charles, approached the manager outside the store and she told him the store opened in 25 minutes.
Charles pointed a gun at the manager, told her it was a robbery, and to open the door and deactivate the alarm.
When she deactivated the alarm, an alert was sent to the police. After the manager told Charles she had to wait 11 minutes for the safe to open, Charles began to get nervous and told her he would kill her if she called the police.
Police Arrive
When the police arrived, they asked the manager if everything was all right, and she said no.
Charles threw the gun under a desk and told the police that he was the manager’s friend. The manager then told the police about the gun. The police found a pair of leather gloves and what turned out to be an unloaded BB gun.
Charles was arrested, and a police officer interviewed him at the city jail. After being advised of his Miranda rights, Charles agreed to speak with the officer. Charles admitted that he tried to rob the check cashing store by using his BB gun to intimidate the manager.
A police detective taped an interview with Charles during which he claimed that he did not show the gun to the manager and that he only pulled it out when the police came.
Charles was charged with attempted second-degree robbery, with the allegation that he personally used a dangerous and deadly weapon within the meaning of the California Penal Code.
It was further alleged that Charles had three prior convictions. Those three convictions constituted three strikes within the meaning of the state’s “Three Strikes” law.
Before the trial, Charles moved to dismiss his prior strikes, arguing that the convictions were sustained long ago, and citing depression, childhood problems and attempts at rehabilitation. The court held a hearing and denied the motion.
Guilty of One Crime Only
The court granted Charles’s motion to split the allegations of prior convictions, and the robbery case went to a jury trial.
The jury found Charles guilty of attempted robbery but didn’t convict him of the allegation that he used a dangerous and deadly weapon.
After being found guilty on the attempted robbery charge, Charles waived his right to a court trial on the allegations of the three prior convictions and admitted to all three convictions.
Again Asks Dismissal
His defense counsel again asked the court to dismiss the prior strikes, arguing that the jury did not agree with the allegation that Charles had used a dangerous weapon and that the BB gun he used was not loaded.
He further argued that Charles did not touch or harm the manager in any way and that he did not attempt to escape when the police arrived, but instead cooperated and gave a detailed confession.
The defense counsel argued that Charles’s prior convictions did not involve any injury, and that even without the prior strikes, Charles would be subject to a lengthy sentence.
The court denied the motion, reasoning that the BB gun looked like a real gun, Charles’s prior convictions were serious or violent, and that he was the type of recidivist contemplated by the Three Strikes law. The court found the allegations of prior convictions were true.
The court then denied probation and imposed an indeterminate term of 25 years to life, plus 5 year consecutive terms for the two serious felony prior convictions, for a total of 35 years to life.
Charles then appealed to the California Court of Appeals. He claimed that the trial court abused its discretion in denying his motion to dismiss his prior strikes.
Charles argued that two of his three prior strikes stemmed from one incident 11 years ago, that the other strike was 15 years old, and that he would still receive a lengthy sentence if the court granted his motion.
He further pointed to his use of a BB gun to commit the current offense and his personal history to support his contention. Charles also argued that the trial court’s denial of his motion violated the due process clause of the Federal Constitution.
Abuse of Discretion
A trial court’s decision to not dismiss or strike a prior serious and/or violent felony conviction allegation under the Penal Code is reviewed for abuse of discretion by an Appeals Court.
A trial court does not abuse its discretion unless its decision is so irrational or arbitrary that no reasonable person could agree with it.
Because, said the Appeals Court, the circumstances must be “extraordinary” by which a career criminal can be deemed to fall outside the spirit of the very scheme within which he squarely falls once he commits a strike as part of a long and continuous criminal record, the continuation of which the law was meant to attack, the circumstances where no reasonable people could disagree that the criminal falls outside the spirit of the three strikes scheme must be even “more extraordinary.”
Charles, said the Appeals Court, had the burden to show that the sentencing decision was irrational or arbitrary
In determining whether to dismiss a prior felony conviction, the trial court must consider whether, in light of the nature and circumstances of his present felonies and prior serious and/or violent felony convictions, and the particulars of his background, character and prospects, the defendant may be deemed partly or entirely outside the scheme’s spirit and thus should be treated as though he had not previously been convicted of one or more serious or violent felonies.

Move to the Web from Brick and Mortar

By THOMAS J. DUFFY

As we all know, whether we want to admit it or not, online payday lenders are cannibalizing the market share of the traditional brick and mortar lenders.
Loans transacted on the Internet are increasing at an estimated rate of 15 percent to 20 percent a year, according to payday lending consultant Jer Ayles-Ayler of Newport Beach, Calif. Ayles-Ayler started multiple brick and mortar locations throughout the California area back in the late 1990s. As the Internet blossomed, he embraced the online payday model.
Not only did Ayles-Ayler embrace it, he mastered it and did very well. He did so well that he retired from active management and now works as a consultant to the industry.
You may be wondering how to make the change when all you have ever known is brick and mortar. Ayles-Ayler advises getting involved with various organizations and associations of lenders.
Attend the conferences and you will be amazed at the overwhelming amount of information you will receive. There will be a plethora of industry professionals, vendors and online lenders present who will be happy to answer your questions and assist you in moving to the online model. Knowledge is power in online lending.
Working Your Advantage
According to Ayles-Ayler, the greatest obstacle for new online entrants is the ability to generate Web traffic and quality leads.
If you are a brick and mortar operator, you have a greater chance of succeeding in the online space than someone without the advantage of a brick and mortar location that is jumping directly into online payday lending.
You have the advantage of a physical location with a physical advertising space that people notice, whether they want to or not.
You can harvest this advantage. Ayles-Ayler says that one of the most powerful tools in the arsenal of brick and mortar operators is their established customer base.
It is imperative to make your current customer base aware that, in addition to the retail location, you will also be launching or has launched an online lending site.
Various incentives could be offered to encourage customers to make their next loan online. There could also be some type of referral or VIP program for existing customers and their friends and family.
It’s important to note that online lenders are choosing to lend into most of the 50 states under a variety of licensing models.
This includes the choice-of-law model, the state licensing model, the sovereign nation model and the offshore model. We will leave the legal ramifications of this to the attorneys, but note that the opportunity to lend into all 50 states is an amazing opportunity not afforded to the brick and mortar operators.
Tax Angles
What are the tax implications of incorporating the online model? Let me start by stating that more and more of the online lenders we work with are choosing to operate internationally. Many refer to this as the offshore model.
The offshore model encompasses many complex tax compliance and reporting matters that will be discussed in future articles.  For now, we will focus strictly on the tax implications of operating a domestic online lending entity.
Generally speaking, a domestic entity refers to an entity that is formed in the United States. The tax implications for an online domestic entity are not too dissimilar from a domestic brick and mortar location. Usually it is recommended that an online lender set up a domestic limited liability company.
Team Work Vital
Your accountant should work in conjunction with your attorney when planning the structure of your online lender, as your risk tolerance will dictate this structure.
It is important to note that your online entity will be taxed in the same manner as your brick and mortar entity is taxed for federal tax purposes.
Legal fees, though hefty, are certainly necessary and the treatment of these fees for tax purposes is very important.
Many new entrants face large penalties from the IRS for the incorrect treatment of these costs.
Legal and accounting costs necessary to organize the partnership and to facilitate the filings of the necessary legal documents are referred to as organizational costs. Organizational costs are generally capital expenditures. Capital expenditures are not deductible in full in the year incurred, but are amortized over a 15 year life.
However, currently you can deduct up to $5,000 of organizational costs in the current year and you must amortize the remainder of these costs over 15 years.
The $5,000 immediate expense is reduced dollar for dollar when organizational costs exceed $50,000.
Please note that under certain limited circumstances these costs may fit the definition of business expansion costs and thus result in a full and immediate deduction. It is important to consult your tax advisor regarding your specific situation.
1099s Protect Deductions
Also, it is important to note that fees paid in excess of $600 to an attorney must be reported on a form1099-MISC.
There are no exceptions. It is strongly recommended that you issue 1099s to any and all service providers as this solidifies your deductions in the eyes of the IRS.
The 1099s are easy to prepare and are well worth it. I recently attended an IRS audit of a client who claimed in excess of $300,000 in professional fees. He failed to issue a 1099 and failed to keep copies of cancelled checks and bank statements.
The IRS subsequently denied the entire deduction. Had a 1099 been issued he would have saved more than $100,000 in taxes, interest and penalties.
The costs incurred for various IT, computer equipment and software packages can be fully expensed under the Sec. 179 or Bonus depreciation provisions of the Internal Revenue Code. (See Cheklist magazine, Summer 2011, “IRS: Once in A Lifetime Opportunity” for an expanded discussion of the deprecation provisions and planning opportunities for 2011).
Investigation Expenses
Finally, where is that tax planning nugget you have been waiting for? A little known deduction, often overlooked by many professionals, is something known as an investigation expense. Investigation expenses are basically the expenses incurred in investigating the potential for a new business. If your investigation results in a new business formation, you can deduct those expenses.
Under a special provision in the tax code, you are eligible to elect to deduct up to $10,000 of these expenses as start-up expenses in 2010 ($5,000 in years thereafter) with the remainder being amortized over 180 months. The $10,000 cap is reduced dollar for dollar once start-up expenses exceed $60,000.

Thomas Duffy is a CPA with Kutchins, Robbins and Diamond. Contact him at (847) 240-1040, ext.181

FiSCA Eyes Cordray CFPB Appointment

By PHILLIP LEE

FiSCA Chairman Joseph Coleman (pictured) gave Cheklist an overview of 2011 from the association’s perspective. In the first part of a two-part series, Coleman discusses the Consumer Financial Protection Bureau, which launched on July 21, 2011.

Cheklist Magazine: Would it be fair to say that the CFPB was the main focus, or one of the top priorities, of FiSCA in 2011?
Joseph Coleman: Yes. CFPB is one of FiSCA’s top priorities at the moment. Clearly, the agency has the potential to significantly impact our industry and so the Association is working hard to establish a solid working relationship with key personnel there.

Has FiSCA had any contact with the CFPB since it has been up and running?
Yes. We initiated outreach this January and have had several productive meetings with senior staff there, including with Elizabeth Warren, Peggy Twohig and several others.

How surprised was FiSCA that Richard Cordray was named to lead the CFPB rather than Elizabeth Warren?
I don’t think “surprised” is the right word. The longer the president waited before naming his choice for director, the more speculation there was as to whom might be selected.

How familiar is FiSCA with Richard Cordray?
Individual members worked with Mr. Cordray in his previous role as attorney general for the State of Ohio. However, FiSCA has not had direct interactions with him to this point.

Does Cordray’s appointment change FiSCA’s approach at all?
No. We have been dealing with  numerous officials at the bureau prior to his appointment and will continue to do so on a moving-
forward basis.

What is FiSCA’s feeling about CFPB so far? What does FiSCA expect from the CFPB? Obviously, it is still early and the CFPB will focus on more pressing problems, but are there any inklings about the alternative financial services industry?
With regard to our view toward the bureau, quite simply it’s a fact of life, and we are dealing with it accordingly. At this point, it is too early to say what the bureau’s initial priorities will be. As you know, the conventional wisdom is that the bureau cannot start promulgating new regulations regarding the non-depository industry until a director is named and confirmed. Given that the Senate has indicated it will refuse to confirm any director until other policy issues related to CFPB are addressed, it may be some time before the bureau has that power to create new regulations for our industry. However, they already have the authority to enforce various existing consumer financial protection regulations transferred to them by other agencies through provisions in the Dodd-Frank act.

>> Editor’s Note: The second half of this interview will be published in the Fall issue of Cheklist.

The Ultimate Irony

By RICHARD B. KELSKY

Reality is a harsh teacher. For years, check-cashers and payday lenders were routinely chastised for charging to provide financial services to consumers and communities that banks refused to service.

In a go-go economy the unfair attacks only worsened as soufflé-like stock prices (based on fast-paced mortgage generation and inflated asset valuations) allowed banks the luxury of spending lots of money to open branches in less-than-toney neighborhoods.

Post bailout realities and regulations have become a wake-up call, both for banks and for their customers, many of whom are finally feeling pinched enough to read the fine print in their monthly statements and make reasoned decisions about what they do and do not want to pay for.

Party’s Over

The music has stopped. So has the giving of free stuff that, in truth, never was very free.

In many neighborhoods, brick-and-mortar service has stopped, too, with 1,400 bank branches closing nationwide in the last two years.

As the consumer becomes increasingly aware, banks that once lived off less visible overdraft-protection and interchange fees are being forced to be more open about their charges.

It turns out the TANSTAAFL principle is all the more true during a recession.

For those of you unfamiliar with the acronym, it stands for There Ain’t No Such Thing As A Free Lunch.

Banks are just getting accustomed to actually admitting TANSTAAFL to their customers. Finding all of a bank’s fees and charges can be difficult and frustrating, to say the least.

So as it stands, despite all of the rhetoric, check cashers and payday lenders are perhaps the only financial service organizations that have been openly disclosing their charges.

Less Money = Better Choices

More to the point, after all of the unwarranted attacks on the industry, it is coming to light that the un-banked and under-banked are way smarter about managing their money than their well-heeled societal counterparts.

They’re also far better able to make intelligent choices about financial services than their self-proclaimed protectors realize.

I really must apologize for falling prey to using the terms “un-banked” and “under-banked.” They are really just clever creations of bank lobbyists and marketers, since both imply everyone should have a bank account.  Perhaps we should rename this group “The I-Don’t-Want-To-Be-Banked.”

The I-Don’t-Want-To-Be-Banked see neighborhood financial service centers as a simpler, much more straightforward alternative to banking: To cash a check, you present it along with your ID, and assuming everything passes the normal verifications, you get your money, less a fee.

Want to pay a bill, get a money order, send or receive a wire, pay a parking ticket, buy a toll pass, get a transit card? You can do that, too.

The service is local, fast, friendly and fairly priced. In fact, that check cashing fee averages only about 1 percent to 3 percent, depending upon market and type of check. And by the way, it’s a clearly disclosed fee — in most cases posted prominently in the store and on a receipt.

Prepaid Now Mainstream

And what of all the attacks on the prepaid industry?

Well, according to recent AP articles, prepaid cards are now “mainstream.” After reading those articles it seems to me “mainstream” is code for “it’s better to know what you’ve got and what things cost than getting surprised every month by bank charges.”

By the way, a search of “prepaid cards” and “mainstream” produced 395,000 results on Google.

Yes, prepaid cards carry charges. But in today’s consumer-driven marketplace, they’re generally simple, usually well disclosed, and relatively easy to understand. That’s precisely why the free-market made them a runaway success.

Face it: If prepaid cards really were too expensive, or had too many hidden charges, people wouldn’t use them for long. Yet today, because of that very simplicity — what might be termed honesty — prepaid cards are often replacing checking accounts.

Transparent PDLs

Just like check cashing, payday loan disclosures are generally very clear, as are the fees associated with the loan.

Sure, some muckraker can always find the widow who borrowed money in an unregulated state and ended up in litigation, and use it with a broad brush to paint the industry. But that has nothing to do with the thousands of payday loans that serve their purpose and work out just fine every single day.

Payday loan customers realize that the APR calculation cannot be compared to collateralized, long-term, large-dollar borrowing.

A payday loan APR is not driven by interest rates alone.  It’s driven in large part by the fee charged to issue a relatively small, short-term, uncollateralized loan.

What exactly is the equivalent APR on a $34 charge by a bank for overdraft protection for using $12 for two weeks? What would it be on a $60 ATM withdrawal where a $2 (or $5) fee is applied?

Does anyone seriously claim that a person could walk into a bank branch and actually get a loan for $177 to get their brakes fixed so they could drive to work and keep their job?

Funny how those who criticize the payday industry didn’t cry foul about irresponsible mortgage lending and lack of disclosures during the housing bubble.

It’s a heck of a lot easier to attack small business owners than banks — and easier to attack in the name of those who need $200 loans rather than call out the over-banked (over-leveraged) middle class.

And just who were most of those folks who purchased homes with that easy mortgage money?  They were not the customers of check cashers and payday lenders or users of prepaid cards. Turns out they were mostly middle- and upper middle-class folks looking to make money in the housing market.

They couldn’t predict where the market was going, had no idea what their costs were going to be, or even how they were ever going to make that monthly payment. Many of the very same folks doomed to a lifetime of credit card debt — with bank-issued credit cards.

The Rest of the Story

Below is a table showing selected published rates for four of the largest banks in the United States.

It took some work to prepare this chart. On July 11, 2011, I went to each of their websites and set out to determine their detailed account charges.

Mind you, I feel that I am an above-average computer user and a proficient web consumer. My experience locating detailed bank charges and fees varied from relatively ready access to a single-page rate chart to rates located in 30-page-plus PDFs.

Actually, I had listed a fifth major bank, but deleted it when I had zero success in finding their detailed account charges after spending more than an hour on their website.

I then went on to look at other bank sites both large and small.  Just trying to find each bank’s checking account charges highlighted the challenges faced by consumers as well as serious disparities between banks.

Namely:

• Required disclosure doesn’t mean easy-to-find-or-easy-to-understand disclosure

• Differences in where to find charges

• Differences in presentation of charges

• Differences in terminology and definitions

• Differences in the amount of information

This experience reminded me of the story about a manager reviewing an employee’s expense report:

Manager: “I have a little problem with your expense report.”

Employee: “What’s that?  It’s all there.”

Manager: “I see a total of $710 — the gas, the hotel, the meals, and the raincoat for $89.  We don’t pay for raincoats.”

Employee: “But it started to rain after I got there.”

Manager:  “You have to take it out.”

The next day …

Manager: “I got your revised expense report. The raincoat is gone — good — but the total is still $710.”

Employee: “Oh, the raincoat’s still in there — you just have to find it.”

Lessons Learned

What did I learn overall?

If your financial life is simple, and you don’t want to spend your time defensively managing a bank account, you can economically use the services of a financial service provider, and avoid a potentially complicated and potentially expensive relationship.

It is important to note that some services provided by neighborhood financial service providers are materially less expensive than banks. Like bank money orders of $5 each, or bank wires from $18.75 up to $50.

When your landlord won’t accept a personal check or your relatives need money, paying a lot less (an average of about $1 for a money order at a check casher) for those services becomes important.

Add to the mix keeing a bank monthly account fees, overdraft fees, multiple overdraft fees, and extended overdraft fees, overdraft transfer fees, returned item fees, statement fees, and many, many others, and you suddenly begin to appreciate why bank-free money managing options are increasingly the choice of people who need make their buck go father than ever.

E=mc2 F=MA S=1/2AT2  and Others

Speaking of checking accounts, one of my favorite requirements to avoid a monthly checking account maintenance fee is to “maintain an average daily balance.”

I consider myself a fairly smart person, but calculating “average daily balance” on a daily rolling basis takes a bit of work — and probably a spreadsheet program. Since an ordinary person can’t figure it out, they are either forced to maintain their balance at a higher level to protect themselves or face the penalty of a monthly charge.

I should point out that some accounts do provide multiple ways (typically involving direct deposit or use of other services) to avoid a monthly account maintenance fee, but if you live paycheck-to-paycheck the monthly charge may be inescapable.

Conclusions

The check cashing and payday lending industries are by and large composed of hard-working, honest business owners who charge fees for the services they provide.

They make investments and take economic risks and are often highly regulated by their host states, and where applicable, as Money Service Businesses by the federal government.

In many states, their rates are regulated by law.

Personally, I love banks and believe they serve a vital role. They have the absolute right to charge fees for all of their services.

So do check cashers, payday lenders and prepaid card issuers. They can peacefully coexist, serving different customers with different needs, wants and resources.

In today’s information age, average consumers have no trouble figuring out what’s a reasonable price to pay (provided the price isn’t buried deep inside some opaque billing structure several clicks deep on an Internet site, and then inside a multi-page PDF).

With tough times pressing them to watch every dollar, they’d much rather be plainly told what they’re paying, pay it, and be sure there are no surprises, than kid themselves that they can get something for nothing.

Richard Kelsky is president of TellerMetrix, Inc. a provider of POS transaction, compliance, interface, electronic deposit and marketing software to check cashers, payday lenders and retail banks. He is also a New York and Connecticut Bar member, a Polytechnic Institute of NYU and NY Law School grad, a certified anti-money laundering specialist, and a frequent lecturer on business, legal, compliance, and technology issues. He can be reached at: rkelsky@tellermetrix.com

Follow the Golden Rules

By Robert Frimet, CMS

It’s no surprise announcement that the gold buying business has swept the nation. If you’re not on the gold buying band wagon, you probably should be by now.

But what about compliance?

Unknown to many, there is something called the U.S. Patriot Act (our old friend), and since 2006, laws have been in effect that require certain dealers in precious metals to be regulated under Chapter X, formerly CFR 103.140.
What this means is that as a purchaser of precious metals, you may have expanded responsibilities. Before you decide to take a liquid bath in nitric acid, there are exemptions that may apply.

Under the regulation, if you purchased less than $50,000 in precious metals from the general public in the previous year, you wouldn’t have to comply with this ruling.

If business was booming in 2010 and you did purchase in excess of $50,000 in precious metals and also sold those metals to a refiner or third party, you would be required to follow the regulation by June of 2011.

To get to the down and dirty, all precious metals including platinum, silver and palladium are covered under the regulation if the metal exceeds 500 parts per thousand, which equates to 50 percent pure.

That means that if all you did was purchase 10K gold all day long and no other karat, you wouldn’t be required to comply with the law as 10K is approx 39 percent pure, not 50 percent pure.

However, if you bought a combination of metals that exceed 50 percent in purity, then you must comply.

Full Program

If you hit that 50 percent mark, you need a full compliance program under Title 31 which means:

• Incorporating policies and procedures based on the risk associated with purchases from customers.
• Creating a risk assessment
• Specifying types of products offered
• Specifying what countries you deal with if out of the U.S.
• Detailing how you spot and handle risk
• Conducting ongoing training for staff
• Providing for an independent review (unlike Title 31, for MSBs, a person who is involved with the operation of the program may not be the reviewer.) An outside person such as a consultant, CPA or bookkeeper could conduct the review if they are familiar with such review processes.

More Compliance

The kicker is that if you do fall under this regulation, you would then comply with 26 and file the 8300 form, not a CTR, which would force you to comply with Title 31 and Title 26 (Title 31 for the program and Title 26 for the 8300.)
You may also file an 8300 under suspicious activity transactions or file a form 109 to protect you under the safe harbor rule.

If you are processing metal through a broker, are they offering you a program or did they even make you aware of these requirements? These are questions business owners should ask themselves when dealing with outside companies.
Jim Colllachia of Hometown Cash Advance, with 24 locations in multiple states, was questioned about his compliance.

“We are a large gold buyer and we really could not have gotten as successful as we are without using Retail Gold Brokers, as they set us up from beginning to end and addressed all our compliance needs, both state and federal,” Colllachia says.

Feds Important, Too

Many in the industry are focused on state issues. While these are critically important, so are the federal requirements.

It also appears that the IRS, on behalf of FinCen, is stepping up its audits and looking closely at those companies that don’t have a compliance program in place despite meeting the requirement under Title 31. Fines can be steep for non-compliance.

Other things to consider on the state level are weights and measures, as well as hold times and reporting to local law enforcement. It pays to have someone involved in your business who can ensure that all regulations are being followed and, if necessary, process your metals as well.

Robert Frimet is the president of RMF Consulting Group, Inc and is a Certified Anti Money Laundering Specialist. He has served the pawn, check cashing, payday, title, and other industries since 1991. Frimet offers compliance programs and independent reviews and federal/state examination audit assistance nationwide. He may be reached at (702) 596-8370 (PST), at Bob@checkconsultants.com or via www.checkconsultants.com