Copyright 2004 Cox Enterprises, Inc. 

Cox News Service


April 14, 2004 Wednesday


SECTION: Financial Pages


LENGTH: 1161 words





Moving in (w) Washington and (f) financial categories.


Cox News Service

WASHINGTON _ Two months ago, Mark Axton decided it was time to kick-start his American dream. He went to the bank with a $3,500 federal income tax refund check he planned to use for a deposit on his family's first home.

Instead, reality kicked in. Bank of America employees told Axton he couldn't cash the U.S. government check because it was over the bank's $2,500 limit for non-customers. And he couldn't become a customer, they said, because he had bad credit.

Axton, a tow truck driver in Virginia, said he went to a check casher, a business that will cash almost any type of check instantly for a fee. They charged him 4 percent of the check's value, or $140, nibbling off a much-needed portion of his refund.

Each year, tens of millions of dollars in federal funds intended to help low-income families are siphoned off to check-cashing companies because most local banks won't cash U.S. government checks for non-customers.

In 2002, more than 20 million people received $36 billion in refunds through the Earned Income Tax Credit (EITC) program, a federal initiative that gives low-income families back more than what they owed in taxes.

The program, created by Congress in 1975 to give poor families a tax incentive to work, is considered one of the country's foremost anti-poverty measures.

The average EITC tax refund check is about $1,700, but often can be as hefty as $4,200, according to the National Tax Assistance for Working Families Campaign.

But many of those refunds pass through check-cashing businesses, where service fees range up to 7 percent.

In a survey conducted in Chicago in 1998 by researchers from Syracuse University, Loyola University and the Urban Institute, nearly 45 percent of respondents said they planned to use a check-cashing service for their EITC refund.

Ace Cash Express Inc., which claims to be the country's largest check-cashing service, garnered $19.2 million, or 28.6 percent of its revenue in the first quarter of 2003, from cashing tax refund checks, it reported in a filing with the Securities and Exchange Commission.

Bob Chaney, manager for All Checks Cashed in Atlanta, said his store usually sees a jump in business around tax time. "On a typical busy Friday, an amount of money that will be cashed might be $60,000 or $70,000," he said. "In tax season, it's well over $100,000."

The banking industry says it can't afford to cash government checks for non-customers because it would be flooded with counterfeit or forged checks.

However, according to the Treasury Department, less than one-tenth of 1 percent of all tax refund checks sent to poor families are forged or stolen.

"The numbers are extremely small," said Wanda Rogers, assistant commissioner for financial operations with the Treasury, which issued more than 250 million checks last year. Bad checks "are not a big problem . . .  in relation to the volume we issue," she said.

The banking industry does not issue guidelines for check-cashing policies, but most major banks will not cash checks for people who do not have accounts, while others limit the size of the checks they will cash.

In 2001, nationwide commercial banks lost $698 million due to cashing bad government and non-government checks, according to Jane Yao, managing director of the Survey and Statistics Division of the American Bankers Association.

However, the ABA does not collect separate data on losses from cashing bad government checks, Yao said.

Still, ABA officials insist the possibility of check fraud is high.

"The reason why the numbers are low is because banks are not cashing checks for bank customers," said Nessa Feddis, senior federal counsel with the ABA. "The way you control losses is to have policies and procedures to protect you _ including not taking checks from people you don't know."

Banks often will encourage non-customers to open accounts, said James Ballentine, director of community and economic development at the ABA.

"A bank wants a relationship; check-cashers just want a date," he said. "Believe me, when you come into a (bank) ... they want your business."

Nevertheless, nearly 22 percent of low-income people do not have bank accounts, according to Michael S. Barr, assistant professor at the University of Michigan law school.

Many barriers discourage _ and often prevent _ poor people from opening or maintaining a traditional bank account.

Often, poor people must use most or all of their tax refunds on existing debts once they receive them, leaving them with nothing to open a bank account with, Barr said.

In addition, 7 million people are listed on a national database called ChexSystems, a private clearinghouse used by banks to identify individuals with bad credit, he said. People on the list are usually turned away when they try to open bank accounts, and can remain on the list for up to seven years.

Poor people who do succeed in opening bank accounts often have trouble maintaining them, Barr said. He said banks often charge fees if an account is overdrawn or require customers to maintain a minimum balance, making an account tricky to manage for people who don't have a steady income.

Part of the attraction of check-cashing services is their ease of use, said Irene Skricki, a program associate with the Annie E. Casey Foundation, a national foundation that provides services to disadvantaged children and families.

Some people, even those with bank accounts, use check cashers to get money quickly, Skricki said. Many people put up with high service fees because they are still cheaper than the account fees some banks impose. And others use check cashers because they have no other option, she said.

"Banks don't want to be dealing with this clientele," she said. "Banks are not all that motivated to serve people who are going to have much lower amounts in their bank accounts."

Check-cashing stores justify their service fees as a way to protect themselves against the risk they assume by accepting almost all checks.

"Paying a fee for service is a better deal (compared to) maintaining a minimum balance, paying monthly fees," said Rick Lyke, spokesman for Financial Service Centers of America, a national trade association that represents 5,000 check-cashing stores across the country.

In Virginia, Axton sees the disadvantages in being forced to use check-cashing services instead of a checking account.

"I live in a cash society. If I can't pay cash for it, I can't get it," he said.

Axton can cash his payroll checks only at the bank where his company holds an account or at check cashing stores, and has to keep all his money at home.

"I get my paycheck on Friday _ what happens when we get robbed on Saturday?" he said.

Shweta Govindarajan's e-mail address is sgovindarajan(at)