69-1000-4615-1

STATE OF MINNESOTA

OFFICE OF ADMINISTRATIVE HEARINGS

FOR THE DEPARTMENT OF COMMERCE

In the Matter of the Proposed Rules REPORT OF_THE

Relating to Currency Exchange Rates ADMINISTRATIVE-LAW JUDGE

The above-entitled matter came on for hearing before Administrative Law

Judge Steve M. Mihalchick on June 26, 1990, at 9:30 a.m. in the Department of

Commerce hearing room at 133 East Seventh Street, St. Paul, Minnesota.

This report is part of a rulemaking proceeding held pursuant to Minn.

Stat. 14.131 to 14.20 to hear public comment, to determine whether the

Department of Commerce (Department) has fulfilled all relevant substantive and

procedural requirements of law or rule, to determine whether the proposed

rules are needed and reasonable, and to determine whether or not the rules, if

modified, are substantially different from those originally proposed.

Carolyn Ham, Special Assistant Attorney General, 1100 Bremer Tower, St.

Paul, Minnesota 55101, appeared on behalf of the Department at the hearing.

The agency panel appearing in support of the rules consisted of Elissa G.

Mautner, Staff Attorney, Ryan Terry, CPA and Consultant to the Department, and

Lenore Scheffler-Rice, Director of Licensing.

Approximately sixty persons attended the hearing. Twenty-two persons

signed the hearing register. The Administrative Law Judge received fourteen

exhibits as evidence during the hearing. The hearing continued until all

interested persons, groups or associations had an opportunity to be heard

concerning the adoption of these rules.

The record remained open for the submission of written comments through

July 16, 1990. Pursuant to Minn. Stat. 14.15, subd. 1, three business days

were then allowed for the filing of responsive comments. On July 19, 1990,

the record was closed. Six comments were received during the initial period;

two comments were received during the response period. On July 30, 1990, the

Department filed a letter replying to a motion that certain portions of its

post-hearing comments be striken.

The Department must wait at least five working days before taking any

final action on the rules; during that period, this Report must be made

available to all interested persons upon request.

Pursuant to the provisions of Minn. Stat. 14.15, subd. 3 and 4, this

Report has been submitted to the Chief Administrative Law Judge for his

approval. If the Chief Administrative Law Judge approves the adverse findings

of this Report, he will advise the Department of actions which will correct

the defects and the Department may not adopt the rule until the Chief

Administrative Law Judge determines that the defects have been corrected.

However, in those instances where the Chief Administrative Law Judge

identifies defects which relate to the issues of need or reasonableness, the

Department may either adopt the Chief Administrative Law Judge's suggested

actions to cure the defects or, in the alternative, if the Department does not

elect to adopt the suggested actions, it must submit the proposed rule to the

Legislative Commission to Review Administrative Rules for the Commission's

advice and comment.

If the Department elects to adopt the suggested actions of the Chief

Administrative Law Judge and makes no other changes and the Chief

Administrative Law Judge determines that the defects have been corrected, then

the Department may proceed to adopt the rule and submit it to the Revisor of

Statutes for a review of the form. If the Department makes changes in the

rule other than those suggested by the Administrative Law Judge and the Chief

Administrative Law Judge, then it shall submit the rule, with the complete

record, to the Chief Administrative Law Judge for a review of the changes

before adopting it and submitting it to the Revisor of Statutes.

When the Department files the rule with the Secretary of State, it shall

give notice on the day of filing to all persons who requested that they be

informed of the filing.

Based upon all the testimony, exhibits and written comments, the

Administrative Law Judge makes the following:

FINDINGS OF FACT

Procedural Requirements

1. On April 2, 1990, the Department filed the following documents with

the Chief Administrative Law Judge:

(a) A copy of the proposed rules certified by the Revisor of Statutes.

(b) The Order for Hearing.

(d) A Statement of the number of persons expected to attend the hearing

and estimated length of the Agency's presentation.

(e) The Statement of Need and Reasonableness.

(f) A Statement of Additional Notice.

2. On May 21, 1990, a Notice of Hearing and a copy of the proposed rules

were published at 14 State Register 2680.

3. On May 14, 1990, the Department mailed the Notice of Hearing to all

persons and associations who had registered their names with the Department

for the purpose of receiving such notice.

-2-

4. on May 29, 1990, 27 days prior to the hearing, the Department filed

the following documents with the Administrative Law Judge:

(a) The Notice of Hearing as mailed.

(b) The Agency's certification that its mailing list was accurate and

complete and the Affidavit of Mailing the Notice to all persons on

the Agency's list.

(d) A copy of the State Register containing the proposed rules.

5. In its cover letter to the filings of May 29, 1990, the Department

stated that it would be represented at the hearing by the Attorney General's

office, and went on to state: "If testimony is deemed necessary, we

anticipate that Elissa G. Mautner, Department counsel, will testify on behalf

of the Department. At the present time, the Department has not finalized its

decision as to whether additional witnesses will be called."

6. On May 30, 1990, 26 days prior to the hearing, the Department filed

the following documents with the Administrative Law Judge:

(a) A copy of a Notice to Solicit Outside Opinion Regarding Proposed

Rules as issued by the Commissioner of Commerce and as published on

December 4, 1989, at 14 State Register 1352. No materials were

received in response to the Notice.

(b) Copies of requests for a public hearing received by the Department

in response to a Notice of Intent to Adopt a Rule Without Public

Hearing published on February 5, 1990, at 14 State Register 1966.

7. The documents listed above were available for inspection at the

Office of Administrative Hearings from the date of filing to the date of the

hearing. Nobody asked to inspect the file during that period.

8. The Department failed to comply with the requirements of Minn. Rule

1400.0600 G in that it did not file the names of agency personnel who would

represent the agency and the names of other witnesses who would appear on its

behalf at least twenty-five days prior to the hearing. However, because no

one inspected the documents filed by the Department, no one was prejudiced

thereby. The Administrative Law Judge finds that the Department's failure is

insubstantial and not a defect in the rulemaking proceeding.

9. Minn. Stat. 14.11, subd. 1, requires proposals of rules requiring

the expenditure of public funds in excess of $100,000 per year by local public

bodies to accompany the Notice of Intent to Adopt Rules with an estimate of

the total cost to local public bodies for the two-year period following

adoption of the rules. The rules proposed here will not require any

expenditure of funds by a local public body.

10. Minn. Stat. 14.11, subd. 2, requires proposals of rules that may

have a direct and substantial adverse impact on agricultural land in the state

to comply with additional statutory requirements. These rules have no impact

on agricultural land.

11. Minn. Stat. 14.115, subd. 4 requires agencies to provide an

opportunity for small businesses to participate in the rulemaking process by

-3-

including a statement of the impact on small businesses in any advanced notice

of proposed rulemaking, publishing notice of proposed rulemaking in

publications likely to be obtained by affected small businesses, direct

notification of small businesses that may be affected by a rule or conducting

public hearings concerning the impact of the rule on small businesses. In

this case, the Department, in addition to the normal notice requirements of

Minn. Stat. 14.14, mailed an additional Notice of Hearing to Mr. Theodore

Mondale "in order for him to forward such notice to those persons who filed a

joint request for public hearing at the behest of the UnBank Company."

Affidavit of Mailing Additional Discretionary Notice of Hearing.

12. The ALJ finds that the Department complied with the requirements of

Minn. Stat. 14.115, subd. 4, with regard to the proposed rules. Providing

additional notice to Mr. Mondale, who was known to be a representative of at

least a portion of the currency exchanges in Minnesota was adequate. Direct

notice to the small number of currency exchanges licensed by the state would

have been preferable, but the attendance at the hearing by a significant

number of the currency exchanges indicates that most did receive notice of the

hearing and that their interests were adequately represented.

Nature of the Proposed Rules

13. Two new rules are proposed: Minn. Rule 2872.0100, which establishes

presumptively fair and reasonable fees for check cashing, and 2872.0200, which

requires the posting of fees and specifies the content of the posted notice.

14. The presumptively fair and reasonable fees are one percent of the

face amount or 50cents for checks issued by a government entity up to $500, and

one and one-half percent of the face amount or 50cents for other checks. When a

currency exchange files its fees with the Department as it is required to do

under Minn. Stat. 53A.07, if those fees do not exceed the presumptively fair

and reasonable amounts, the Department will approve them. If they exceed

those amounts, the fees "may be disapproved by the Commissioner as not fair

and reasonable based on a consideration of the standards in Minnesota

Statutes, 53A.07, subd. 3."

15. The posting requirement requires two signs made of certain

materials, of no less than a certain size, with letters of a certain size,

indicating in increments of one cent up to certain maximums the amounts

charged for various size checks, together with a notice of the minimum fee

charged.

Statutory_Background and Authoritv

16. Currency exchanges came under regulation by the State of Minnesota

on August 1, 1989, the effective date of Minn. Stat. Ch. 53A. Minn. Laws

1989, Ch. 247, 16. Currency exchanges are defined by Minn. Stat. 53A.01

as persons engaged in the business of cashing checks, drafts, money orders or

travelers checks for a fee. (The term "person" includes all forms of business

organizations; Minn. Stat. 645.44, subd. 7.) The definition of currency

exchange specifically excludes persons who cash checks incidentally to their

primary business if the charge does not exceed $1.00 or one percent of the

value of the check.

-4-

17. Under Minn. Stat. 53A.02, currency exchanges must be licensed by

the Commissioner of Commerce (Commissioner). The Commissioner may take

disciplinary action against any currency exchange license for reasons and upon

the procedures set forth in Minn. Stat. 53A.06.

18. Minn. Stat. 53A.07 requires that fees charged for check-cashing

services must be filed with and approved by the Commissioner. Minn. Stat.

53A.07, subd. 3 provides:

Standards; unreasonable fees prohibited. The

commissioner may disapprove the fees filed by a currency

exchange if they are not fair and reasonable. In

determining whether a fee is fair and reasonable, the

commissioner shall take into consideration:

(1) rates charged in the past for cashing of checks by

those persons and organizations providing check

cashing services in the state of Minnesota;

(2) the income, cost, and experience of the operations

of currency exchanges existing prior to this

enactment or in other states under similar

conditions or regulations;

(3) the amount of risk involved in the type of check to

be cashed and the location where the currency

exchange operates;

(4) the general cost of doing business, insurance costs,

security costs, banking fees, and other costs

associated with the operations of the particular

currency exchange;

(5) a reasonable profit for a currency exchange

operation; and

(6) any other matter the commissioner deems appropriate.

The commissioner shall set a separate rate, consistent

with the above standards, for checks issued by a

government entity in an amount up to $500 to be cashed by

a currency exchange.

19. Minn. Stat. 53A.12 states that the Commissioner may adopt rules

under Minn. Stat. Ch. 14 "as may be necessary to administer and enforce" Minn.

Stat. Ch. 53A. Minn. Stat. 45.023 states that the Commissioner may adopt

rules "whenever necessary or proper in discharging the commissioner's official

responsibilities." In its Statement of Need and Reasonableness (SONAR) the

Department cites both of these statutes as its authority to adopt the proposed

rules. In its post-hearing comments, Ex. Q, the Department also points to the

provision at the end of Minn. Stat. 53A.07 requiring the Commissioner to set

a separate rate for government checks up to $500 and notes that "prima facie

rates" are used to facilitate rate approvals for credit life insurance under

Minn. Rule 2760.0300. The Department argues that even though the statutes did

not specifically authorize the Commissioner to establish credit life insurance

rates, Administrative Law Judge Jon Lunde recognized that setting the rates

was a lawful means to simplify the rate approval process in the Report of the

Administrative Law Judge, In the Matter of the Proposed Amenments to the

Rule5 Relating to the $ale of Credit life insurance, OAH Docket No.

-5-

8-1004-1908-1, February 10, 1988. (The Lunde Report). A copy of the Lunde

Report has been included in the record by the ALJ as Ex. U. Actually, Judge

Lunde stated:

The statute does not empower the Commissioner to set

rates for credit life insurers, but only authorizes him

to approve or disapprove of rates requested by them.

Consequently, when the Commissioner decided to simplify

the approval process, he chose to adopt prima facie rates

that could be approved without a detailed review. Since

the Commissioner already has existing rules governing

prime facie rates, it must be assumed that they are

authorized and that he has the power to amend them.

Lunde Report, Finding 7. In another finding, Judge Lunde stated:

"Since the Administrative Law Judge has no authority to consider the

validity of a duly adopted rule, it must be presumed that prima facie

rates are authorized under Section 62B.07." Lunde Report, Finding 28.

20. The Minnesota Currency Exchange Association argues that the only

authority expressed granted by the Legislature to establish rates is that

provided by Minn. Stat. 53A.07 requiring the Commissioner to set a separate

rate for government checks up to $500 and that going beyond that is a clear

violation of the enabling legislation. In support of this position,

Mr. Mondale testified as to his view of the legislative history of the

provision. He had lobbied on behalf of the currency exchanges and worked

closely with the author and other interested persons in developing the Act.

His clients were in favor of licensure and reasonable rate regulation because

they were aware of the poor image of the industry in light of recent press

reports. The original bill had a rate limit of two percent for government

checks. But that issue was hotly debated and removed in committee. It was

the industry's position that the rate was too low to sustain business. The

legislative solution was to take the matter out of the political arena and to

allow the Department to set the rate in a non-political setting and in

consideration of all the relevant factors. However, there was never any

debate about setting any type of presumptive rate other than for government

checks. Ex. T, Attachment 1 at 142-143.

21. The ALJ finds that Minn. Stat. 53A.12 and 45.023 provide

sufficient statutory authority for the Department to adopt the proposed

rules. The proposed rules were at least intended to implement and make

specific the law enforced by the Department and parts of them are required by

Minn. Stat. Ch. 53A itself. Minn. Stat. 53A.07 requires the Commissioner to

set a separate rate for government checks. Setting a single rate that applies

-6-

to all currency exchanges is adopting a rule. The fact that the statute

refers to a "separate" rate for government checks indicates that other rates

are also to be set. If, as Mr. Mondale believes, the Legislature intended

that only a rate for government checks was to be set, the word "separate"

should have been left out. The intent of the Legislature is to be determined

primarily by the words it actually uses. Minn. Stat. 645.16. Similarly,

Minn. Stat. 53A.13, subd. 1, requires that the fees be prominently displayed

"in the fashion required by the commissioner." Any such requirements, again,

would constitute a rule that must be adopted under the rulemaking procedures.

In Re Hibbing Taconite Co., 431 N.W.2d 885 (Minn. App. 1988). These statutory

provisions require that rules be adopted, but they do not, technically,

provide the authority. However, because rulemaking is appropriate and

necessary to administer and enforce Minn. Stat. Ch. 53A, the statutory

authority is provided by Minn. Stat. 53A.12, and Minn. Stat. 45.023.

Small Business Considerations

22. Minn. Stat. 14.115, subd. 2, requires an agency proposing rules

that may affect small businesses to consider certain methods for reducing the

impact of its rules on small businesses and to document how it has considered

those methods in its SONAR. It would appear that all currency exchanges in

Minnesota are small businesses as that term is defined in Minn. Stat.

14.115, subd. 1.

23. Minn. Stat. 14.115, subd. 2, requires the agency to consider the

following methods:

(a) the establishment of less stringent compliance or

reporting requirements for small businesses;

(b) the establishment of less stringent schedules or

deadlines for compliance or reporting requirements for

small businesses;

reporting requirements for small businesses;

(d) the establishment of performance standards for small

businesses to replace design or operational standards

required in the rule; and

(e) the exemption of small businesses from any or all

requirements of the rule.

The Administrative Law Judge did not consider this provision of Minn.

Stat. 53A.07 in denying a prehearing motion by the UnBank Company that the

hearing be postponed or cancelled for failure of the Department to comply with

Minn. Stat. 14.12. The Administrative Law Judge now concludes that 53A.07

does require the adoption of rules by the Department. Thus, the Department's

failure to initiate rulemaking proceedings within 180 days of the effective

date of the statute violated Minn. Stat. 14.12. Nonetheless, as stated in

the order denying the motion to postpone, that failure is not a defect in the

rulemaking proceeding here. The remedy provided by the statute is that the

agency must report its failure to the Legislative Commission to Review

Administrative Rules, other appropriate committees of the Legislature and the

Governor.

-7-

24. In its SONAR, the Department made the following comments regarding

the small business considerations:

Minn. Stats. section 14.115 provides that the impact on

small businesses be considered in the development of

proposed rules. Subdivision 2 of that section lists five

possible methods for reducing the impact of the rules.

The only relevant provision to the rules at issue is

subdivision 2(a) which requires the agency to consider

less stringent compliance standards for small

businesses. Subdivision 3, however, states that any

relaxation of the rules for small businesses shall not be

incorporated into the rules if "doing so would be

contrary to the statutory objectives that are the basis

of the proposed rulemaking." The purpose of the currency

exchange rules is to unify currency exchange fees and

protect the public from rate gouging. A blanket

relaxation of the requirements of the rules for small

businesses would defeat the purpose of the rules, and is

also unnecessary. Since the rules set out a rebuttable

presumption, small businesses that wish to charge rates

in excess of those established in the rules, may present

evidence of their reasonableness to the commissioner.

Based upon consideration of the purpose of the rules and

the rebuttable presumption incorporated therein, the

commissioner concludes that compliance with the proposed

rules would not unduly burden small businesses and that

the rules are necessary to achieve the legislative

purposes.

25. Since apparently all the persons affected by the rules are small

businesses, the Department is probably correct that relaxation of the

requirements of the rules for small businesses is inappropriate. However,

that does not relieve the Department from the obligation to consider methods

for reducing rule impact on small businesses. In fact, since all the affected

persons are small businesses, the statute applies with even greater force.

26. With regard to proposed Minn. Rule 2872.0100, which establishes the

presumptively fair and reasonable rates, the Department is correct that Minn.

Stat. 14.115, subd. 2(a) is the only clause that is applicable. Clause (b)

does not apply because the rule does not deal with schedules or deadlines;

clause (c) does not apply because the rule does not deal with reporting

requirements and is already designed to simplify compliance requirements; and

clause (d) does not apply because the rule does not establish design or

operational standards. The real purpose of these rules is to establish a

simplified procedure for determining that the fees charged are fair and

reasonable. That, in theory, benefits both the Department and the affected

businesses. The Department is also correct that small businesses should not

have a different level of presumptively fair and reasonable rates than large

businesses in light of the apparent purposes of the statute and the standards

set forth in Minn. Stat. 53A.07. Therefore, the ALJ finds that the

Department has complied with the requirements of Minn. Stat. 14.115 with

regard to proposed Minn. Rule 2872.0100.

-8-

27. With regard to proposed Minn. Rule 2872.0200 establishing the posted

notice requirements, the Department has failed to document that it considered

any of the statutory methods for reducing the impact on small businesses. In

this case, the Department is proposing a requirement for signage that is

incredibly specific and would require small businesses to expend very large

sums to have signs painted that comply with the rule. The Department could

have considered a less stringent compliance requirement as required by Minn.

Stat. 14.115, subd. 2(a). It could also have considered a performance

standard as required by Clause (d) in lieu of the design standard that would

have achieved the desired result of informing the public while reducing the

cost impact on the small businesses affected by the rule. Given the extreme

requirements of this rule, for which the Department provided no

rationalization, and given the many alternative, less onerous rules it is

possible to imagine, it is clear that the Department did not consider any

methods for reducing the impact on small businesses. Since the Department

failed to do so, the ALJ finds that the Department failed to comply with Minn.

Stat. 14.115, subd. 2, with regard to proposed Minn. Rule 2872.0200.

Proposed Minn.-Rule 2872.0100 - Currency Exchange Fees

28. Subpart 1 of this proposed rule establishes presumed reasonable fees

for two classes of instruments: (1) "Checks, drafts, money orders, or

travelers' checks," and (2) "Checks issued by a government entity in an amount

up to $500.00." Even though the former class includes the latter, no one

objected to the possible confusion created by the overlapping definitions.

Everyone seemed to understand that there was a rate established for checks

issued by government entities in an amount up to $500.00 and a rate for all

other checks. Nonetheless, the rule could be clarified and improved by

eliminating the overlap. That could be done by adding a proviso such as

"Except as provided below," to subp. 1A, the general class, or by listing the

general class last and changing it to read "For cashing all other checks,

drafts, money orders or travelers' checks,

29. A fee of one and one-half percent of the face amount of the

instrument, or 50 cents, whichever is greater, is set for cashing all types of

instruments. A fee of one percent of the face amount of the instrument, or 50

cents, whichever is greater, is set for cashing checks issued by a government

entity in an amount up to $500.00.

30. According to the SONAR, the proposed rules are intended to provide

uniformity in the fees charged by currency exchanges in Minnesota and to allow

currency exchanges to charge a fee that results in a reasonable profit,

without being excessive. In its post-hearing comments, the Department states

that the purpose of using presumed reasonable fees is to facilitate fee

approval. Ex. Q at 1. No objection was raised to using a presumed fair and

reasonable rate methodology. As discussed below, the objection is to the

level at which these rates are proposed to be set. As noted above, the

Department has used a similar methodology in approving credit life insurance

policy rates. But Minn. Stat. 53A.07 requires the commissioner to "set a

separate rate" for government checks, which would at first blush seem to

require the setting of a specific, universally-applied rate applicable to all

currency exchanges for such checks. In the other states that regulate

currency exchanges, or check cashers as they are sometimes called, maximum

-9-

rates are set that apparently do not allow for exceptions or waivers from

those rates. Nonetheless, using a presumed fair and reasonable rate

methodology is, on its face, a reasonable method of approving rates because it

makes things administratively convenient while providing exceptions for

unusual cases and providing guidance to the regulated persons in establishing

their rates. An administrative agency may declare that certain things

constitute prima facie evidence or create rebuttable presumptions. Juster

Bros. v. Christgau, 214 Minn. 108, 7 N.W.2d 501 (1943). Such a methodology,

if properly implemented, also meets the requirements of Minn. Stat. 53A.07,

subd. 3, that the commissioner determine whether rates are fair and reasonable

by considering certain factors. The final advantage of a presumptively fair

and reasonable rate is that it quite likely saves the rule from any

constitutional infirmity. Any currency exchange dissatisfied with the

presumptive rates has an opportunity to demonstrate that, in its particular

situation, higher rates would be fair and reasonable. However, in order to

fulfill its purposes, a presumptively fair and reasonable fee must be set at a

level that would not require every currency exchange to apply for an

exception. That would not only defeat the very purpose of the rule but would

unfairly prejudice the currency exchanges. The public and the press would

quite likely feel that any currency exchange applying for an exception, even

if it were granted, is charging an unfair and unreasonable rate. That would

be all the more so if every currency exchange had to apply for an exception.

31. In the context of the credit life insurance rates, the prima facie

rates became the rate most insurers charged for credit life insurance. Lunde

Report, Finding 10. Similarly, in this situation, because of the adverse

publicity of seeking rate exceptions and the extra administrative burden and

legal expense of doing so, few currency exchange operators will be willing to

seek exceptions. Therefore, the presumptively fair and reasonable fees must

be set at a reasonable level, consistent with the relevant statutory

standards, that is only somewhat less than the level at which maximum rates

would be set.

32. In proposing the presumptively reasonable fees, the Department at

the hearing briefly addressed the statutory criteria set out at Minn. Stat.

53A.07, subd. 3. However, the Department then took the position that it was

not obliged to apply those standards in establishing the presumptively fair

and reasonable rates. Clearly the Department is wrong. Minn. Stat. 53A.07

specifically states that the rate for government entity checks shall be set

consistent with the standard set forth in this statute. For other checks,

since the very purpose of the rule is to provide a convenient mechanism for

determining whether rates are fair and reasonable under the standards of the

statute, it is incorrect to suggest that the standards don't apply.

Certainly, individual circumstances of individual currency exchanges needn't

be applied, but typical circumstances of typical well-run currency exchanges

as they relate to the factors must be considered in determining a

presumptively fair and reasonable rate that applies to all the currency

exchanges. A similar argument by the Department in the credit life insurance

rate hearing was dismissed by Judge Lunde as follows:

The Department also suggests that Section 62B.07, subd. 2

applies only to the approval of policy forms filed by

individual insurers. Chapter 62B does not mention prima

facie rates or specifically authorize the Commissioner to

-10-

adopt them. Moreover, the plain language in Section

62B.07, subd. 2 states that each insurer's rates are to

be determined after an examination of its claims costs

and administrative expenses. However, it does not

follow, as the Department implies, that when prima facie

rates are set the statute is inapplicable. Since the

Commissioner must consider the factors in Section 62B.07,

subd. 2 in determining whether rates are excessive in

relation to benefits, and since a prima facie rate is

presumptively not excessive in relation to benefits, it

follows that the Commissioner must give some

consideration to the statutory expenses in establishing

prima facie rates. It makes no sense to suggest that a

bench mark that totally ignores the statutory expenses

can be used. Prima facie rates are designed to be a

surrogate for the individual examination and approval of

insurer rate filings under the statute. An insurer's

rates are still approved on an individual basis: if they

are at or below the prima facie levels they are usually

approved under the rules, and if they are above prima

facie levels they are approved after a detailed

examination of their expenses pursuant to the statute.

The Commissioner's decision to adopt rules to streamline

the approval process alters, but does not negate the

statutory mandate. Hence, when individual approval is

based on a rule, the rule must consider the statutory

expenses.

Lunde Report, Finding 31.

33. In July, 1989, the Department conducted a survey of the thirty known

currency exchanges in Minnesota for the purpose of determining the fees

charged for check cashing services and whether fees were posted. (Ex. B).

From its 15 responses, the Department concluded that it was necessary to adopt

a uniform fee schedule because of the wide range of fees charged. The survey

revealed the following range of fees charged:

Government checks: 1.5% to 15%, average 4.2%, most frequent 3%.

Payroll checks - handwritten: 2.5% to 15%, average 6.1%, most frequent

8%.

Payroll checks - typed: 2.5% to 15%, average 5.4%, most frequent 3%.

Second-party checks (3 respondents don't cash): 10% to 16%, average

13.83%, most frequent 15%.

Computer checks: 2.5% to 15%, average 4.9%, most frequent 3%.

Money orders: 3% to 15%, average 7.67%, most frequent 8%.

34. The survey did not request that fees charged for cashing public

assistance checks issued by government entities be distinguished from fees

charged for non-public assistance checks issued by a government entity.

Neither do the proposed rules make that distinction. There is some basis for

making such a distinction; as discussed below.

35. With regard to government checks, the apparent basis for the

Department's finding in the survey that the highest rate charged was 15% is

-11-

based upon one currency exchange, Broadway Sales, which stated that all of its

charges vary from 3% to 15%, If that rather vague response is eliminated from

the survey, then the highest rates are at two currency exchanges that charge

6% for new customers and 3.2% and 3% for established customers. One other

currency exchange, UnBank, which operates eleven stores, charges 3% plus 75

cents on government checks over $900 and on a sliding scale for government

checks below that amount with a $2.75 minimum. Two currency exchanges charge

2.5% on government checks. All the others charge 3%, except for Ramsey

Financial which, according to the survey, charged 3% on government payroll

checks, but 1-112% on social security checks.

36. David Taklo, who operates Ramsey Financial, testified at the hearing

that they had been charging 1-1/2% fee for government checks. He stated that

they evaluated the rate over a recent 11-month period and determined that they

had lost $7,400 against the fees collected on those checks. Therefore, they

were going to be filing for new rates at the level of a maximum of 3% for

government checks. The reason for the loss, according to Mr. Taklo, was that

they cash many Ramsey County welfare checks and many of those checks are

returned to them because they have been reported stolen and stop-payment

orders have been issued by the County. Mr. Taklo stated:

One thing about government checks and welfare

checks, a lot of them have a way of disappearing.

They will get new ones issued and the old ones

always seem to be cashed. And we always take the

loss on that.

Ex. T, Att. I at 93-94. Mr. Taklo submitted Exhibit F, the June 14, 1990,

Ramsey County Human Services stop-payment list, which lists some 500 checks

the County had stopped payment on at that point in time.

37. In post-hearing comments, one currency exchange, My Bank, which

operates in a neighborhood in St. Louis Park, reported that 90% of its

business is cashing payroll checks with very few welfare checks or personal

checks. They charge senior citizens 1-112% on all their checks, including

government issued checks and payroll. They charge other persons 2.5% on

payroll and government checks and 5% on all personal checks. Their data was

not included in the Department's survey because they were unknown to the

Department at the time.

38. As to payroll checks, again the highest rate according to the survey

was Broadway Sales with its general response that it charged from 3% to 15% on

all checks. Again, if this rather vague response is eliminated, there is a

much narrower range of fees. For typed payroll checks, two stores charge 8%,

one charges 6%, eight charge 3% and two charge 2-112%. Two of those who

charge 3% charge more if it is not for an established customer and one charges

a 75 cent surcharge. Four of the currency exchanges charge a slightly higher

percentage if the payroll check is handwritten rather than typed.

39. As to second-party checks, the charges are uniformly high because of

the risks associated with them. Even the currency exchanges with the lowest

rates on other types of checks charged 10% for second-party checks and the

most frequent charge was 15%.

-12-

40. Minn. Stat. 53A.01, subd. 1, which defines currency exchange,

excludes from the definition persons who provide check cashing services

incidental to their primary business if the charge for check cashing does not

exceed $1.00 or 1% of the value of the instrument. This exception is intended

to exclude those grocery stores, bars and other businesses that cash checks

incidentally to their main line of business, so long as they charge only a

minimal fee. It can be assumed that the Legislature intended to allow

currency exchanges somewhat higher rates because Minn. Stat. 53A.07

specifically states that items such as reasonable profit, costs of doing

business as a currency exchange and risks associated with check cashing

operations are to be considered in determining whether currency exchange fees

are fair and reasonable. The Department's proposed presumptively reasonable

fee for government entity checks is equal to the 1% fee allowed to incidental

check cashers and its minimum fee of 50 cents on both government entity and

non-government entity checks is one-half of the $1.00 minimum fee allowed to

the incidental check cashers.

41. At the hearing, Ms. Mautner stated that after proposing the rates,

she received a lot of feedback and information regarding the significant

differences between the Minnesota market and the markets in Illinois and New

York. She then confirmed for herself that in Illinois, government benefit

checks were delivered directly to the currency exchanges to be distributed,

thereby reducing the problems of theft and forgery and creating a market

incentive to have the recipient cash the check at that location. She also

learned of similar arrangements in New York and that in both states the

currency exchanges handle additional matters that create other sources of

income for them. She stated that the Department also took particular note of

Connecticut, which it felt to be more comparable to Minnesota because it did

not have any government tie-ins or bank tie-ins like New York and Illinois.

42. There was considerable testimony at the hearing on the rates allowed

in other states. It is the principal factor the Department relied upon in

establishing the presumptively fair and reasonable fees. In the SONAR, the

Department stated that it was reasonable to assume that all Minnesota currency

exchanges could, if properly and efficiently operated, charge fees

approximately the same as those charged in other regulated states and still

obtain a reasonable profit. In the SONAR, the Department stated that only

Connectizut, Illinois and New York regulated the rates charged by check

cashers and that the Illinois rate for all checks was 1.2% of the face amount

plus 90 cents and that New York's rate for all checks was 9/10 of 1% or 50

cents, whichever was greater. In Connecticut, the maximum rate for cashing

government checks was 1%.

43. Having decided that rules were needed because of the wide

fluctuations it thought the survey revealed, the Department next considered

what the rates should be. Ms. Mautner attended a meeting of state regulators

in November of 1989 on the subject of regulation of check cashers and money

order sellers, She came away from the meeting with the knowledge that only

Illinois and New York were regulating the rates as to all types of checks and

that Connecticut was only regulating the rate on government checks. She was

aware of what those maximum rates were in those states, as set forth in the

previous finding. In describing the Department's decision-making process at

the hearing, Ms. Mautner stated:

-13-

So the Department discussed this and determined that we

would set the rates slightly higher for Minnesota to allow

for possible differences in the market. So that was the

rate that we came up with and - the 1.2% for government

checks and the 1.5% for every other type of check. And we

gave it a slightly higher boost than what New York and

Illinois were doing. And that's the rate that was in the

proposed rules and that's the rate that's discussed in the

Statement of Need and Reasonableness.

Exhibit T, Att. I at 9-10.

Several things need to be noted about this testimony. First, the only basis

for the rates established by the Department were the rates then existing in

Connecticut, Illinois and New York, with the rate for other-than-government-

entity checks being given "a slightly higher boost" than what New York and

Illinois were doing. The rates being charged by currency exchanges in

Minnesota were not considered; the only conclusion drawn by the Department

from its survey was that there was a wide variation in rates and, therefore,

rates needed to be set. Obviously, it did not use the survey data in setting

the fees because they were set far lower than anyone was charging. None of

the other statutory criteria was considered at all. Second, rates allowed in

other states is not a statutory factor. Clause 2 of Minn. Stat. 53A.07

requires the Commissioner to take into consideration "the income, cost, and

experience of the operations of currency exchanges existing prior to this

enactment or in other states under similar conditions and regulations

This clause does not direct the Commissioner to consider the rates in those

other states, it directs consideration of the financial operation of currency

exchanges in an unregulated environment. The best that can be said about this

factor is that it is "any other matter the Commissioner deems appropriate",

which may be considered under Clause 6 of the statute. Third, it was not a

slip of the tongue when Ms. Mautner stated that the rate for government checks

was 1.2%. Later in the hearing the following exchange took place:

MR. VAN CLEVE: . . . Now the rates that are being

proposed, 1-112% for non-government checks and 1% for

government checks, those are asserted by the Department to

be a fair and reasonable rate, correct? A presumptively

fair and reasonable rate?

MS. MAUTNER: 1.2% for government and 1.5% for anything

else. Yes, presumptively reasonable.

MR. VAN CLEVE: 1.2% or I%?

MS. MAUTNER: It's 1.2% for government.

THE JUDGE: It says 1 and 1-112%.

MS. MAUTNER: Doesn't it say 1.2% for government? (She is

handed a document by Ms. Ham.) I'm sorry, you're right.

It says 1%.

MR. VAN CLEVE: 1-112% or 50 cents, the greater of, for

non- government, and 1% or 50 cents for government checks?

-14-

MS. MAUTNER: Yes, you're right.

Thus, at one percent for government checks, the Department did not give "the

slightly higher boost" it had apparently intended. Finally in this regard, it

appears that the Department may have been considering its proposed rates to be

maximum fees, subject to few exceptions. For example, in its SONAR the

Department stated, after noting the right of currency exchanges to present

evidence in order to rebutt the presumption, that "the rule sets a higher

maximum fee than the other states which regulate currency exchange fees."

SONAR at 5.

44. New Jersey has set a maximum fee of 1% for in-state checks and 1.2%

for out-of-state checks. Georgia's maximum fees, effective July 1, 1990, are

3% for government checks, 5% for payroll checks, and 10% for all other

checks. Ms. Mautner testified at the hearing that the trade-off in Georgia

was that they charged a very high application fee of $2,000, from which she

concluded that Georgia had decided to use their check cashing statute as a

money-making device for the state as opposed to protecting the check cashing

consumer. Ex. T., Att. I at 13-14. No doubt the state of Georgia would

strongly dispute such a conclusion and would state that their application fee

relates to the cost of their background investigation. Moreover, the Georgia

application fee has now been reduced to $250. Ex. W, Att. F at page 11.

45. At the time the Department first proposed its fees, the Connecticut

rate of 1% on government checks had been preliminary enjoined from being

enforced by the United States District Court in Connecticut. A new law was

passed by the Connecticut legislature effective July 1, 1989, amending the law

so that the maximum fee of 1% applied only if the check were drawn by the

State of Connecticut and payable to a recipient of public assistance. The

rate on all other checks has been set by regulation in Connecticut at a

maximum of 2%. Upon amendment of the statute in Connecticut setting the 1%

rate on Connecticut welfare checks, the District Court dismissed the pending

action challenging the statute without prejudice to allow the plaintiffs to

amend their complaint to address the new statute. On July 12, 1990, the

plaintiffs did so, filing a second amended complaint alleging that both the

statute and the fee limitations contained in the regulation are

unconstitutional. Ex. J and Ex. W, Atts. A, C and D.

46. Harold Turner, a Legal Aid attorney who was involved with the

adoption of Chapter 53A, testified at hearing that the 1% fee for government

checks is reasonable. His concern is particularly for those persons who are

receiving public assistance benefits, who have difficulty establishing banking

relationships, paying the fees, and negotiating instruments. Mr. Turner

presented a situation involving one of his clients who had received an

insurance settlement specifically chose to have the check cashed by a currency

exchange for a fee of 8% to 10% over cashing it at a bank which would have

held the check for three to five days. He felt the fee charged by the

currency exchange was unreasonable.

47. Currency exchange owners and representatives testified to the service

aspect of their businesses. They offer convenience, courteous service, bill

paying services, money orders and stamps. Therese Balach, a broker of

closely-held businesses in the Metropolitan area, testified at hearing that

-15-

currency exchanges are a convenience service, one that is used by employed

persons with no over-representation by persons who are disadvantaged. For the

UnBank, 67% of the checks it cashes are payroll checks, 15% are government

assistance checks, 13% are personal checks and second-party checks, 3% are

money orders and 2% are something else.

48. A significant percentage of the population do not have bank accounts

because they are unable to establish a banking relationship and the only

banking alternative available to them is a currency exchange. Ms. Balach

cited a two year old statistic from Entreprepeur magazine indicating that 30%

to 35% of the population doesn't have a banking relationship. Thomas Dietz,

owner of Kwik Cash, Inc., in a post-hearing comment, included information from

Western Union Financial Service citing a 50% figure (Ex. P). Other testimony

indicated, however, that in some currency exchanges, many of the clients do

have banking relationships, but still prefer to use the currency exchanges'

services.

49. Gerald Harding, owner of Best Cash Co. in Minneapolis, stated that

the current fees don't seem to bother anyone who cashes checks. However,

several currency exchange operators did agree that some rate regulation was

necessary to eliminate the few abusive cases and to assist the industry in

creating a better image for itself. Jeffrey Voss, owner of a national

franchise operation known as Check-X-Change, suggested that Minnesota should

follow the Georgia statute in establishing rates here. He testified that

establishing extremely low rates would restrict the business to the less

desirable currency exchanges. The Minnesota Currency Exchange Association

stated that the Association agreed that the highest fee being charged in each

check category shown in to the Department's survey was excessive.

50. Vince Aprea and Ron Peterson, who recently purchased a currency

exchange in North Minneapolis, stated in a post-hearing comment that the

increase in business in the store they purchased indicated that their

customers felt its 3% payroll check rate was fair and reasonable. From

August, 1989, to March, 1990, its gross monthly income increased from $283.21

to $4,207.64. (Ex. S).

51. There was vehement objection to the proposed maximum fees.

Ms. Balach stated that the ceilings "would effectively diminish" the profits

of currency exchange owners and "take away their livelihood." All the

currency exchanges felt they would not be able to operate at the rates

proposed by the Department and would be forced out of business if the rates

were adopted.

52. Ms. Mautner testified that between the time the rule was first

proposed and the hearing, the Department had an opportunity to "delve somewhat

deeply" into at least one check cashing operation and found the expenses

incurred to be "very troubling." She went on to state:

There were large amounts in the cost factor for

expansion, large amounts for consulting, six-figure

salaries, large amounts for non-compete contracts. And

what one of the costs set out was, was cars, was

transportation and the personal use of vehicles had not

been separated out. So if anything, when we looked at

these costs, we found the industry playing fast and loose

-16-

with the numbers. And it further encouraged us that they

could make some significant changes and work with our

rules and still make a profit.

Ex. T, Attachment I at 16. The currency exchange to which Ms. Mautner was

referring is the UnBank which operates eleven currency exchange operations in

Minnesota and is totally unlike any other currency exchange operation in the

state, all of which are one or two store operations. The reference to the

six-figure salary apparently grew out of a conversation between UnBank's

accountant, Mark Ziessman, and Mr. Terry, who had been retained by the

Department to assist it in reviewing the financial statements of the currency

exchanges. During that conversation, Mr. Terry noted that $120,000 had been

budgeted for the owner's salary and Mr. Zeissman responded that that amount

would not be unreasonable for the owner of eleven stores. Mr. Ziessman

testified at the hearing that the full budgeted amount had never been paid to

the owner.

53. The UnBank had provided its financial data to the Department and the

Department agreed to keep the materials confidential and to return them

following their review. In a letter to UnBank's attorneys, the Department did

reserve the right to question any UnBank witnesses at a rule hearing from

notes made from the materials submitted. At the hearing, the Department

provided no particulars regarding its claims of excessive expenditures being

made by UnBank. Mr. Terry, in fact, did not testify that he had seen the

excesses that Ms. Mautner had described, but that they were the type of things

that small businesses tended to do, that ought to be looked for, but that he

was not able to identify. Ex. T, Attachment I at 203-210. He did say that

the financial statements he reviewed, along with comments from the

accountants, did indicate that there had been expenditures for covenants not

to compete, money spent for expansion and personal use of autos. Ex. T,

Attachment I at 214-215.

54. In its post-hearing comments, Ex. Q, the Department argued that the

currency exchanges in Minnesota had failed to produce evidence that the

proposed rates would prevent them from earning a reasonable profit. It should

first be noted that the burden is upon the Department in this proceeding to

demonstrate that its proposed rules are reasonable and necessary, not upon the

regulated parties to prove that they are unreasonable. In support of its

argument, the Department specified the amount of management fees that had been

paid to related parties and shareholders of UnBank as a questionable expense.

It also specified the amount listed in UnBank's statements for a non-compete

contract and the amount of expenditures for trips to other states to

investigate possible expansion. The comment states that Mr. Terry stated that

these items were excessive and questionable, that a covenant not to compete is

not a true business expense and that expenses for expansion purposes are not

typical operating expenses. The Administrative Law Judge can find no such

statements in his review of Mr. Terry's testimony. In fact, these may all be

legitimate business expenses, except for personal use of automobiles and other

personal benefits that may be derived by corporate owners and officers. As

for non-compete agreements, the only question raised by Mr. Terry was the

length of time over which they are amortized.

55. The Minnesota Currency Exchange Association has moved the

Administrative Law Judge for an order striking the specific amounts referred

-17-

to in the Department's comments from the record on the basis that they were

provided subject to a confidentiality agreement. The Department objected to

the request on the grounds that the Association had no standing to raise the

issue of confidentiality and on the grounds that it had not presented the

information at the public hearing but chose to present it only in its written

comments after the hearing. The letter from the Department stated,

"Unbelievably, this courtesy has prompted an outburst on behalf of the

Minnesota Currency Exchange Association." Ex. X. The Motion to Strike should

be granted. The Department breached its agreement to maintain the

confidentiality of UnBank's specific financial figures by putting them in a

comment that is part of a public record. The UnBank's attorneys are the same

attorneys that represented the Association at the hearing and the objection

was properly raised. Whether or not the data submitted to the Department by

the currency exchanges should be data that is not public is a broader question

that could be addressed in future rulemaking proceedings or legislation.

Since the currency exchanges now have their rates subject to review by the

Department and the currency exchanges' costs and profits are specifically

factors to be considered, it would appear that that information should be part

of the public record. The Department may decide otherwise. Nonetheless, in

this particular case, the Department promised confidentiality and must be held

to its promise.

56. Mr. Harding, owner of Best Cash Company, submitted his uniform

financial reporting forms into the record. Ex. E. His income and expense

statement for the year ending December 31, 1989, showed the following:

INCOME

Total check cashing fees $ 93,115.00

All other income 0.00

Total income $ 93,115.00

EXPENSE$

Salaries/officers $ 4,500.00

Other payroll expenses 338.00

Money delivery fees 798.00

Bank service charges 11,804.00

Insurance 451.00

Rent 4,420.00

Depreciation of fixed assets 7,840.00

Legal and professional fees 1,352.00

Advertising, dues, etc. 4,588.00

Telephone 3,980.00

Losses 30,924.00

Amortization of non-compete l6,105.00

TOTAL EXPENSES $ 87,100.09

NET INCOME $ 6,015.00

Mr. Harding works seventy-two hours a week at his store and charges 2.5

percent for cashing government and payroll checks. On money orders he charges

8 percent and he does not take personal checks or second-party checks. He

entered the business two years ago, investing money that he obtained by

placing a second mortgage on his home and borrowing against his life insurance

-18-

policies. Approximately 15 to 20 percent of the checks he cashes are

government checks. He believes that limiting his fees to the rates proposed

by the Department would put him out of business. The non-compete agreement

for which he pays approximately $16,000.00 per year goes to the individual

from whom he bought the business and runs for five years.

57. Reducing Mr. Harding's rates to the levels proposed by the

Department, assuming 20 percent of the checks he cashes are government checks,

would reduce his overall rate to approximately 1.4 percent. Assuming that all

of his 1989 check cashing fees were generated at the 2.5 percent level, he

cashed approximately $3,724,600.00 worth of checks in 1989. At the rates

proposed by the Department, assuming the same volume, his total income would

be $52,144.00 and he would have a net loss of about $35,000.00. Adding back

in his own salary of $4,500.00 would yield a net loss of $30,500.00. Mr.

Harding is making very little money at the rates he currently charges; he is

correct when he says he would be out of business very quickly at the

Department's rates.

58. Jerome Gagerman, Chairman of the National Check Cashers Association,

questioned the use of the words "government entity" in the proposed rules as

this would include both public assistance checks and government payroll

checks. He suggested a distinction be made, or that term defined, because

there is greater business risk associated with the former.

59. At hearing, the Department referred to the risk factor as one that

could easily be "manipulated". They suggest, for example, that a currency

exchange that chooses to operate 24 hours a day for the entire year is not

engaging in a prudent business practice. This is a comment that could be made

against other business operations, from large grocery stores to small

convenience stores, that have expanded their hours and operate

around-the-clock in response to consumer demand. It may very well be a sound

business judgment to operate a check cashing store around the clock.

60. Others testified to the risk of cashing certain types of checks.

Mr. Voss testified at hearing that not only is it more difficult to collect on

personal checks that are returned for insufficient funds, but that the return

rate on personal checks is four times greater than on government checks.

Gerald Harding testified that he does not cash personal checks because of the

high risk involved; he does, however, cash money orders which are "very high

risk", but comprise only a small percent of his business. He estimated that

15% to 20% of his business is cashing government checks, which are not always

secure because of theft or forgery. He also stated that he is able to collect

on "quite a few" NSF checks, but does recover his initial cost. Mr. Gagerman

stated that federal regulations require the immediate replacement of public

benefit checks reported as lost, stolen or forged, and that this was one of

the reasons why Illinois began its direct delivery program of public checks to

currency exchanges.

61. Deanna Fredericks, Vice President of UnBank and President of the

Minnesota Currency Exchange Association, presented copies of fifteen

government checks that UnBank had cashed, but had been returned unpaid. She

reported that for calendar year 1989, UnBank had been unable to receive

payment on $7,000.00 of the government checks they had cashed. UnBank cashed

$32,000,DOO worth of checks in 1989. The Department, in its post-hearing

-19-

comment, gave its analysis of the extent of this loss (Ex. Q). Based on the

percentage of government assistance checks cashed by UnBank of 15%,

$4,800,000.00 of such checks were cashed. Since $7,000.00 went uncollected,

the Department argues that that is only a 0.14% loss in that category and thus

a small risk. The Department then goes on to state that currency exchanges

shouldn't be permitted to charge a higher fee for cashing government checks

than the risk warrants. The Department's analysis is faulty. Since the

UnBank charges approximately 3% on government checks, its gross return on

those $4,800,000 worth of checks is approximately $144,000. $7,000.00 is

4.86% of that amount, and that is clearly a significant cost and not an

insignificant risk.

62. It appears from all the testimony and evidence submitted that

government benefit checks mailed to the recipients carry a risk different from

payroll checks. They are subject to claims of loss and theft which cause the

government entities to stop payment, even though such claims may be false. It

would also appear from the record that this risk renders government benefit

checks mailed to the recipients at least as risky as payroll checks.

Nonetheless, it is apparent that the main focus of the Legislature and the

main concern with check cashing rates is with government benefit checks. The

feeling is that those receiving government benefits are already living at a

minimum level of income and that that income should not be further reduced by

large check cashing charges. Therefore, greater scrutiny must be given to the

rates charged on government benefit checks than other checks. The Department

has suggested that the check cashers should take steps to decrease the risks

on benefit checks by working with the government to develop programs such as

those in New York and Illinois of direct delivery of the checks. They also

state in their post-hearing comment, Ex. Q at 4, that Hennepin County has an

agreement with certain banks that it will pay any instrument that has been

cashed as long as proper identification has been produced, even if it is later

claimed that an instrument bears a forged signature or has been stolen.

Apparently, the Department thinks that the currency exchanges should seek such

an agreement with County welfare agencies. At any rate, they claim that such

considerations were weighed by the Commisisoner in setting the presumptively

fair and reasonable rates. There is no evidence in this record that such

considerations were weighed by the Commissioner in setting the rates.

Moreover, if they were, it was inappropriate because the rates are to be set

on existing facts, not on what might be.

63. There was no testimony offered regarding the relationship between

the risk involved in different locations of currency exchanges.

Traditionally, most currency exchanges have been located in poorer

neighborhoods, but some, such as Check-X-Change, attempt to locate in suburban

areas and operate more up-scale stores. See Ex. C. My Bank is apparently a

similar operation.

64. The Minnesota Currency Exchange Association prepared a pro forma

combined statement of operations for the year ended December 31, 1989, based

on data from the sixteen locations operated by its members. The original pro

forma statement offered at the hearing, Ex. M, included owners' and officers'

salaries, depreciation and amortization of non-compete contracts in its

listing of total expenses. Based upon comments by the Department at the

hearing that such expenses may be inappropriate or may distort the net income

figure, the Association revised the pro forma to delete those expenses. Ex.

-20-

T, Attachment 2. The revised pro forma statement shows the following:

Historical Pro Forma

Dollar value of checks cashed $42,320,678 $42,320,678

Check cashing fees 1,420,977 634,810

Other income 500,758 500,758

TOTAL REVENUE 1,921,735 1,135,568

Total expenses: (these expenses

do not include officers/owner's

salaries, depreciation and

amortization of non-competes) 1,894,451 1,894,451

Operating income (loss)

before income taxes 27,284 (758,883)

The revised historical operating income before taxes of $27,284 for all the

members is very close to Mr. Harding's alone; the total of his 1989 salary of

$4500, non-compete payment of $16,105 and net income of $6015 was $26,620.

Also, the majority of the Association's pro forma is made up of figures from

the UnBank's operations. Despite the doubts about the pro forma these issues

raise, it is clear that the Department's proposed presumptively fair and

reasonable fees would essentially cut the typical Minnesota currency

exchange's gross revenues in half and place it in a loss situation.

65. Heated statements were both made by and aimed at the Department

regarding reasonable profit. Therese Balach stated that an annual income of

$40,000 to $45,000 is not excessive for an operator who has been in business

between three and five years. She admitted that she had no basis for this

figure and that she had literally "pulled it out of the air." From the

evidence presented at the hearing, no profit anywhere near that is being made

at any currency exchange location.

66. Mr. Dietz and Ms. Balach, in their post-hearing comments, argued

that the competitive market will give customers the lowest cost and that

eventually fees will stabilize. In response, the Department asserted that the

Legislature has mandated that the industry be regulated and that a free market

system is not an option since the passage of Chapter 53A. While the

Legislature has required that a separate rate be set for cashing checks issued

by a government entity, and while currency exchanges are subject to licensure

and licensing requirements, and prohibited from engaging in activities

associated with the banking industry, it is erroneous to state that a free

market system ceases to exist under this statute. The purpose of the Chapter

53A is to prevent abusive practices and charges, not to eliminate market

competition. The Department's own information as submitted at the hearing,

together with the evidence submitted by the currency exchange operators, shows

only a few examples of abusive charges. Nothing in the record indicates any

need to clamp down on the rates charged by the majority of the currency

exchanges to the extent the Department proposes.

-21-

67. Regulations must be reasonable in order to be valid. In the absence

of a "reasoned determination" of how the proposed maximum fees were selected,

they are arbitrary and capricious. Manufacted_Housing Instityte_y.

Pettersen, 347 N.W.2d 238, 246 (Minn. 1984). The Department has demonstrated

that there is a need for a presumptively fair and reasonable rate to be set

for government entity checks, because that is mandated by statute and because

there are a few examples of rates that would appear to be unfair and

unreasonable being charged. Similarly, the need for some regulation of

charges on other checks has been shown. Some members of the industry want

some reasonable regulation and the evidence tends to show that some persons

are charging unreasonably high rates for the relatively low risk cashing of

payroll checks. Government and payroll checks constitute the vast majority of

the checks cashed. There has been no need established in the record to

regulate the rates charged for other types of checks and money orders. The

higher risk personal checks, second-party checks and money orders may be a

legitimate market, and there is no suggestion in the record that rates of 10%

to 16% on such instruments are abusive. If there is a market for such checks,

the record indicates that it should be allowed to operate, rather than simply

being dismissed as too risky and foreclosed entirely, as the Department is

attempting to do by setting a very low rate applying to all other checks.

68. The Department has failed to demonstrate the reasonableness of its

1% or 50cents presumptively fair and reasonable rate on government entity checks

within the meaning of Manufactured Housing Supra The rate is far lower than

anything charged by currency exchanges in Minnesota today. Only two exchanges

charge as low as 1.5%, and one of those does it only for senior citizens and

the other one is raising its rate. The other states on which the rate is

supposedly based are not really comparable. Illinois, New York and New Jersey

have procedures to enhance the safety of cashing government benefit checks and

check cashers there do a very limited amount of business in other types of

checks. Connecticut applies the 1% rate only to checks issued by the state

itself for public assistance. Georgia has a cap of 3%. The rate is no

greater than that allowed to incidental check cashers by statute in this state

and the minimum charge is even lower. The record in this case would support a

presumptively fair and reasonable fee for government checks of $500 or less of

2.5% or $1.00, whichever is greater, if it is limited to checks issued by

government entities to provide government benefits and if the currency

exchanges are allowed to charge twice that rate for new customers.

69. The Department has failed to establish the reasonableness of a

presumptively fair and reasonable rate of 1.5% or 50cents for all other checks,

As found above, no need has been established to regulate checks other than

payroll checks at all. As to payroll checks, 1.5% is about half of the 2.5%

or 3% that most Minnesota currency exchanges now charge and there is no basis

in the record to support the Department's "assumption" that currency exchanges

could survive on such a rate "if they improved their business practices." In

Illinois, New York and New Jersey, these types of checks are not cashed in any

significant amount. In Georgia, the cap is 5%. In Connecticut, it is 2%.

The record in this case would support a presumptively fair and reasonable

charge for government checks not included above and payroll checks of 3% or

$1.00, whichever is greater, and 6% or $1.00, whichever is greater, for new

customers. The several currency exchanges that charge such rates now make no

more than a reasonable profit and the rate is less than one-half of the 8% to

10% that one witness described as abusive.

-22-

Proposed Minn. Rule 2872. 0200 Posting Qf Fee Schedule

70. The proposed rule states as follows:

The fees charged by a currency exchange for

rendering any service authorized by Minnesota Statutes,

chapter 53A, at all times shall be prominently posted on

the premises. The notice shall be made of plastic or

metal, be no less than 30 inches wide and 36 inches high,

with letters between one-half inch and three-quarters

inch in size.

For checks, other than those which are issued by a

government entity in an amount up to $500, the notice

must indicate, in one cent increments, between 50 cents

and $7.50, the fee that applies to the full amount of the

check to be cashed.

For checks which are issued by a government entity

in an amount up to $500, the notice shall indicate, in

one cent increments, between 50 cents and $5, the fee

that supplies to the full amount of the check to be

cashed.

If a minimum fee of 50 cents is imposed, the notice

must indicate that fact. The notice must be posted on

two separate walls in the customers' area.

71. This proposed rule sets out the manner in which fees are to be

posted for both government and non-government checks, but limits that posting

to checks in an amount up to $500. This rule provides no guidelines for the

posting of fees for checks in an amount greater than $500 and therefore

conflicts with the fee notice provision of the statute, Minn. Stat. 53A.13,

subd. 1, which requires that all fees be prominently displayed.

72. If the posting of fees for a government check must be in one cent

increments from $0.50 up to $5.00, it would require 451 entries. If the

posting of fees for other types of checks must also be in one cent increments

from $0.50 up to $7.50, it would require 701 entries. This is a total of 1156

entries. If each "letter" must be at least one-half inch, and allowing

one-half inch space between each entry, then 1156 entries lined one under the

other would reach 96 feet, 4 inches. Of course, if they were put in

side-by-side columns, the length could be reduced, perhaps to eight feet. It

would still be incomprehensible, and very expensive to have painted.

73. The only justification provided for this rule was that it was needed

because the Department's survey showed that some currency exchanges weren't

posting their rules "as required by the statute." That does not establish the

need for this rule, it only establishes a need to enforce the statute or to

remind the currency exchanges to post their rates.

74. The Department offered no evidence or argument to demonstrate that

this rule was reasonable. There is no explanation of why the posting shall be

-23-

made of plastic or metal. The Department has not provided a "reasoned

determination" as to issues such as: What's wrong with a sign painted on

wood, masonite, glass, paper, poster board, chalk board or on the wall

itself? Why does it have to be no less than 30 inches by 36 inches? Why do

the letters have to be between 112 inch and 3/4 inch in size, and does that

mean high or wide? Why does it have to be a posted sign at all? Can't small

printed rate sheets be placed on the tables and counters where the customers

are endorsing their checks? Why does it have to be posted on two separate

walls? And why does the rule require a sign that would have over 1,000

detailed entries on it? If customers cannot comprehend a sign that says "We

charge 3%", they will never comprehend a sign with 1,000 entries. In some

cases, a rule or a provision of a rule appears reasonable on its face and the

agency will not be required to provide a detailed rationalization for it.

Here, the rule appears unreasonable on its face and the Department has

provided no rationale at all. The Administrative Law Judge finds, therefore,

that the Department has failed to demonstrate the need for and reasonableness

of this rule. Since the Administrative Law Judge has also found that the

Department failed to comply with the small business considerations

requirements of Minn. Stat. 14.115, this rule cannot be adopted in any form

at this time.

Based upon the foregoing Findings of Fact, the Administrative Law Judge

makes the following:

CONCLUSIONS

1. The Department gave proper notice of the hearing in this matter.

2. The Department has fulfilled the procedural requirements of Minn.

Stat. 14.14, subds. 1, la and 14.14, subd. 2, and all other procedural

requirements of law or rule.

3. The Department has demonstrated its statutory authority to adopt the

proposed rules and has fulfilled all other substantive requirements of law or

rule within the meaning of Minn. Stat. 14.05, subd. 1, 14.15, subd. 3 and

14.50 (i)(ii), except as noted at Finding 27.

4. The Department has documented the need for and reasonableness of its

proposed rules with an affirmative presentation of facts in the record within

the meaning of Minn. Stat. 14.14, subd. 2 and 14.50 (iii), except as noted

at Findings 68, 69, 73 and 74.

5. The Administrative Law Judge has suggested action to correct the

defects cited in Conclusion 4 as noted at Findings 68 and 69.

7. That due to Conclusion 4, this Report has been submitted to the Chief

Administrative Law Judge for his approval pursuant to Minn. Stat. 14.15,

subd. 3.

8. That any Findings which might properly be termed Conclusions and any

Conclusions which might properly be termed Findings are hereby adopted as

such .

-24-

9. That a finding or conclusion of need and reasonableness in regard to

any particular rule subsection does not preclude and should not discourage the

Department from further modification of the proposed rules based upon an

examination of the public comments, provided that no substantial change is

made from the proposed rules as originally published, and provided that the

rule finally adopted is based upon facts appearing in this rule hearing

record.

Based upon the foregoing Conclusions, the Administrative Law Judge makes

the following:

RECOMMENDATION

It is hereby recommended that proposed Minn. Rule 2872.0100 be adopted

with the changes recommended herein and that proposed Minn. Rule 2872.0200 not

be adopted.

ORDER

IT IS HEREBY ORDERED that the dollar amounts related to certain expenses

of UnBank Company set forth in Part VI of the Department's post-hearing

comments, Ex. Q, are striken from the record.

Dated this 21st day of August, 1990.

STEVE M. MIHALCHICK

Administrative Law Judge

2 5 -