In a recent Salt Lake Tribune op-ed on payday lending, national payday lender executive Dennis Shaul is correct in pointing out that just because a payday loan is stretched out to 10 weeks does not mean the borrower has defaulted. What does this mean for the borrower? Have they rolled the original loan over several times? Do they now have several outstanding loans to cover the building interest? Are they being hit with excessive fees and interest?
For reasons that defy common sense, the state of Utah has never required, and payday lenders have never volunteered, this important piece of information. This leaves the state and public with an information gap when determining whether or not the payday lending industry is behaving in a responsible and ethical manner. All we know from the newly released state Department of Financial Institutions’ report is that more than 45,000 loans have been charged five times the original interest, which could amount to more than 400 percent APR.
If payday lenders aren’t going to be transparent, then we must turn to other sources that shed additional light on the number of defaulting loans and the resulting consequences. Utah State Court documents show that in 2014, payday lenders filed more than 14,000 debt collection cases in the small claims (9,754) and district (4,759) courts.
A typical payday lender claim runs $2,000 to $3,000, according to my contacts in the court system, but it’s not at all uncommon to also find claims well in excess of $10,000. Furthermore, my court contacts assure me that those large dollar amount cases are the result of payday lending, not payday lenders providing other types of loans.
What makes those amounts so frightening is how they fly in the face of what two payday lending representatives told me: That it’s impossible for what begins as a $350 payday loan to balloon to $10,000 or more. They point out that after 10 weeks, a $350 loan will only have accrued around $260 in interest, at which point state law prohibits any further interest, so the total claim would have to be under $650.
This is true. Therefore, in my view, the only way a payday lender could be suing a client for thousands of dollars would be if they had given them multiple loans and allowed each one to accrue the maximum amount of interest before default. This leads us to draw two conclusions: the default rate could be much higher than the 14,000-plus court cases would indicate; and the real problem with payday lenders is doling out multiple loans simultaneously to one individual.
Shaul seems to agree with this last point when he states that the majority of borrowers take out one or two loans at a time and pay them back in full. So my question is this: If the real problem landing borrowers and lenders in court comes from borrowers having multiple loans on the books at the same time, why allow this practice? Regulation limiting multiple loans has worked remarkably well in other states. It does not cripple the industry, as some have contended, but it has stopped the abuse of financially vulnerable people.
Surprisingly, even though this type of regulation has clearly been an effective deterrent to irresponsible lending (and borrowing), and has not prevented customers from receiving a single loan and paying it off in full, the payday lending industry has spent hundreds of thousands of dollars lobbying against such regulation, preventing a similar commonsense solution from being passed in Utah.
Which begs one final question. Why?
Rep. Bradley Daw serves on the Social Services Appropriations subcommittee and represents District 60 in Orem.