Each payday, Patty Bailey of Kearns faced a long line of lenders whose two-week loans to her were due — along with interest at annual rates ranging from 400 percent to 980 percent.
Bailey could not afford to pay off those "payday loans." So, with cash from her paycheck, she visited lenders to buy more time. For example, she would pay, according to her records, $26 to Cash America to extend a $200 loan for another two weeks for an interest rate that comes to 469 percent annually.
Then she would pay $30.77 to Payday Murray to renew a different $150 loan also for two weeks at 534 percent annually. Then she would pay $100 to the Cash Store also to "roll over" another $500 loan for two weeks at an annual percentage rate of 521 percent. She was paying interest that was twice the 250 percent charged by the 1960s Mafia.
After buying time with such lenders, Bailey would find she had little left to live on, so she would sometimes take out yet another payday loan. "At one point, I had seven to nine payday loans at the same time," Bailey said.
It all led her to bankruptcy after months of harassment from collectors, a mountain of bounced-check fees, small-claims lawsuits, wage garnishment, stress-induced sickness and loss of her job.
Bailey is not alone.
Credit counselors, church groups and bankruptcy lawyers say increasing numbers of Utahns are mired in a payday loan system they say is designed to trap and financially drain the desperate or unsophisticated. But lenders, regulators and some lawmakers say it provides needed emergency help to those without credit.
Few states have laws that are friendlier to the payday loan industry than Utah. It is among 39 states that explicitly allow such loans. It is among 10 that have no cap on interest rates or fees. It is among two with no legal maximum amounts for such loans. Utah also has among the longest time allowed to "roll over" loans with continuing high interest: 12 weeks. Most states ban rollovers.
Amid such friendly laws, Utah has seen meteoric growth of payday lenders. The first store appeared here in 1984. In 1994, the Salt Lake area still had only 14, according to old Yellow Pages. Now, the state has 381 payday loan stores or licensed online lenders.
Utah has more payday loan stores than 7-Elevens, McDonalds, Burger Kings and Subway stores — combined. "It's more convenient to get a payday loan here than it is to get a hamburger or sandwich," said Jerry R. Jaramillo, a supervisor in the Utah Department of Financial Institutions who oversees inspections of the industry.
While payday lenders in Utah face relatively few regulations, Deseret Morning News visits to 67 stores showed that about a quarter of them still broke at least one of even those easy rules.
The Deseret Morning News also found lenders who made misleading claims to a reporter asking about loans. It found fine print in applications and contracts that could easily lead to financial disaster and surprises. It found stores offering many other high-priced loan products to the financially troubled.
Many bills have been proposed in the Legislature to more tightly regulate the industry, but few have passed.
Critics blame that on some surprising, powerful allies of the payday loan industry: mainstream banks that oppose limits (even very high ones) on interest rates. They want to preserve Utah's wide-open, let-the-market-rule financial atmosphere.
Such allies are powerful. The financial industry is the largest donor to members of the Legislature, providing $1 of every $8 raised by them in the last election.
How loans work
Payday loans are quick, available for even those with horrible credit, and help customers avoid the embarrassment of asking relatives or friends for money. But the loans come at extremely high interest.
Payday lenders generally loan between $50 and $1,000 to anyone who has been employed three months at his current job, has a checking account, has a utility bill to prove his address and is not in bankruptcy. The loan is usually due on the employee's next payday, or in two weeks. Most stores advertise that they do not check applicants' credit.
A borrower is asked to write out a post-dated check for the amount he is borrowing, plus the interest and fees he will owe. For example, if he borrows $100 at the common 521-percent interest rate, it will cost him $20 for two weeks. So the borrower writes a post-dated check for $120.
If a borrower does not pay off the loan in cash before it is due, the lender will deposit his post-dated security check. But a borrower usually does not have enough money in his account to cover it, or he would not need the high-interest loan.
Complicating the situation is that a borrower's paycheck usually will not clear, if deposited, until a day or two after his payday loans are due. So a borrower faces likely bounced-check fees from both his bank and the payday lender if the post-dated check he used as security is actually deposited. So, most borrowers try to pay off or extend payday loans in cash first.
The Deseret Morning News contacted 307 payday loan stores and online lenders that are licensed, operating or advertising in Utah to ask what their rates would be on a $100 loan for two weeks.
It found the median quote was $20, or 521 percent annual interest. Rates ranged from a low of 312 percent annual interest to a high of 913 percent, or $12 to $35 on a two-week $100 loan.
"Studies on interest rates charged by the Mafia in New York City in the 1960s found an average rate of 250 percent. So, payday lenders in Utah charge more than twice as much as the Mafia loan syndicates. It shows it has gotten out of hand," said Christopher Peterson, a native Utahn who is a law professor at the University of Florida, a national expert on high-interest loan industries.
"It is legalized loan sharking at its worst," complained Linda Hilton, coordinator of the Coalition of Religious Communities, who says local church groups see many people whose financial problems are worsened by the high-interest loans.
Don Hester, co-owner of the Debt Free Consumer Counseling service in Provo, said, "These payday loan companies are all bottom-feeders preying on the desperate, the uneducated, single mothers and the Hispanic population. . . . They take and take and take until the customer has to declare bankruptcy."
Michele Morin, a consumer protection lawyer in Salt Lake City, says that of the people she has helped with bankruptcy, "almost all of them had problems with payday loans."
Lenders disagree with critics. Frank Pignanelli, attorney and lobbyist for the industry's Utah Consumer Lending Association (and also a political columnist for the Deseret Morning News), says, "Payday lenders fill an important niche. Try walking into a bank or credit union and say you have withdrawn all your savings and maxed-out your credit card but want to borrow $300 for two weeks. They will send you to a payday lender."
He added, "People compute and figure it is cheaper to get a payday loan than to pay fees for a bounced check, or have a late utility payment, or fees for a late mortgage payment. That's why they proliferate here."
State regulators also say they do not feel payday loan interest rates are too high.
"Yes, the rates are high," Jaramillo said. "But they are disclosed on forms and orally as required by statute. People have to make a judgment whether that loan at that cost is in their best financial interest. Because of the volume of those loan products across the nation and here in Utah, they are making the judgment that it is."
Critics and academics say payday loans can easily become traps to financially drain the unwary.
Peterson, the University of Florida law professor, says he began years of research on the industry after he worked a few months in Utah before law school as a collector for a payday lender. "I have been doing penance for that ever since," he said.
"I heard lots of stories, and it was sort of an endless tide of human misery. I saw one family disintegrating after another," he said, noting he saw a repeating pattern of people falling into financial traps they could not escape.
"It happens because of the financial facts involved. Anybody who takes out these loans doesn't have money in their checking accounts or they would not need the loan.
"It is likely that in two weeks when the loan is due, they won't be able to afford to pay it off then, either. They will have just enough to pay interest and roll it over. The interest rates are so high that they become onerous very quickly. . . . It's possible they may never have enough to pay it off and just keep rolling it over or replacing it," Peterson said.
Utah has a 12-week limit on rolling over a payday loan, after which no more interest can be charged on it — in theory.
But, Peterson says, lenders easily sidestep that by having customers technically pay off a loan and replace it with an identical new one. Why would they do that and continue high-interest rates? It avoids likely bounced-check fees if lenders deposit post-dated checks required as security — plus additional collection fees, harassment, lawsuits, further damage to credit and cutting off more payday loans.
Pignanelli acknowledges Utah payday lenders indeed sometimes issue replacement loans for borrowers at the end of their 12-week rollover limit. "But that happens only on 3 percent to 5 percent of those loans. They (lenders) want to have the loan paid back sooner than later but will work with people," he said.
Still, Peterson wrote in his book, "Taming the Sharks: Towards a Cure for the High-Cost Credit Market," that he had a "refreshingly candid" talk with a cashier for one Utah lender who said despite Utah's 12-week rollover limit, "We have them paying for sometimes two or three years. . . . They will, like, pay for the loan two or three times and still owe the loan."
Of note, the payday loan industry's national Consumer Credit Research Foundation adopted a list of "best practices" that calls for limiting rollovers to a maximum of four (about 8 weeks), or the state limit, whichever is lower. Most, if not all, of Utah's payday lenders here appear to exceed that "best practices" guideline.
The Center for Responsible Lending, a national group opposed to payday lenders, says its studies show that the average payday loan borrower will end up paying $800 to borrow $325 over time.
Hilton, with the Coalition of Religious Communities, said, "The payday loan system inherently sets up clients to fail. They do no credit checks. They don't look at any ability of a person to repay. . . . We've seen people who have been loaned money (from several lenders at the same time) equal to three or four months' pay on a two-week loan cycle. That's failure from the word go."
The industry says it is set up to help, not trap, people. Pignanelli says most borrowers use them only briefly in their lifetimes. "Most use them for one or two years. They experience problems; they use the loans to work things out and then move on."
He says industry studies say a typical borrower in Utah is a woman in her early 30s with a household income of $50,000 to $70,000 and is "using payday loans because she doesn't want to pay overdraft or retail merchant fees." He says lenders "don't prey on the poor and the homeless because the poor and the homeless don't pay back loans."
Of note, a 2003 study by the Center for Responsible Lending said it found that 91 percent of all payday loans are made to borrowers who take out five or more such loans a year. It said only 1 percent of all payday loans are made to one-time emergency borrowers.
Utah has only a few minor rules that the payday loan industry must follow, such as posting signs clearly listing the annual percentage rate interest of loans, their dollar cost and the phone number of state regulators where borrowers may file complaints.
The Deseret Morning News found that violations of even those minor regulations were common — and could help mislead the unwary.
The Deseret Morning News visited 67 payday loan stores in Salt Lake, Davis and Utah counties. It found 18, or 27 percent, with at least one violation.
It also found that about one of every five stores visited failed to post, as required, their interest in terms of an annual percentage rate. And cashiers at some of them made misleading statements about that interest.
For example, an employee at a Dollar Loan Center in West Valley City, where no rates were seen posted, said verbally that it charges "7.5 percent interest." That is how much it charges in interest per week. The annual rate is 443 percent. Others similarly quoted weekly instead of annual interest rates.
Jaramillo says state law requires lenders when asked for cost of loans to quote interest as an annual percentage rate.
Some lenders also advertise "interest-free loans," even though they charge annual rates of approximately 500 percent. Some, such as Quick Loan, said the first two-week loan is free if the borrower pays it off in cash before it is due. Others called their charges "fees" instead of interest, although Jaramillo says all fees and interest by law must be calculated into the APR posted and included in contracts.
Some cashiers, such as one at the Cash Store in Layton, said the 521 percent interest offered there is "the same as everyone else charges," although rates vary greatly and were sometimes cheaper in nearby stores. Cashiers at several stores said their rates "are what the state allows," which is true, but seem to suggest that Utah has one rate or a maximum set by law. It does not.
One cashier at Cash City in Midvale quoted by phone two different rates: a lower one of 391 percent interest if no rollovers are allowed and a higher rate of 521 percent allowing rollovers "with six weeks interest free at the end of a 12-week period."
What she failed to mention is Utah law bans rollovers beyond 12 weeks, so lenders cannot legally charge more interest on that loan beyond that time anyway, so "six weeks interest free" at the end of that period isn't much of an offer.
Some cashiers also tried to make high interest rates seem not so bad. One at Check Into Cash in Orem said the 521 percent annual interest it charges "seems high because it is only a two-week loan," noting it "only costs $20 per $100."
High interest is high interest and doesn't merely appear that way because of a short loan period. If the 521 percent annual rate were paid for an entire year, a $100 loan would cost $521. For just two weeks, it costs $20. But the rate is the same.
State regulators report finding about half as many violations as the Deseret Morning News.
During required annual inspections in 2004, Jaramillo said the state found that 12 percent of lenders failed to post required signs about interest and dollar costs of loans and 7 percent failed to post phone numbers of regulators.
Hilton's Coalition of Religious Communities reported far more violations than what regulators or even the Deseret Morning News found. When it sent people undercover to ask about loans at 57 stores last year, it said it found three out of four violated at least one state law.
That included 23 percent that failed to post required interest rate disclosure signs. Most of the violations reported by Hilton's group were for something not tested by the Deseret Morning News: Whether they would, as required by law, allow a borrower to back out of a loan without penalty within 24 hours.
Hilton's group says 53 percent of lenders said they would not allow that to occur. State law provides such a right of rescission, but it does not require lenders to disclose that the right exists in loan contracts.
When Hilton's group released its findings last year, regulators took issue with them. Ed Leary, Utah commissioner of financial institutions, said then that his examiners had found problems at only five of the 57 stores visited by Hilton's group. Hilton claimed violations at three-quarters of them.
"It's an industry that's very compliant," Leary said at the time.
In turn, Hilton complains now that state examiners do not visit while undercover, so lenders are on their best behavior when inspectors appear. "If an inspector asks them if they honor the 24-hour right to rescission, what do you think they will say? 'Sure!' " She says identifiable inspectors will not find deception that lenders might otherwise use.
Jaramillo says the only question that state inspectors ask while undercover is how much a loan costs, to see if cashiers properly disclose the APR and dollar cost. After that, inspectors identify themselves and ask other questions and review paperwork.
Also, Jaramillo says the state receives only two dozen written complaints per year about payday lenders. "Considering the volume of business transacted by payday lenders, the number of complaints are minuscule," he said.
However, an online search of complaints recorded by the Better Business Bureau showed it received more. The BBB reported 174 complaints against 24 Utah payday lenders over the past three years. It said eight lenders had "unsatisfactory" records for failing to resolve complaints.
In comparison for the same period, the BBB logged 126 complaints against 16 banks, and only one had an "unsatisfactory" rating. It logged 87 complaints against 11 credit unions, and none had unsatisfactory ratings.
The fine print in loan applications and contracts could also contribute to financial surprises and difficulties for the unwary — and allow lenders to apply extreme pressure until past-due loans are paid.
"Hidden fees are limited only by the lender's imagination," Peterson said after years of studying the industry's fine print.
Maybe for that reason, several lenders refused to give a Deseret Morning News reporter copies of loan applications or contracts to take home and review before signing them. "We don't like to let them out of the office," one Check City cashier in South Salt Lake said.
Among provisions found in applications and contracts that were obtained are:
Almost all impose fees ($20 and up) if the post-dated check given as security eventually bounces. Also, they require borrowers to give them permission to resubmit checks that bounce, and permission to withdraw funds owed via electronic means.
Of course, the borrowers' banks often impose bounced-check fees of $20 or more, too. Bailey said when she could no longer pay interest on her loans, some payday lenders would try to redeposit her original post-dated check several days in a row, racking up hundreds of dollars in bounced-check fees for her.
On top of the fee for bounced checks, some require borrowers to agree to another "$30 late fee for any amount left unpaid more than 10 days from the due date."
The fine print, in at least one contract provided by a borrower, also essentially automatically rolls over loans not paid on time up to the legally allowed 12 weeks.
Beyond even that, most require borrowers to agree that if they go into default to pay the "maximum fees allowed" for collection, attorneys, court costs, process service fees or filing fees. As a recent Check Loan contract (provided by a borrower) says, "If the loan becomes more than 15 days past due, I agree to pay a 33 1/3 percent cost of collection, plus reasonable attorney fees and court costs . . . whether or not a lawsuit is commenced against me."
Peterson notes the contract does not say who decides what reasonable collection and attorneys fees are.
Most payday lenders in Utah require borrowers to sign away their right to a trial by jury for any grievances and to agree to arbitration instead, including agreeing not to hire an attorney to represent them in any proceedings. Many also require borrowers to agree not to be parties to any class-action suits against the lender.
Some payday lenders, such as Rental Action Center in West Valley City, sought signatures on an agreement to allow it to garnishee wages if default occurs. Jaramillo says Utah law allows garnisheeing wages only if a borrower voluntarily agrees to it, and said they have the right to rescind that anytime.
Most require borrowers to list family or friends as references and their employers, but oddly also vow not to contact them to determine whether they qualify for a loan.
Bailey said she found that when she went into default, lenders started calling relatives and her employer trying to get them to pressure her to pay her loans or to tell them how to contact her.
Hilton said she has often heard Hispanics complain about another collection tactic used against them that is not found in fine print. "Collectors will threaten to have them deported. Even if they say they are here legally or are citizens, collectors have threatened to call immigration anyway to cause problems, especially for family or friends who may be here illegally."
Other high costs
Payday lenders offer plenty of other high-cost products that also could cause problems for the unsophisticated. They include:
Car title loans. If someone has a clear title on a car, lenders offer loans using that title as security. Most charge around 300 percent annual interest for 30-day loans. Rates tend to be lower for newer cars and higher for older cars.
Borrowers keep their car — unless they default on the loan. Lenders are allowed by law to seize and sell the car to cover amounts owed in default and return the rest to the owner.
State records show 204 locations statewide are now licensed as title loan lenders. Most are also payday lenders.
Check cashing. Many payday loan stores will cash checks for fees ranging from 2 percent to 12 percent of their face value, plus other flat processing fees of $1 to $6. For borrowers desperate to roll over a payday loan who cannot wait for their paycheck to clear in a few days, some will pay the fees to obtain the money instantly.
Also, an estimated 12 million poor Americans nationally do not have checking or other bank accounts. The only way for them to exchange a check for money is to pay fees to cash it. To seek their business, not only payday lenders but also businesses such as Wal-Mart and Harmons stores are licensed by Utah to cash checks for fees. Also, 7-Elevens nationally have launched ATM-like kiosks to cash such checks.
Payday loans by ATM. Some lenders advertise cards that work in Automatic Teller Machines to allow borrowers who have filled out the proper paperwork to use them to create new payday loans whenever they like. The rules are the same, and the ATM provides their cash. But borrowers are also subject to extra ATM fees.
Special debit cards. Some offer debit cards whose main advertised attraction is their overdraft privileges. An ad for the Axcess Debit MasterCard that several Utah payday lenders offer says it allows a $50 overdraft that would cost users about $20 for a week.
Pawn loans/furniture rental. Some payday lenders are also pawn shops, offering the traditional loans for musical instruments, tools and about anything imaginable. Some also are in rent-to-own furniture stores where customers obtain furniture but pay much more for it over time than they would if they paid cash up front.
Monday: Exponential growth of payday lenders.