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Payday lender suits swamp Utah small claims courts

Lenders filed more than half of all small-claims cases along Wasatch Front in  '09

Copyright 2010, Deseret News

This is a corrected version of the story. The original included some data from the company, Checknet which is a collections company and not a payday lender.

Payday lenders sued more than 11,000 Utahns in small-claims courts during 2009. That's the equivalent of suing every man, woman and child in Emery County.

That happened even though payday lenders tell the Legislature every year — as they seek to avoid tough restrictions pushed constantly by critics — that almost all borrowers pay off their 500-percent-or-so, short-term loans on time and can afford them.

But computer-assisted analysis of court records by the Deseret News shows that payday lender suits are swamping some small-claims courts.

In fact, about half of all small-claims cases last year along the urban Wasatch Front were filed by payday lenders. And in the Provo District — where the large Check City payday loan company has its headquarters — a whopping 81 percent of all cases were filed by such lenders.

"Maybe we shouldn't call them small-claims courts anymore. Maybe we should call them payday lender courts," said University of Utah law professor Christopher Peterson, who has written a book on predatory lending and testified at the Legislature about payday lenders. "It makes me wonder whether their cases are getting sufficient scrutiny."

Frank Pignanelli, lobbyist and spokesman for the Utah Consumer Lending Alliance, which represents most larger payday lenders, said the group figures that it makes more than 1 million payday loans a year in Utah, so the lawsuits filed represent only 1 percent or so of all its loans.

He said that shows most borrowers can afford the loans, and that few go to default.

The problem is, according to Linda Hilton, director of the Coalition of Religious Communities and a longtime critic of payday loans, is "we have to take payday lenders' word about how many loans they make in Utah." If they actually make fewer loans than the million they claim, "the percentage of problem loans represented by the lawsuits could be much higher."

So Rep. Laura Black, D-Salt Lake, is pushing a bill at the Legislature that would require payday lenders to disclose how many loans they make a year and their overall value. "I think they skew their statistics to say whatever they want us to hear, so it doesn't look as bad as it really is for the consumer," she said.

Pignanelli said payday lenders oppose that bill "because it is unclear that it would do anything for the consumer."

(Of note, Black unsuccessfully pushed a tougher bill last year to cap payday loan interest at 100 percent APR, instead of the 521 percent median that a 2005 Deseret News study showed they charge. She said she "used up most of my social capital on that last year." It was defeated after lenders gave $91,000 to state-level politicians and parties in 2008.)

Pignanelli said payday lenders this year are instead backing a bill by Rep. Jim Dunnigan, R-Taylorsville, that he said will help consumers and end an argument on different data that also raised questions about how many loans are paid on time.

That argument came because while the industry claims that 90 percent of loans are paid within the original 14-day period, regulators reported this year (as required by a new law) that the average loan lasted 31 days.

Critics said that showed the industry lied. But the industry claimed the average was thrown off by a small number of loans that were outstanding for very long periods.

Dunnigan's bill would have regulators figure average length for loans for only the period when they can be "rolled over," or extended. After that period, lenders by law cannot charge more interest. So Dunnigan's bill would end any skewing of averages by loans that are not paid for long periods but also are not accruing additional interest.

Dunnigan's bill also shortens the time that payday loans can be extended from 12 weeks to 10, allows borrowers to stop lenders from calling their place of employment to seek payments and gives borrowers an option once a year per loan company to stop accruing interest on a loan to give them 60 days to pay off the loan interest-free.

Perhaps because of the recession, the Deseret News found that the number of lawsuits filed by payday lenders jumped by 25 percent between 2008 and 2009 — from at least 9,666 cases to 11,250.

More than two of every five payday cases statewide in 2009 were filed in the Provo District small-claims court (the city where the large Check City has its headquarters). Records show that at least 5,005 of the 6,177 overall small-claims cases there were filed by payday lenders, or 81 percent.

Across the Wasatch Front, 49 percent of all small-claims cases were filed in 2009 by payday lenders.

That includes at least 53 percent of the small-claims cases in the West Jordan District, 41 percent in Layton, 39 percent in Orem and 38 percent in Ogden. Some Wasatch Front small-claims courts, however, had relatively few payday lender cases — including 16.1 percent in Salt Lake City, and 0.7 percent in Bountiful.

Paul Vance, court executive for the 4th District court, which includes the Provo small-claims court, noted that many borrowers agree in their original loan documents to have any lawsuits entered in the 4th District (which is convenient for companies such as Check City), even if the borrowers live far away.

"We've seen cases from as far away as the St. George area" filed in the Provo court, he said. Not surprisingly, he added, "There's a high number of defaults" in favor of payday lenders because the borrowers fail to appear.

Law professor Peterson says that raises questions about whether justice is served.

"It makes it very unlikely that people will contest their debts, even when they have valid defenses," he said. "Why would they spend more money and time in traveling and perhaps acquiring lodging in Provo than the total value of the claim?"

He added, "When these volunteer (small-claims courts) were set up, they were supposed to be courts that were helpful to families and individuals as opposed to exclusively helpful for businesses." Such courts often meet at night and are presided over by attorneys who volunteer as judges.

Pignanelli said Check City reported that it has changed its procedures so that beginning last month, it will file cases in courts near where the original loan contract was signed — instead of making defendants travel long distances. He said the company responded to complaints from borrowers about cases filed in distant courts.

Pignanelli also said use of small-claims courts by payday lenders may actually help defendants because such courts often meet at night at times when it is easier for people to attend.

Peterson said by taking cases to small-claims court, payday lenders can essentially convert an unsecured loan into a secured one — and pursue collection remedies they could not seek otherwise from garnishing wages to going after assets in bank accounts and possibly taking cars.

Peterson said the high number of small-claims cases filed by payday lenders "is another example of how the legal environment in Utah is a stacked deck of cards in favor of the businesses that are preying on vulnerable consumers."

He said that until 1984, Utah capped the annual interest on any loans at 36 percent.

Many payday lenders now charge more than 500 percent interest. Peterson said that is "more than twice what the New York mafia charged (in the 1960s). Mob loans averaged 250 percent."

Of note, the Deseret News analysis showed that 41 different payday lenders filed lawsuits last year.

Those that filed the most were: Check City, at least 4,752 cases; Money 4 You, 2,286 cases; Chekline, 817; Convenient Loan, 489; QC Finance, 457; Quick Loan, 438; Dollar Loan Center, 370; USA Cash Services, 295; and Raincheck, 273.