Copyright (c) 2002 Utah State Bar
Utah Bar Journal

March, 2002

15 Utah Bar J. 16

ARTICLE: ONLY UNTIL PAYDAY: A PRIMER ON UTAH'S GROWING DEFERRED DEPOSIT LOAN INDUSTRY

by Christopher Lewis Peterson

CHRISTOPHER PETERSON is a Judicial Clerk for United States Court of Appeals for the Tenth Circuit.

TEXT:


[*16] EDITOR'S NOTE: The opinions in this article come from Mr. Peterson's student research project, are his alone, and in no way reflect upon the United States or the Tenth Circuit. This article is derived in part from a winning entry in the 2001 Utah State Bar Business Law Writing Competition, sponsored by the Utah State Bar Business Law Section. The original and more extensive study of consumer credit is entitled "Failed Markets, Failing Government or Both? Learning from the Unintended Consequences of Utah Consumer Credit Law on Vulnerable Debtors" and is published in the 2001 Utah Law Review.

The term "loanshark" originated toward the end of the nineteenth century to describe lenders who sold credit secured by borrowers' future wages. Contrary to today's Hollywood imagery, these early loansharks rarely used violence to extort payment and catered to salaried workers with stable jobs and respectable home lives. Salary lenders, as they were less colloquially known, would typically lend five dollars on a Monday to be repaid six the next Friday. The contemporary outgrowth of these early American "five for six boys" are today's payday lenders. Payday lenders go by a variety of names including: post-dated check cashers, check lenders, payday advance companies, and deferred deposit lenders. Like their predecessors, payday lenders offer small loans to cashstrapped consumers under the assumption the debtor will repay the obligation on his or her next payday. Also, like their predecessors, today's payday lenders have engendered widespread controversy about their charges and business practices. This article describes the Utah payday loan industry and recent developments in the state laws which regulate it. This article also provides a brief discussion of practice tips as well as projects future trends in payday lending regulation. n1



n1 Mark Haller and John V. Alviti, Loansbarking in American Cities: Historical Analysis of a Marginal Enterprise, 21 AM. J. LEGAL HIST. 125, 127-28 (1977); Kathleen E. Keest, Stone Soup: Exploring the Boundaries Between Subprime Lending and Predatory Lending, B0-00ZV PRACTICING L. INST. CORP. I., & PRAC. COURSE HANDBOOK SERIES 1007, 1111 (April 16, 2001).

Background
In a typical payday loan transaction, a customer might borrow $ 100.00 by writing a personal check made out to the creditor for $ 117.50. The date written on the check reflects a day two weeks in the future when full payment of the loan is due. The lender will verify the debtor's identity by asking for documents or identification such as a drivers license, recent pay stubs, bank statements, car registration, or telephone bills. Some lenders will telephone the borrower's human resource manager or boss to verify employment. Virtually all lenders require the names, addresses, and telephone numbers of close family and friends in the event the borrower skips town. Payday lenders decide whether to issue a loan on the spot without obtaining a credit report. Both parties are aware the checking account does not have sufficient funds to cover the check when it is tendered. After the paperwork is complete, the debtor walks away with $ 100.00 in cash or a check drawn on the lender's account. When the two weeks are up, the debtor can redeem the check with cash or a money order, permit the check to be deposited, or attempt to "rollover" the loan by paying another fee. If the borrower cannot pay off the loan, the obligation continues to accrue $ 17.50 in interest every two weeks. Although the initial $ 17.50 fee represents only 17.5 percent of the loan amount, the annual percentage rate of the transaction is around 456 percent. n2



n2 Jean Ann Fox, Wbat Does it Take To Be a Loanshark in 1998? A Report on the Payday Loan Industry, B4-7226 PRACTICING L. INST. CORP. L. & PRAC. COURSE HANDBOOK SERIES 987, 989-90 (April-May 1998); Deborah A. Schmedemann, Time and Money: One State's Regulation of Check-Based Loans, 27 WM. MITCHELL L. REV. 973, 974-76 (2000); Scott Andrew Schaaf, From Checks to Cash: Regulation of the Payday Lending Industry, 5 N.C. BANKING INST. 339, 341-42 (April, 2001).

Fueled by high interest rates, Utah's payday loan industry has experienced dramatic growth over the past decade. Utah government only began collecting data on payday lenders in 1999, leaving precise growth figures unknown. One method of compensating for the absence of government data is to rely on classified telephone directory listings. Because lenders are anxious to advertise their businesses, tallying these listings over time is likely to provide a fairly accurate estimate of the number of lenders in a given market. The author recently examined "Yellow Page" classified listings in the Salt Lake Metropolitan area telephone directory for the previous twenty-one years. n3 Figure 1 shows listings under the category of "check cashing services" blossomed in the late 1990s. n4 The number of listed check cashing services grew from zero to seventy-five, with the vast majority of the growth occurring after 1995. With only fourteen lenders listed in 1994, the industry appears to have since quintupled its outlets in the Salt Lake area. n5



n3 This simple study used Bell Telephone and U.S. West classified listings on file at the special collections department of the University of Utah Marriott Library. All data were counted and compiled solely by the author.

n4 The Yellow Page classified directory for the Salt Lake Metropolitan area did not provide a "check cashing service" category until 1985. Furthermore, these data almost certainly underestimate the number of deferred deposit lenders operating in the Salt Lake Metropolitan area. The Yellow Page listing of "check cashing service" is somewhat misleading. Only around a dozen outlets in the area actually perform the simple function of cashing a check. Committee Debate, Senate Transportation & Public Safety Committee (Monday, February 22, 1999) (Committee Recording, side A) (statement of Kit Cashmore) ("There are approximately 121 businesses, outlets in the state of Utah. Probably less than a dozen of those actually cash checks. We get lumped into a category of check cashing, but the majority of us do what are called payday loans."). The vast majority of outlets only provide deferred deposit lending services, and not simple check cashing. This appears to have led many payday lenders to list their businesses only in the "loans" section of the classified directory. Unfortunately, credit unions, banks, mortgage lenders, and other businesses also advertise in the "loans" section along side of payday lenders. This makes a reliable count of deferred deposit lenders in that section unfeasible.

n5 Salt Lake County population growth from 625,000 to 843,271 over roughly the same time period does little or nothing to diminish the significance of check lender outlet growth over the past two decades. See 2000 ECON. REP. TO THE GOVERNOR at 52.

[*17] Recently collected Department of Financial Institution Data indirectly corroborates these figures. The Department lists a total of ninety-six registered lenders for the 1999-2000 year. However, the number of operating outlets in the state is much higher since many lending companies have multiple locations, not counted by the Department's report. By way of perspective, Utah currently boasts 140 state and federal chartered credit unions, only forty-four more than the number of our check lenders. Difficulties in tracking growth aside, there can be little doubt that payday lenders have become a large force in Utah's credit market. n6



n6 1999-2000 REP. OF THE COMMISSIONER OF FIN, INSTITUTIONS STATE OF UTAH at 148.

Government data also do not provide information on the current prices charged by payday lenders. In order to find a non-anecdotal estimation of credit prices, as well as to assess compliance with disclosure laws, the author conducted a second empirical study surveying payday loan outlets in the Salt Lake Metropolitan area. Twenty-six randomly selected payday loan outlets in the Salt Lake Metropolitan area were approached and presented with an outwardly reliable credit risk. n7 The sample of lenders constituted approximately one third of the lending outlets presently operating in the Salt Lake City area. The survey results concerning disclosure law compliance are presented in the section on practice tips. The annual percentage rates for surveyed loans are summarized in figure 2. The highest annual interest rate a surveyed lender offered was 780%. The lowest annual interest rate offered was 360%. Nine lenders offered post-dated check loans at 520% making this the most commonly offered rate. An average interest rate of 528.49% was calculated by adding the interest rates of each offered loan, and dividing by the number of loans offered. By way of comparison, average reported interest rates for extortionate criminal loanshark syndicates in New York City during the 1960s were a relatively inexpensive 250%. n8



n7 Three of the twenty-six surveyed lenders offered two different post-dated check loan options, leaving a total of twenty-nine offered loans. Lenders were approached by the author in December of 2000 and January of 2001. It was explained to each lender that I was seeking a post-dated check loan for the first time. Lenders were presented with four previous months of paycheck stubs to verify employment, a personal check book indicating the checking account had been open since 1993, and with a recent credit union statement showing a balance of $ 73.00. It was further explained I was hoping to shop around for the best deal and to examine the loan contract to ensure nothing out of the ordinary was included in the obligation.

n8 Comment, Syndicate Loan-Sharking Activities and New York's Usury Statute, 66 COLUM. L. REV. 167, 197 (1966) (reporting criminal loanshark interest rates averaging 250 percent annually).

Utah Payday Lending Regulation
As is widely known, the Utah Consumer Credit Code ("UCCC") does not place an interest rate cap on Utah lenders. Creditors are free to charge whatever price a debtor might agree to. n9 However, the UCCC does include an unconscionability provision which allows courts to refuse to enforce an agreement or to enforce only the remainder of an agreement without an unconscionable clause. Moreover, the Utah Code allows debtors to recover a penalty of "not less than $ 100 nor more than $ 5,000" plus "the cost of the action together with a reasonable attorneys fee" from lenders who extract unconscionable contracts. Class action lawsuits seeking monetary damages or statutory penalties are not permitted under the unconscionability provision of the UCCC. However, class action lawsuits may seek injunctive or declaratory relief. n10



n9 UTAH CODE ANN. § 70C-2-101 (2000)

n10 Id. § 70C-7-106.

Unlike other mainstream lenders, the Utah payday lending business evolved with no regulatory oversight. It was only in 1998 that the Utah legislature placed payday lenders under the jurisdiction of [*18] the Utah Department of Financial institutions. The legislature passed the Utah Check Cashing Registration Act ("UCCRA") as a response to widespread reports of abusive lending practices. In particular, legislators were concerned that payday loan rollovers turned short-term cash advances into long-term debts. n11 Therefore, the UCCRA prohibits lenders from extending the duration of a payday loan beyond twelve weeks from the day on which the loan is first executed. Thus, under Utah law payday lenders are only entitled to collect a maximum of twelve weeks of interest on any payday loan transaction. n12



n11 Committee Debate, Senate Transportation & Public Safety Committee (Monday, February 22, 1999) (Committee Recording, side A) (statement of Senator Mayne); Floor debate, 53rd Leg., General Sess. (February 24, 1999) (Senate recording number 38, side A) (statement of Senator Mayne).

n12 UTAH CODE ANN. § 7-23-105(2) (2000).

The Check Cashing Registration Act also requires lenders to comply with several state disclosure provisions. Lenders must
post in a conspicuous location on its premises that can be viewed by a person seeking a deferred deposit loan: (i) a complete schedule of any interest or fees charged for a deferred deposit loan that states the interest and fees using dollar amounts; and (ii) a number the person can call to make a complaint to the department regarding the ... loan. n13


Also, lenders must provide debtors a written copy of the loan contract and orally review the relevant interest rates and due dates with the debtor. Violation of the UCCRA is a crime punishable as a class B misdemeanor. n14



n13 Id. § 7-23-105(1)(a).

n14 Id. § 7-23-105(1)(c) & (d), 108(1)(a).

Practice Tips
Although Utah lacks the substantive consumer protections of many other states, counsel for both debtors and creditors should be aware of important payday lending controls provided by the UCCC and UCCRA. Counsel should look for violations of both UCCRA disclosure rules as well as the twelve-week time limitation. Data collected recently by the author and summarized in table 3 suggests many payday lenders have made only a half-hearted attempt to comply with UCCRA disclosure provisions. Of twenty-six surveyed lenders ten either failed altogether to provide any sign posting interest and fees or did so in a way that was inconspicuous. Seven lenders provided a listing which was incomplete. Ten lenders failed to post interest rates in annual percentage rate format. n15 Twenty-four of twenty-six lenders failed to provide a complete list of fees using dollar amounts. n16 Seven lenders failed to conspicuously post the telephone number of the Utah Department of Financial Institutions for customer complaints. And, when orally describing a loan, seventeen lenders failed to disclose the loan's percentage rate as an annual percentage rate, violating the federal Truth in Lending Act. n17 Accordingly counsel for payday lending businesses should carefully warn their clients about possible criminal penalties for non-compliance with the UCCRA. Debtors' counsel should present courts with evidence of non-compliance when arguing payday loan contracts unconscionable. [*19] Moreover, although the UCCRA does not provide a private cause of action, the UCCC unconscionability provision does. Because Utah's unconscionability provision provides for costs and attorney's fees, concerned members of the Utah bar should consider bringing pro bono actions on behalf of vulnerable debtors.



n15 It is not immediately clear whether the UCCRA requires postings be made in the annual percentage rate format established by the Federal Reserve Board, since the statute requires only that lenders post "a complete schedule of any interest." UTAH CODE ANN. § 7-23-105(1)(a)(i) (2000). However, deferred deposit lenders must comply with the Truth in Lending Act. Id. § 7-23-105(1)(e)(i). And, the Truth in Lending Act probably requires that lenders give conspicuously posted interest rates in APR formal under its advertising regulations. See 15 U.S.C. § 1664(c) (2000) ("If any advertisement to which this section applies states the rate of a finance charge, the advertisement shall state the rate of that charge expressed as an annual percentage rate.").

n16 Several of these lenders listed one or two fees. But virtually all deferred deposit lenders have a greater arsenal of contingent collection fees which were not posted.

n17 15 U.S.C. § 1665a (2000) ("In responding orally to any inquiry about the cost of credit, a creditor, regardless of the method used to compute finance charges, shall state rates only in terms of the annual percentage rates....").
Efficacy of Federal and State Disclosure in
Salt Lake Area Post-Dated Check Lenders

Figure 3

Legal Issue Tested: "Yes" "No"
Was there a posting in a conspicuous location which could be
viewed by a person seeking a loan? 16 10

Was a complete schedule of interest rates posted? 19 7

Did the interest rate appear in APR format? 16 10

Was there a complete schedule of fees using dollar amounts? 2 24

Was the telephone number of the Department of Financial
Institutions posted? 19 7

Was the interest rate orally disclosed in APR format? 9 17

Would the lender provide a disclosure statement before approving a
loan application? 9 17


No data exist indicating whether Utah lenders are complying with the UCCRA's twelve-week time limitation on the renewal of payday loans. However, industry representatives often claim payday loans are meant to be short term contracts. For responsible Utah lenders, this is undoubtedly true. However, if history provides wisdom, counsel representing debtors should treat these claims with caution. Early American salary lenders made similar claims which were widely denounced.
There was, for example, the employee of a New York publishing house who supported a large family on a salary of $ 22.50 per week and had been paying $ 5 per week to a salary lender for several years, until he had paid more than ten times the original loan. Or the case of a Chicagoan who borrowed $ 15, paid back $ 1.50 per month for three years before fleeing the city to escape the debt. Or the case of a streetcar motorman who in 1912, had seventeen Chicago loan companies attempting to collect $ 307 on an original loan of $ 50 after he had already paid $ 360. Or the claim of another Chicago borrower that he had borrowed $ 15, ten years later he had repaid $ 2,153 and still owed the original $ 15. n18





n18 Haller & Alviti, supra note 2, at 133-34.

More recently, government data from several states show that, in general, it is common for payday lenders to renew debts well beyond twelve weeks. For example, North Carolina regulators counted the total number of payday loan transactions of given customers at a given company in a year. About 87 percent of borrowers would roll over their loan at least one time with any given lender. Not counting debtors who borrowed from multiple locations, 38.3% of customers renewed their payday loans more than ten times. About 14 percent of borrowers would renew their payday loans with the same lender more than 19 times per year. n19 Illinois regulators found payday loan customers "who were borrowing continuously for over a year on their original loan." n20 Indiana found that approximately 77 percent of payday loans are roll-overs of existing loans. While the average customer borrows 10.19 payday loans per year, some debtors borrow many more times. n21 Indiana regulators describe one debtor who renewed 66 times in order to pay off a single payday loan--approximately a two-and-one-half year debt--assuming a typical two week renewal cycle. n22 These results indicate payday lenders should [*20] carefully avoid allowing debtors to rollover loans longer than twelve weeks. Moreover, when reviewing a payday loan contract it is important to discover the original date of the transaction. Practitioners representing debtors should argue courts must not allow lenders to circumvent the twelve-week limitation by subterfuge such as paying off an old loan with the proceeds of a new loan. Counsel for payday lending institutions should scrupulously advise their clients against taking any interest or fees after twelve weeks from the origination date of any payday loan.



n19 OFFICE OF THE COMMISSIONER OF BANTS, STATE OF NORTH CAROLINA, REPORT TO THE GENERAL ASSEMBLY ON PAYDAY LENDING 5-6 (February 22, 2001).

n20 SARAFE D. VEGA, ILLINOIS DEPARTMENT OF FINANCIAL INSTITUTIONS, SHORT TERM LENDING FINAL REPORT 30 (1999).

n21 Public Interest Research Group and Consumer Federation of America, Show Me the Money: A Survey of Payday Lenders and Review of Payday Lender Lobbying in State Legislatures 8 (February 2000).

n22 Indiana Department of Financial Institutions, Summary of Payday Lender Examination: 7/199 Thru 9/30/99, available at www.dfi.state.in.us.

Finally, Utah government officials should carefully enforce provisions of the UCCRA. For example, volunteer pro tem small claims court judges should actively review payday loan complaints for compliance with the UCCRA and award no more than twelve weeks' interest. Small claims court judges should also brush up on the common law elements of unconscionability, and exercise their authority to refuse enforcement of unconscionable contracts as well as award penalties under the UCCC. Moreover, lenders in violation the UCCRA are guilty of a class B misdemeanor. Local and state prosecutors have a duty to deter non-compliance by actively seeking out and bringing charges against violating payday lenders. Perhaps most important of all, the UCCRA gives the Department of Financial Institutions broad authority to pass administrative rules clarifying the act and to conduct administrative inspections--the cost of which is assessed to lenders rather than taxpayers. The Department should actively use this authority delegated by the Utah Legislature to ensure a fair and legal market for payday loans.


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