One of every six Utah payday loan stores went out of business last year as more borrowers took advantage of new options created by the Legislature to escape debt from their ultra-high interest loans, a new state report shows.
At the same time, payday lenders here raised their average rates last year to nearly 485 percent annual interest — almost double the 250 percent that academic researchers say Mafia loan sharks charged in the 1960s.
Amid the higher rates, new data also show that increasing numbers of Utah customers are unable to pay off such loans during the maximum-allowed 10-week rollover period.
“It’s never as good as we hope,” Rep. Brad Daw, R-Orem, who has pushed reform of the payday loan industry, said about the annual report compiled by the Utah Department of Financial Institutions. “But it does show that we may be helping consumers a little bit.”
He added, “If our studies show anything, it is that far too many people get trapped by these loans and don’t know there is a way out. This shows that more are finding the off-ramps that we have created.”
They include the state requiring payday lenders to offer an interest-free extended payment plan before they can sue customers for default. Recent changes also allow borrowers to change their minds and rescind new loans quickly at no cost.
Most payday loans are for two weeks, or until a borrower’s next payday. Utah law allows renewing them for up to 10 weeks, after which no more interest can be charged. Critics say customers often take out new loans to pay off old ones — even though the Legislature just outlawed that — leading to spiraling debt.
Stores closing
New state figures show the number of Utah payday loan stores decreased last year from 553 to 462, meaning one of every six closed.
They remain plentiful. Payday loans stores in Utah still exceed the number of Subway, McDonald’s, Burger King and Wendy’s restaurants combined in the state.
Wendy Gibson, spokeswoman for the industry’s Utah Consumer Lending Association, said so many stores closing “demonstrates how Utah is an extremely competitive environment to do business” for those enterprises.
Utah has 50 separate payday loan companies, plus another 32 registered to offer such loans online. The state also has 61 registered title loan companies, which offer high-interest loans that use customers’ cars as collateral.
Gibson said all the competition helps ensure that “the market determines interest rates.”
(Leah Hogsten | The Salt Lake Tribune file photo)
High interest
Those rates rose last year to an average 484.74 percent annually, up from 459.14 percent the previous year.
While the state mandates that payday lenders list the rates they charge as annual interest rates, Gibson contends that is misleading. She notes it “measures interest for an entire year,” while “payday lenders can only charge interest for 10 weeks and the average length of a loan is 31 days.”
An annual 484.74 percent loan costs $9.30 per week for every $100 borrowed. She said it may be cheaper than other alternatives that low-income people with poor credit may face.
“If you bounce a $100 check with an overdraft fee of $39, the APR [annual percentage rate] would calculate to 2,033.57 percent,” she said. “Our customers are smart. They do the math and select the less-expensive option of taking out a payday loan.”
Data show that some payday lenders in Utah last year charged as much as 1,407.86 percent annual interest a year, or $27 a week on a $100 loan.
Gibson said that happens “because some lenders charge a flat fee regardless of loan duration.” So if customers pay back the loan quickly, that saves no money and the effective interest rate is higher.
Debt traps?
Critics call the loans debt traps.
“Their business model is to squeeze as much out of people as they can,” said Bill Tibbitts, director of the Coalition of Religious Communities, which has long contended the loans target the poor who cannot afford them and ensnares them.
He said that a normal loan company makes its money when people pay back loans on time, but payday lenders make it when borrowers don’t — and continue paying ultra-high interest that makes it difficult to escape the debt.
(Rick Egan | The Salt Lake Tribune) Bill Tibbitts
He said the companies charge such high interest “because they can,” since Utah law puts no caps on interest rates. He calls such rates ridiculous, considering that people complain that credit card rates are too high when they hit 15 percent to 25 percent.
Tibbitts said proof that the loans are unaffordable debt traps is seen in other data included in the latest report.
For example, last year 45,114 payday loans were not paid in full at the end of the allowed 10-week rollover period — equivalent to one for each resident of Bountiful.
That was up from 43,564 the previous year, showing more people are not paying off loans on time.
Also, a new category in the report this year shows that 3.35 percent of all payday loans in the state end up in lawsuits filed by lenders against borrowers for default.
Gibson noted that means “nearly 97 percent of loan agreements are fulfilled” and that “consumers are well protected and satisfied with payday loans.”
Escape options
The Legislature passed several laws in recent years designed to help people escape any spiraling debt from payday loans.
Two years ago, Daw passed a bill requiring lenders to offer in writing an extended payment plan at no interest to customers before they could sue for default.
New numbers show that 8.47 percent of all payday loans ended up using such a plan last year, up from 7.6 percent the previous year. So that new law “seems to be helping a little bit,” Daw said.
Gibson said the extended payment plans are “the exact solution consumers needed for an effective method for loan repayment” and show that Utah offers “some of the best consumer safeguards associated with payday lending in the country.”
She added, “Payday lenders are the only lenders who provide consumers an interest-free period to repay their loan without fee or penalty.”
Another recent law also allows borrowers with buyers’ remorse to rescind new loans quickly at no cost, and not be stuck with their high interest. Data show that borrowers rescinded 3,819 such loans last year, up from 2,332 the year before.
New law
This year, the Legislature passed — with support from the payday loan industry — a measure clearly banning taking out new loans to pay off old ones. Critics long alleged the industry pushed people into that by threatening lawsuits and high attorney fees unless consumers essentially extended loans at high rates.
That law took effect in May, and the new report covers activities only through the end of June. So all sides say it is too early to see effects of the law.
But anecdotal evidence shows people are obeying it. Still, some low-income people are still managing to get in over their heads with debt.
Martha Wunderli is executive director of the nonprofit Fair Credit Foundation, which helps people mired in debt work out repayment plans with creditors. She said while her counselors report that people seem to be complying with the new law, “people are still coming in with, like, 10 payday loans” as they seek help.
“An example was a 22-year-old married couple with two kids. They had 10 payday loans and are paying basic expenses with them.” They weren’t taking out new loans to pay old ones, but kept taking out more loans for basic living expenses.
“If they have 10 payday loans, you know what the interest rate looks like on those. They are never going to get out from under them,” she said.
“But I kind of understand why people go to payday loans. When you need to pay the electric bill or feed your kid or get diapers, there are not many places to go.” She added that many young adults taking out such loans do so because their parents did the same thing. “It seems to be intergenerational.”
While extended payment plans are technically available to help such people, Wunderli said seeking them requires “a little finesse and chutzpah,” which many of her clients lack. “Low-income people sometimes don’t want to rock the boat and are afraid, and have never been taught” how to work out of such problems.
More laws?
While Gibson said current laws adequately protect consumers, Tibbitts would love to see more — including caps on allowed interest.
A legislative audit last year also called for laws to limit access to loans for those who do not use them responsibly. It found that 32 percent of all payday borrowers are “chronic” users of the service and another 14 percent were in default.
Daw said state lawmakers likely will closely watch a current fight on the federal level before taking more state action.
The Consumer Financial Protection Bureau last year issued rules, to take effect in 2019, that would require payday lenders to make sure borrowers could afford to pay off a new loan and still meet basic living expenses. It would also limit to three the number of payday loans that could be made in quick succession.
However, President Donald Trump’s new appointee to head that agency opposes such measures, and some members of Congress have introduced legislation seeking to overturn them.
Daw said, depending on what happens on the federal level, he may seek similar legislation at some point in Utah.
Tibbitts is skeptical that much else will be done in coming years and points to heavy donations by the industry to Utah politicians as a reason why.
The payday industry, for example, gave $127,950 to Utah politicians in 2016, according to the National Institute on Money in State Politics.
“You have to ask: Why does an industry that claims to do so much good feel like they need to soften the elected officials’ perception of them so much?” Tibbitts said.
Gibson counters that it is “common for businesses, individuals and industries to participate in the political process. Consumer lenders are just one of the hundreds of industries and thousands of companies that make political donations in Utah.”
The industry once managed to defeat longtime critic Daw. House investigators who looked into scandals that toppled former Utah Attorney General John Swallow — who received large donations from the industry — said it funneled big money through Swallow to shady groups that helped defeat Daw in 2012. He won election again two years later.
