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Deseret Morning News

Nov. 13 2005:

Trapped for cash: Deeper in debt

"Payday loan" stores dodged a legislative bullet Tuesday that would have limited them to charging a mere 8 percent annual interest to extend their short-term loans — instead of the 521 percent median annual interest that they now charge.

Rep. Dave Hogue, R-Riverton, said he had to jettison the proposed interest rate cap to salvage other reforms he is seeking — or they would be torpedoed together.

"I don't think that (interest rate cap) would ever pass this Legislature. And I don't think that would be acceptable to the financial industry because it would be a beginning of going back to usury" caps that the Legislature erased in the 1980s, Hogue told the House Business and Labor Committee.

After Hogue dropped the interest rate cap, the committee passed his reform bill 9-2. It includes such other restrictions as limiting the penalties that payday lenders may collect on bounced checks that customers had used to secure payday loans.

The mainstream financial industry has long lobbied against imposing any caps on interest rates — even in the payday loan industry where a Deseret Morning News series in November found the median rate charged in Utah is 521 percent. In contrast, the 1960s Mafia charged only 250 percent.

The overall financial industry — which provides about $1 of every $8 of campaign donations raised by Utah legislators — has argued that putting caps on payday loans could lead to caps on other loans from mortgages to credit cards. It also has said any caps could scare large lending companies out of Utah along with the jobs they provide.

Payday loans are usually made in amounts between $100 and $1,000 for two weeks or until the customer's next payday. In Utah, payday lenders charge a median of $20 per $100 loan for those two-week loans, which is 521 percent annual interest.

Hogue's bill still would have allowed unlimited interest on the initial loan. But if customers sought to extend it because they could not pay it off, Hogue's initial proposal would have allowed only 8 percent interest for the extension period.

Utah law does not allow extending payday loans for more than 12 weeks, but some lenders work around that by persuading customers to take out "new" loans to pay off the initial extended one. That helps them to delay possible default penalties.

Credit counselors and advocacy groups for the poor say that payday loans are designed to trap and financially drain the desperate or unsophisticated. But payday lenders say they offer emergency help to people with no credit, and their loans are cheaper than paying fees for bounced checks or for restoring disconnected utilities.

Even without the interest cap, the payday loan industry still opposes Hogue's bill.

Kip Cashmore, vice president of the Utah Consumer Lenders Association, testified that restrictions Hogue proposes are not needed because most consumers are happy with payday loans. "Out of all the hundreds of thousands of transactions that the companies did last year, the (state) registered 22 complaints. That's phenomenal," he said.

Cashmore said his group of payday lenders supports instead a bill by Sen. Ed Mayne, D-West Valley, which has already passed the Senate. Its main provision would allow the state to fine payday lenders for violations of state law. Now, the only penalty allowed is to entirely close a lender, which has happened only once.

But James Evans — owner of Check Line and Check Action, and chairman of the Salt Lake County Republican Party — said he opposes Mayne's bill and Hogue's. He has been lobbying hard against any changes, saying they are coming only because the Morning News series on payday lenders inflamed passions.

"I am fundamentally opposed to any bills this session because they are based on a premise that there's something wrong with the industry. And that premise is basically based on the articles you wrote," Evans told the Morning News, adding he believes stories were slanted against the industry.

Evans may have an advantage that many lobbyists do not. As chairman of the Salt Lake County Republican Party (besides being a payday lender), he helps oversee how much money and support his party may give to the same lawmakers he lobbies.

When asked how much power he has on such issues, Evans said, "That is an unfair question. . . . It's no different than the majority leader in the House or Senate sponsoring a bill who have control over their own caucus PAC (political action committee)."

Of note, the recent Morning News series on payday lenders found that Utah has more payday loan stores than 7-Elevens, McDonald's, Burger Kings and Subway stores — combined. Utah has some of the friendliest laws of any state for the payday loan industry, which has attracted some national online payday lenders here.

While Utah's payday lenders face relatively few regulations, Morning News visits to 67 stores last year showed that about a quarter of them broke at least one of those easy rules. Several lenders also made misleading claims to a reporter about loans, and they included fine print terms in contracts that could easily lead to financial disaster.

The News also found that payday loan stores are concentrated in areas that are poorer, heavily Hispanic or are near the large Hill Air Force Base (where members of the military tend to have low salaries).

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