A University of Utah law student’s random survey of check-cashing centers in the Salt Lake area found that a majority don’t fully comply with state and federal disclosure laws designed to protect consumers from unfair lending practices.
These “payday lenders,” which cash paychecks for individuals with poor credit and loan money on post-dated checks, are part of a growing high-cost, high-risk consumer finance industry in Utah that is preying on the working poor, said Chris Peterson.
The third-year law student conducted the survey as part of a report that calls for stricter consumer credit laws and tighter enforcement measures. It will be published in the June edition of the Utah Law Review.
Posing as a customer with a rocky credit history, Peterson visited a third of the check cashing shops with a listing in the Salt Lake metropolitan telephone book and asked about loan options.
He observed how each of the firms measured up to the 1968 Federal Truth and Lending Act and the 1999 Utah Check Cashing Regulation Act. The more recent Utah statute places payday lenders under the jurisdiction of the Department of Financial Institutions and mandates disclosure of interest rates and fees.
Of the 26 shops surveyed, 10 (38 percent) failed to conspicuously post interest rates, as required by the act. Another 10 violated the federal rule that requires them to post interest charges as annual percentage rates.
“Rather than telling the customer the charge is 100 percent APR, they might say it will cost them $10 a week,” said Peterson.
But most disturbing, said Peterson, is that 92 percent of the polled firms did not post all fees that, under its contracts, could be collected.
For example, one lender posted fees for bounced checks, but neglected to note that a $75 hourly charge for time spent collecting from delinquent debtors could also be levied.
Peterson also recorded the annual percentage rates offered by each lender, which averaged 528 percent, and ranged from a low of 360 percent to a high of 780 percent.
It’s a lucrative business, said Peterson, adding that check-cashing shops in the Salt Lake Valley have quintupled over the past 15 years.
Peterson blames the lenders’ low compliance rate on the Department of Financial Institutions’ negligent enforcement of the law.
“The department has the power to respond to consumer complaints, but doesn’t,” said Peterson.
Paul Allred, deputy commissioner and staff attorney for the Department of Financial Services, disagrees and said he has doubts as to the accuracy of Peterson’s report.
“We examine all institutions that come under our jurisdiction on a regular basis, once a year,” said Allred. In addition to payday lenders, the agency oversees state-chartered banks, credit unions and industrial-loan corporations.
Annual audits of check-cashing outlets involve a review of their loan documents and compliance rate with disclosure rules, Allred said.
Peterson suggests, however, that the department conduct unscheduled spot checks. Allred said he isn’t sure such action would be worthwhile or is even warranted.
Contrary to Peterson’s report, said Allred, “Our audits have only found some misunderstanding about how to calculate [annual percentage rates], honest mistakes.
“We think the industry does a pretty good job trying to stay within the law,” Allred said.
But the law is part of the problem said, Peterson.
Unlike other states that cap interest rates, Utah passed a law eliminating such caps in 1985. During that legislative session, the Senate debated the issue for less than a minute, according to Peterson’s report. Since then the number of post-dated check-cashing services in the Salt Lake Valley has grown from zero to 75.
Peterson said the state could easily approve an interest rate cap that would protect the consumer without penalizing loan corporations. “Even a cap of 100 percent would provide meaningful protection for these debtors,” he said.
Bob Rochford, deputy general counsel for the National Check Cashers Association in Hackensack, N.J., which represents about two-thirds of the deferred deposit lenders in the U.S., said “We have been advising our members of the importance of complying with the Truth and Lending Act, which is extremely technical.
“You can in good faith end up in violation,” he said. For example, printing interest rate charges on a loan document in the same size font as other information could be interpreted as violating the conspicuous posting rule.
Education, is the answer, not interest-rate caps, said Rochford, who says the national organization sponsors conferences to keep members posted on new regulations.
University of Utah law professor John Flynn says Peterson’s study is a “much-needed warning” about a largely unnoticed but growing problem.