Audit says payday loan industry limits not effective enough

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SALT LAKE CITY — A legislative audit released Tuesday says state limits on payday loans may not be stopping customers from overuse.

The performance audit of the Department of Financial Institutions' regulation of the payday loan industry requested by Rep. Brad Daw, R-Orem, showed that some borrowers used payday loans at a high rate, with chronic users and defaulters comprising nearly half of customers included in a study.

The study, which looked at 303 customers from five Utah communities in 2015, showed that only 17 percent used the service as intended — sparingly. The so-called low-risk users took out less than three payday loans in a year and repaid them on time or after one extension.

Moderate-risk customers comprised 37 percent of users who borrowed an average of four loans per year and often extended their loans several weeks or months, the report said.

The audit described chronic users as frequent borrowers who took out an average of 7.4 payday loans, with some taking out multiple loans simultaneously. In the study, 32 percent of users fell into the chronic user category, while 14 percent of users were classified as "defaulters" — those who defaulted within a few weeks of borrowing money.

"A lot of what we have in place is not getting the job done," Daw said. "(The laws) are either not being enforced or there are simply ways to work around what is in place so that the abuse still happens."

The audit found that chronic users and default borrowers accounted for 46 percent of users studied. The average chronic user had at least one payday loan for 213 days and paid $1,248 in interest during fiscal year 2015.

While Daw agrees that payday loans have a place within the financial services sector and serve a specific population that needs such a service, the fact that so many people are being negatively impacted by the lack of properly utilized regulation and onerous interest rates is very troubling for consumers.

"It's not a benefit to them to get a loan and pay so much in interest that you pay the (entire) loan back in interest before you touch the principal," he said. "That's the catch. Let's have it available for those who need it, but in such a way they can use it responsibly and well."

Similar to a recommendation in the performance audit, Daw advocates for a centralized database to monitor industry activity and help track the effectiveness of state limits on payday loans. He said doing so would help prevent consumer overuse and lower risk to lenders.

The report also recommended that the state Department of Financial Institutions take a strong approach to enforcing regulations on the payday loan industry, which could include imposing more fines, conducting more stringent and thorough examinations of loan histories to verify compliance, and keeping better track of the results of those actions.

The audit also suggested placing increased limits on the industry by the state Legislature such as restricting the number of loans a borrower can have at one time, prohibiting lenders from rolling over old loans in to new ones, or requiring a "cooling off" period between loans.

In addition, the audit recommended enhanced data gathering to help the department better regulate the industry. The audit will now be reviewed by the Business and Labor Interim Committee.

KSL attempted to contact Frank Pignanelli, a lobbyist representing the payday loan industry, but he was unavailable.

Attempts to reach Check City spokeswoman Wendy Gibson also were unsuccessful.