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For years, consumer groups have warned Utahns about the dangers of payday loans.

Their success at urging legislators and city officials to crack down on an industry that charges an annual percentage rate of 400 percent or more for a quick short-term loan has been limited, though.

Until now.

In recent months, a host of cities along the Wasatch Front have either imposed limits on the number of payday lenders that can operate within their boundaries or are considering it. Salt Lake County is moving forward on a similar proposal. On the federal level, Congress passed a measure capping interest rates at 36 percent on payday loans for the nation's military personnel after a number were denied security clearance because of high levels of indebtedness.

Buoyed by all the momentum, legislators and consumer advocates are quietly laying the foundation for not one but several pieces of legislation. Together, they could provide sweeping reform of an industry that many say preys on the poor but that the industry contends meets a need that no one else can or will.

"Before, we were never sure if we would be able to find even one legislator to run a bill for us," said consumer advocate Linda Hilton, who has lobbied for years for greater consumer protections. "Now there are a lot of people coming to us, saying, 'Let's talk about a bill that does something about the payday loan industry.' ''

That said, the industry has some formidable allies in the Legislature and a powerful cadre of lobbyists. Majority Leader Dave Clark is a Zions Bank manager and one of a number of bankers who in the past have opposed interest rate caps. Then there's James Evans, a payday loan operator, who is the Salt Lake County Republican Party chairman.

But for the first time, those protecting the interests of the industry might be outnumbered - or even outmaneuvered - by those demanding reform.

"The public is fed up and they want something done," said State Rep. Paul Ray, R-Clearfield, one of several legislators planning to support one or more bills. "And that gives us a tremendous advantage."

Rate cap? No way

The payday loan industry's trade group, the Utah Consumer Lending Association, says it might even support some of the measures, especially those designed to weed out bad operators and provide greater oversight of Internet-based lenders. But interest rate caps? No way.

Tracy Rawle, a Check City vice president, said caps make no sense because "there's a lot of competition to keep rates in line."

Plus, he thinks that looking at annual percentage rates is misleading.

Check City, which is based in Provo and has 43 locations in Utah and four other states, charges $8 interest per week for every $100 borrowed. That works out to an APR - annual percentage rate - of 417 percent.

But payday loans are not paid back over years such as with other types of loans. "Our average loan is for only 13 days," Rawle said. "There is no way to make that short term of loan for a low APR."

He also contends that consumers would pay far more in fees if they bounced a check. If they neglect to pay their rent or utility bills, the repercussions could be even greater.

So what exactly are payday loans, and why are they so polarizing?

They are short-term loans for people who need cash to tide them over until their next paycheck. They often are paired with other check-cashing enterprises and also are known as cash-advance or postdated-check loans.

The first payday loan company opened in Utah in the early 1980s. Today, there are 128 state-registered lenders, with more than 400 offices, mainly along the Wasatch Front. Many are open round the clock or until midnight.

Borrowers taking out payday loans typically pay at least $8 interest a week for each $100 of principal. It may not sound like much, but the annual percentage rate works out to more than 400 percent, with some loans approaching 1,000 percent. The typical high-rate credit card, by comparison, charges 20 percent or 30 percent.

Bad lenders

In a recent report, the nonprofit Center for Responsible Lending said "predatory payday lending costs American families $4.2 billion per year in excessive fees." Utah's share was $69 million, the center estimates.

Fees can be become a real issue because of the way loans are structured.

Unlike with other types of loans, payments by payday loan borrowers are not made over time. They must pay the entire amount borrowed - plus interest - in one lump sum, typically in about two weeks. Loans can be rolled over, or continued, for those who can't pay off the entire amount at once, but additional fees apply. State law limits such rollovers to 12 weeks to protect consumers from being trapped in a cycle of debt.

Rep. Ray said yet another issue is that payday lenders in Utah don't share a common database, as such lenders do in other states.

That means a low-income borrower could take out multiple payday loans based on the same paycheck - something payday lenders probably never would allow if they knew about it because such borrowers would have a slim chance of repaying.

Perhaps the biggest issue is that even though most payday lenders are law abiding, there are a host of unscrupulous operators who have skirted laws and abused consumers, advocate Hilton said.

She said there are plenty of payday lenders who don't make it clear to borrowers they have 24 hours to rescind the loan or that they can make partial payments in an effort to reduce the amount they owe. Both were protections passed at the state level several years ago.

The industry counters that abusive lenders are the exception.

Tom Despain is the operations director for USA Cash Services of Ogden, which operates 40 lending shops in seven states, including 12 in Utah. His company charges $10 per week for each $100 borrowed.

He doesn't believe the industry needs additional regulation because competition tends to drive out the bad operators.

"Customers won't go to a bad lender once they figure out they are a bad lender," he said.

But by then, advocates say, it is too late. People who go to a bad lender are more likely to face serious financial difficulties, including bankruptcy.

Too many stores?

Like many operators, he is enraged at the steps cities have taken to limit the number of operations in their boundaries.

"It's like saying you can't have a McDonald's next to a Burger King."

Despain and Rawle of Check City also consider interest rate caps unreasonable.

"What do you think McDonald's would do if the federal government told them they had to sell quarter-pounders with cheese for 14 cents to the military?"

He contends McDonald's would halt such sales, and his company has decided it will stop lending to military personnel and their dependents once the 36 percent cap goes into effect late next year.

Under that cap, he said he would be able to charge about 70 cents per week for every $100 borrowed instead of the $10 per week he charges now.

"We can't even cover our costs [of doing business] and overhead if we were to take in only 70 cents," he said.

He said the public misunderstands payday loans, and he takes the industry's argument about loan rates one step further.

"These are high-risk loans." In other words, when a bank provides a car loan at a single-digit interest rate, that lender has collateral in the form of the vehicle's title until the loan is paid off.

Payday loans are not secured, and losses can be high, which he contends means interest rates have to be stout or some lenders would not be able to stay in business.

Although there are numerous concerns about payday loans, industry representatives say that the state receives few complaints, which is something the Utah Department of Financial Institutions confirms. Advocates say consumers often don't complain because they don't know where to go - or they figure no one will help. People with little education - financial or otherwise - and those who speak limited English are especially at risk, they say.

National security

Despain offers another explanation. He thinks it's because his industry is meeting a need by providing a valuable service - giving borrowers a source of cash in a time of need.

"Many of these people have no other place to go," he said.

That is exactly why Congress passed the measure capping interest rates for military personnel.

A number soldiers and others in need of cash - especially those being deployed to Iraq and other hot spots - increasingly have been taking out payday loans. Due in great part to the high interest rates, many have been caught in a cycle of debt. This can affect national security when someone has to be reassigned from an area because their debt loads are so high they become a risk.

Karen Burton of West Valley, who has two sons in the military, supports the interest rate cap because she has seen how easily young members of the military - including her own sons - can build up mounds of debt.

"The younger guys, especially, don't understand how high the interest rates are," she said. "All they know is they have to pay their bills."

Payday loan operators insist that borrowers know the consequences.

Rawle, vice president of Check City, said nearly one-quarter of his customers are college graduates. More than one-third are homeowners.

"Our customers are educated individuals who are capable of making a wise financial decision. It saves them money over more costly alternatives."

Trista Gibson of Salt Lake City, who has used payday loans several times in the past year, says she is more than capable of making sound lending decisions. She views payday loans as an emergency fund.

"It makes me feel secure. If something happens, you can go there and they will help you."

Rate cap in question

Though there is little agreement between opponents and proponents about payday loans, there is even less among those who want to try to regulate the industry.

The Utah Department of Financial Institutions, which has oversight over such companies, is helping draft one reform bill. But it will not include an interest rate cap.

That's because Commissioner Ed Leary contends that caps stifle a free-market system. He prefers to see greater fines for violations of state law, greater oversight of Internet-based payday lenders and a measure that would limit the financial penalties loan operators could assess.

Bankers also do not support rate caps, which has led some critics to consider banks supporters of payday lenders.

"Bankers are not opposed to efforts to regulate payday lenders," said Howard Headlee of the Utah Bankers Association. "Reports that banks were involved in the defeat of last year's payday lending bill are simply not true."

Headlee concedes he would not actively oppose a cap for payday lenders that would exempt banks.

Whether consumer advocates would be willing to provide an exemption is not clear. One thing is for sure: They are hoping credit unions will support payday industry reform.

Scott Simpson, president and CEO of the Utah League of Credit Unions, is trying to figure out whether his powerful lobby should get involved. Like the bankers, credit unions traditionally have been reluctant to support limits on the operations of other financial services company.

It's too early to know what shape the bills will take - and whether they will go anywhere.

But Sen. Ed Mayne, D-West Valley City, is another legislator who believes this next session will bring meaningful reform.

He supports a bill that would stiffen penalties for bad operators and offer greater disclosures about loan terms.

And like others, he is hoping the Legislature will give more thought to capping rates.

"We have made some progress, and I think we'll make even more," he said. "But we never have been able to take the last step of capping interest rates. We should be doing the same thing that the federal government has done to protect their military personnel."


* Tribune reporters

JENNIFER SANCHEZ AND BRIANNA LANGE contributed to this story.

What is a payday loan?

A short-term loan for people who need cash to tide them over until they get their next paycheck. Often, people who take out payday loans have maxed out their charge cards, do not have access to credit, have little or no savings or cannot borrow from family and friends.

Borrowers typically pay $8 to $15 in interest a week for each $100 of principal they borrow. Such loans also are called cash-advance or postdated-check loans.