High-Cost Lenders In Utah Putting Insolvent Borrowers Behind Bars

• Lenders providing high-cost loans in the state of Utah are suing insolvent borrowers in the state’s small claims courts for repayment of outstanding loans.
• In many cases, lenders are obtaining bench warrants for the arrest of borrowers who are unable to show up.

A new report that has been released by the Consumer Federation of America (CFA) has revealed that payday lenders are pursuing borrowers in the state of Utah that are unable to repay their outstanding debt obligations through the small claims courts by suing them and, in many cases, putting them in prison.

According to the report, when a debtor fails to make an appearance at these hearings, a bench warrant is requested by the lenders in the court for the borrower’s arrest. After warrants are issues, constables that work for-profit take these borrowers into custody and then require them to pay the bail money.

The report has estimated that more than 3,100 payday loan borrowers were being served bench warrants on average in a year and that 91% of all arrest warrants issued for small claims were being issued for high-cost loan cases.

Christopher Peterson, who is the Director of Financial Services at the CFA, this trend outlined the debt-to-jail schemes that were being offered by payday lenders. According to him, this report had revealed that payday lenders were misusing the criminal court system to force insolvent customers into repaying them interest rates in the triple digits.

However, perhaps the most shocking revelation of this report is the bail money that is being asked by constables from the arrested borrowers. According to Lisa Stifler, who works for the Center for Responsible Lending as the director of state policy, what’s especially worrisome is the rule that was passed back in 2014 in the state of Utah, which enabled creditors to take part of this bail money as well.

In principle, a small claims court does not require the involvement of a lawyer to file a case for the claim of money, such as for values under $10,000 in the state of Utah and under $5,000 in the state of New York. The system is especially popular among small creditors for the collection of bad debt, although it was originally created to be used by the people against other people.

The data presented in the study showed more than 66% of the cases in the small claims courts were filed by lenders of payday, vehicle title, and other high-cost loans. Almost 70% of cases were filed for the collection of high-cost debt, the study revealed.

The study also found that cases pursued by high-cost lenders were litigated in a more aggressive manner, running prolonged cases compared to other plaintiffs and also routinely obtaining warrants for arrest. In almost 30% of such cases, the outcome was the issuance of arrest warrants as borrowers were held in contempt of court.

In the past, debtors prisons were banned in the US by Congress back in 1833. Also, interest rates were capped between 5%-8% by the 13 original states in the US after independence. However, in 1978, the Supreme Court ruled that a lender would be subject to the laws in the home state even if it sold loans in another state.

Hence, even if a state has imposed limits on the interest rate that may be charged on loans, if a resident opts for a loan with a lender in another state that has no such limits, they can end up paying exorbitant interest rates. This has allowed lenders to provide high-cost loans to customers on a national level.

According to Peterson, the problem in Utah stems from the state’s deregulated financial environment and is evidence of the issues that arise if sufficient regulation does not govern the free market. Peterson believes Utah’s example should make regulators and policymakers conscious of adopting similar regulatory practices in the rest of the country.