Audit raises questions about payday lending oversight

State regulators let payday lenders slide on more than 8,000 “major violations,” according to the Louisiana legislative auditor, a lapse that had at least one lawmaker Monday formally requesting a joint legislative investigation.

“You have all these 8,000 violations and you haven’t assessed a single penalty; that’s borderline fraud to me,” said state Rep. Ted James II, a Baton Rouge Democrat whose district has a number of companies offering the short-term, small-amount loans, such as from payday to payday, hence the name.

Critics say the practice promotes borrowers to fall into “a cycle of debt,” from which they find it difficult to recover. Backers say the loans provide a source of ready cash to help consumers with short blips in their cash flow.

The state Office of Financial Institutions failed to assess any penalties against payday lenders found to have violated state law between Jan. 1, 2010, and June 30, 2013, according to a report by Louisiana Legislative Auditor Daryl Purpera released Monday.

James sent a letter Monday asking House Speaker Chuck Kleckley, R-Lake Charles, and Erich Ponti, the Baton Rouge Republican who chairs the House Commerce Committee, to hold a special hearing and take testimony from the state Office of Financial Institutions. OFI is the agency charged with overseeing the financial services industry in the state.

“I want to know specifically why OFI has refused to assess penalties,” James said.

In a written response, the Office of Financial Institutions did not dispute the auditor’s findings, saying OFI’s objective is to have the lenders refund borrowers for overcharges. The examiners don’t make practice out of levying fines but would “revisit its penalty assessment practices,” the response stated.

“It’s completely bogus,” Troy McCullen, who heads Cash2U stores, said of the audit report. He lobbied the Legislature as president of the Louisiana Cash Advance Association.

McCullen said more than 90 percent of the examinations find no problems at all. When regulators do find an issue, it is addressed immediately by examiners and the store owner; the problems are fixed and refunds are paid, if need be. Most of the infractions that the legislative auditor called “major violations” were paperwork errors, often caused by changes in procedure, he said.

“You can take anything and blow it out of proportion. It’s not real life,” McCullen said.

Payday loans are for small amounts over a short term. The average is a 30-day loan for $300 plus fees. The auditor found 965 payday stores, mostly in low-income neighborhoods across the state, issued more than 3.1 million loans and collected $145.7 million in fees during 2013.

The audit found that 163 lenders committed 8,315 violations during the time period, including 8,082 that were considered “major,” in that they involved overcharging borrowers. OFI did not follow up on 6,612 of the major violations that required a refund to the borrower.

State law gives OFI the authority to fine offending institutions up to $1,000 for each violation.

“By not assessing penalties, OFI is failing to hold lenders accountable for adhering to state law,” the report stated. The auditor’s report stated: “We found that OFI needs to strengthen its examination, follow-up, enforcement and complaint procedures to ensure it is effectively regulating payday lenders.”

John Ducrest, OFI commissioner, would not comment Monday. His office released a statement saying that because of the “systemic nature of the violations,” three companies made up 62 percent of the overcharge violations.

“OFI requires refunds on all overcharge violations and also requires companies to submit evidence of the refund,” the statement said. “OFI is looking at ways to strengthen evidence of refund.”

Groups such as AARP and Together Louisiana pushed during the recent legislative session for new laws that would rein in payday lending practices. Backers of the bills packed hearing rooms by the hundreds and repeatedly rallied on the State Capitol steps. Their efforts were in vain. The industry, with a phalanx of lobbyists, defeated the legislation.

The only payday lending bill that passed required online lenders to obtain a license to conduct business in Louisiana.

“It really questions the basic relationship between the regulators and the industry they’re supposed to regulate,” said Broderick Bagert, who runs Together Louisiana, a coalition of churches and community groups from around the state.

Jan Moller said: “This report confirms what the industry tried to deny and what we claimed all along, which is that these short-term loans are designed to trap workers in a long-term cycle of debt.”

Moller is the director of the Louisiana Budget Project, a politically liberal group that researches public policy impacts on low- and middle-income households.

What often happens is that a loan goes unpaid and a new loan is written. If this happens 10 times, which is often the case, the initial loan amount of $300 remains unpaid but the borrower owes $605 in fees, according to the report.

Auditors found that state regulators don’t sufficiently document their work and their examinations did not detect whether payday lenders renew — called rollover — the loan before the borrower paid down 25 percent of the loan amount as required by law.

“We identified 318,489 instances of borrowers being charged approximately $7.3 million in fees during fiscal year 2013 for closing and opening a loan on the same day, at the same location and for the same amount,” the audit stated. Rollover loans are not allowed under state law unless 25 percent is paid on the principal amount.

“That’s the real fear,” Purpera said in an interview. “Looks like, smells like an illegal rollover. But there’s no evidence of an illegal rollover. You can’t conclude that from the data. But you don’t know. The essential element here is for OFI to go out into the field and do the procedures that may detect these potential rollovers. They have the ability to do that right now.”