Ramblings of Silver Blue


17 Jun

Second Verse…

…same as the first. This time, something that I haven’t had the (mis-)fortune to have experience with — Car Title Loans. State regulators are attempting to reel them in (as they are looking at doing with the “payday loan” storefronts, one of which appears on almost every street corner or strip mall)…

The problem? Stratospheric interest rates. Some in excess of 300% APR. Virginia currently has “Consumer Finance Act” which limits interest to 36% (still exuberant, but better than 300%), and the lenders are crying foul. They claim it would put them out of business.

Could it be that you didn’t need to be in business in the first place? How many lives are being ruined, in the name of greed?

Would you pay $125 to borrow $500?
By TOM SHEAN, The Virginian-Pilot
© June 17, 2005
Last updated: 1:36 AM

Once considered dead in Virginia, car-tltle lending has sprung back to life.

A Georgia title-loan company has opened 20 LoanMax offices in Virginia during the past year, half of them in Hampton Roads. Another Georgia-based lender has opened at least a dozen Fast Auto Loans offices in the region.

By providing vehicle titles as collateral, cash-strapped car owners can get a 30-day loan while continuing to use their car. They can borrow from $100 to $5,000, depending on the lender and the value of the car. They can repay the loan when it’s due or roll it over after the initial 30-day term expires.

The credit, however, isn’t cheap. A car-title loan in Virginia typically carries an annual percentage rate of 300 percent or more, which works out to $125 of interest for a one-month loan of $500. In addition, borrowers must pay fees, including an “annual membership fee” and another for having a lien recorded on the car title.

At Fast Auto Loans, for example, the membership fee is $50 and the title fee is $6.

To help recover the car in case of a default, lenders require their customers to leave a spare set of keys.

Concerns that some consumers could find themselves buried by the interest expense have triggered warnings from regulators, legislators and consumer advocates. Virginia’s Bureau of Financial Institutions posted a warning regarding the loans on its Web site after receiving inquiries about the loans. Based on the loans it had seen, the bureau cautioned that borrowers who failed to make the required payments within 10 days after the date due could forfeit their vehicle.

“Because of the high interest rate on these loans and the risk of losing your car, consider a loan from a bank, a credit union or a family member before obtaining a motor vehicle equity line of credit,” the bureau said.

If properly informed, some consumers in need of cash could benefit from car-title loans, said J. Brandon Bell II, a Republican state senator from Roanoke . However, some consumers have failed to receive important information about the cost of the loans or the terms when talking with lenders, he said.

“There needs to be a set of rules,” said Bell, a financial planner and asset manager.

When some constituents described how their son took out a car-title loan and needed help repaying it, Bell introduced a bill during the 2005 session of the General Assembly to regulate title lending in Virginia. His proposal would have made certain revolving loans of less than $6,000 subject to the state’s Consumer Finance Act. The annual percentage rate on the loans, when made for personal, family, household or other non-business purposes, would be limited to the 36 percent ceiling imposed by the act.

“People came out of the woodwork saying, ‘Don’t do this. It will ruin our business,’ ” Bell recalled. Rather than push for passage of his bill late in the past session, he decided to spend more time looking at regulations that would be feasible, he said.

Bell said he plans to meet with the commissioner of Virginia’s Bureau of Financial Institutions later this month to explore a regulatory structure for title lending and likely would introduce a bill for the General Assembly to consider in 2006.

“We need something,” he said, “but I don’t have an exact idea of what needs to be done.”

In the early 1990s, a Norfolk company began making the loans under an exemption created for pawn shops. By using the exemption, Car Pawn of Virginia was able to charge a much higher interest rate than what was allowed by the state’s Consumer Finance Act.

The strategy didn’t work. The Circuit Court for the city of Richmond ruled that Car Pawn had to be licensed under the Consumer Finance Act and abide by the act’s interest-rate ceiling. Car Pawn’s loans, the court said, failed to fit the definition of pawn transactions because the company didn’t retain physical possession of the real collateral, the car.

Since then, title lenders have bounced back with another strategy. This time, LoanMax, Fast Auto Loans and others have characterized their loans as equity lines of credit, a type of lending that isn’t subject to the interest-rate ceiling of the Consumer Finance Act. The interest-rate ceiling for opened-ended consumer loans was abolished in Virginia, so credit-card lenders based in the state could better compete with card lenders elsewhere.

Rod Aycox, chief executive officer and co-owner of Select Management Resources in Alpharetta, Ga., said he would welcome regulation of car-title lending in Virginia. His company’s offices, Aycox said, are regulated in 16 of the 21 states where it does business.

However, its LoanMax offices in Virginia couldn’t survive if forced to abide by the state’s interest-rate ceiling on small, short-term loans, Aycox said. The company’s average loan in Virginia is $300, and the rate ceiling imposed by the Consumer Finance Act would make it difficult for the company to cover its expenses, he said.

Two consumer advocacy groups – the Center for Responsible Lending in Durham, N.C., and the Consumer Federation of America of Washington – contend that car-title loans should be closely regulated because of the financial harm they can cause for unwary borrowers. Knowing that they can take the car if a borrower defaults, lenders ignore the borrower’s ability to repay a loan, the consumer groups argued in a recent report on title lending throughout the U.S.

Because of the triple-digit interest rates charged, too many borrowers have difficulty coming up with the lump sum needed to repay what they owe at the end of 30 days, the organizations said in their report, “Car Title Lending: Driving Borrowers to Financial Ruin.” These borrowers, the organizations said, routinely respond by rolling over their loans and adding to their interest burden.

The consumer groups called for limits on the interest rates that can be charged, longer terms for borrowers to repay and the ability of borrowers to repay by means of installments instead of a lump sum. And in those states where title lenders operate, legislators should establish licensing, bonding, reporting and examination requirements, the groups contend.

Reach Tom Shean at (757) 446-2379 or tom.shean@pilotonline.com.

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