Legislators Weigh Capping High-interest 'Car-title Loans'
San Franciso Chronicle, May 4, 2013
The pitches sound enticing. "Need cash? Have bad credit? No problem. You can get a loan today by using your car as collateral - and you get to keep driving it."
These "car-title loans," also called "pink-slip loans" and "auto-equity loans," are a booming industry in California, where 38,000 people took out $134 million worth in 2011, according to the Department of Corporations.
Anyone with equity in a car (meaning they own it outright or owe just a small amount) can get a short-term loan for up to half of the car's value by pledging their car's title (and often forking over spare keys) to secure the loan. Borrowers keep possession of their cars while they're making payments.
But that quick cash comes with a steep price tag: interest rates that can top 100 percent a year, extra fees and the possibility of having the car repossessed.
While 31 states have outlawed car-title loans, a loophole in California law allows unlimited interest on some secured loans for more than $2,500. Now, consumer advocates, who call the loans predatory, are urging state legislators to take action, either to ban the loans outright or cap interest at 36 percent. The federal government implemented that same cap for auto-equity loans to military members.
"Car lenders say they have to charge so much because they're high-risk loans," said Rosemary Shahan, president of nonprofit advocacy group Consumers for Auto Reliability and Safety. "There's no risk. They just show up and take your car if you don't pay. They can resell it to recoup their costs."
Shanell White understands the loan pitfalls well. When car repair expenses and the temporary care of her niece cut into her funds, White needed some quick cash for help with her rent.
"I looked on the Internet and came across car-title loans," said White, who lives in Elk Grove (Sacramento County) and works for the state as an analyst. "I did a quick online questionnaire, and they called me back. I did the application and got the loan."
Staking her 1996 Lexus, worth about $12,000, as collateral, she borrowed $3,900 at an interest rate of 80 percent a year. Payments came to $290 a month for three years, which she assumed covered interest and principal.
"I knew it was a high interest rate, but I figured as long as I paid what they told me to, I would be fine," she said.
When she missed some payments, the company repossessed her car and charged her $1,400 to get it back. After three years, she figured she had repaid the loan, but when she asked for a payoff statement, the company said she still owed the original loan amount, she said. "Their attitude was very nasty. Everyone would tell me something different," she said.
She missed some more payments and then woke up one day to find that the car was missing - the lender had towed it in the middle of the night.
"I called the company and they said there was nothing they could do unless I repaid the full amount" of the original loan, she said. The company sold the car in December and still sent her a bill for the loan amount.
"To me, it's just modern-day loan sharking," she said. "People are being taken advantage of."
Cars as Lifelines
What's particularly insidious, Shahan said, is that borrowers will make many sacrifices to keep making payments on the high-interest loans.
"People will hang on for dear life to their car because it's their lifeline to get to work, medical appointments, school," she said. In many cases, people who took out the loans would have been better off simply selling their cars and buying less-expensive ones, she said.
Assemblyman Roger Dickinson, D-Sacramento, chairman of the Assembly Banking Committee, has been holding hearings on auto-title loans. He introduced a bill last year to cap interest rates, but it failed to gain any traction.
"Next to home loans, they are probably the most secured type of loan one can make to a consumer," he said. "It seems inconsistent that you have loans made with collateral that is worth well more than the amount of the loan, and yet the interest rates on these loans tend to be extraordinarily high. It's hard to understand how interest rates that run to 150 percent or 200 percent can be necessary or justified."
He said he plans to continue investigating the industry and will introduce legislation next year to rein in interest rates and fees, possibly encompassing other types of small loans.
Loan companies did not return calls for comment. But in testimony before state legislative committees, Oscar Rodriguez, president of industry trade group Equal Access Auto Lenders of California and CEO of lender LoanMart, said car-title lending fills an important need for people with poor credit who can't get loans from banks or credit cards because their credit scores are too low.
"We are a source when they need access to credit when the door is shut to them from every other place," said Joe Lang, a lobbyist for Community Loans of America, which has 20 locations in California.
Dickinson said that outlawing the loans isn't on the table.
"There is a legitimate need for products in this price range available to people who may not have recourse to other avenues of borrowing," he said. "Our obligation is to make sure that when people do borrow, in any context, that they are treated fairly and reasonably, particularly in the small-loan category, where you tend to see people who are more desperate."
Lang and Rodriguez say lenders charge high interest rates because they pay a premium for capital for customers considered risky, and shoulder big expenses for marketing, personnel and the overhead of maintaining storefronts.
"Yes, our interest rates are high, in some cases over 100 percent" a year, Lang said. But the industry's profit margins are about 21 percent, slightly less than the 23.9 percent return that credit card companies get, he said.
Rodriguez testified that default rates range from the teens to 40 or 50 percent.
Capping the Rates
"We would like to see responsible loans, with rigorous underwriting of a borrower's ability to repay the loan out of their income, taking into account income, debt and expenses," said Paul Leonard, California director of the Center for Responsible Lending. "We would like to see fair pricing. It seems to me that for a loan that's fully secured, 36 percent interest is a generous cap."
Lenders have plenty of tools in their arsenal, he said.
"A lot of lenders put in GPS devices to track the cars," Leonard said. "They also can install ignition auto locks - a remote-operated kill switch to prevent the borrower from starting the car" if they're behind on loan payments. If lenders do repossess the car, California law lets them recoup those expenses as well, he said.
What: Small-dollar, short-term loans secured by the title to a borrower's vehicle.
Who: 7,730 car-title lenders operate in 21 states. California had 58 car-title lenders with 781 locations in 2011.
Volume: Nationwide, car-title loans are about $1.6 million, but cost $3.6 billion in interest. Some 38,000 Californians took out $134 million in car-title loans in 2011.
Costs: The average car-title borrower renews a loan eight times, paying $2,142 in interest for $951 of credit. A typical borrower receives cash equal to 26 percent of a car's value, and pays 300% APR.
More information: http://tinyurl.com/cvbjlna
Source: Center for Responsible Lending, Consumer Federation of America, California Department of Corporations