Cash-strapped families risk losing their cars in the latest form of high-cost small lending spreading across America, according to a new report from the Center for Responsible Lending (CRL) and Consumer Federation of America (CFA).
Consumers who put their cars on the line to borrow a few hundred dollars for one month become trapped in a cycle of repeated loans with interest rates often around 300 percent.
Borrowers often find themselves "rolling over" these loans repeatedly -- paying huge amounts in interest and fees while barely touching the principal. In many cases, the lender repossesses the car after the borrower has made substantial payments. That can be devastating because a car is often the borrower's largest asset and his or her only way to get to work.
"Car title lenders are taking a page out of the payday lender playbook by making very short-term loans without considering the borrower's ability to repay the loan," said Mark Pearce, CRL's President. "Emergency loans should help families out of trouble, not keep them in it."
CRL and CFA have issued a first report on the car title pawn/loan industry, titled "Car Title Lending: Driving Borrowers to Financial Ruin," which describes the title loan product and industry, illustrates predatory aspects of these over-secured small loans, and makes recommendations for stronger protections for borrowers.
To get a title loan, borrowers sign over the title to a paid-for car and, in some states, provide the lender with a spare set of keys. The loan is usually due within a month in a lump-sum payment, making it difficult for families to repay the loan.
Since car title loans are typically made for a fraction of the value of the car, the lender is well-protected if the borrower fails to make the full payment at the end of the month. In some states, title lenders are allowed to keep the surplus from the sale of the car, allowing title lenders to reap a windfall from the borrower's default.
"Some title lenders claim their secured loans are "pawns," "sale leasebacks," or open end credit to evade state usury and small loan protections," stated Jean Ann Fox, CFA's director of consumer protection. "State legislatures should close loopholes and protect consumers' assets from unfair lender terms and practices."
While CRL and CFA do not encourage states to legalize small loans based on titles to vehicles, the report spells out an extensive set of legal protections that should apply to car title loans.
• Establish Fair and Affordable Loan Terms. Title-secured loans should be repayable in affordable installments rather than a lump sum. Rates should be limited, and lenders should be required to consider the borrower's ability to repay. Borrowers should have a right to cancel loans within a reasonable time and to prepay without penalty at any time.
• Protect Borrowers After a Default. States should bar abusive practices such as seizing cars without notice, pocketing the difference between the sales price and what the borrower owes or pursuing the borrower for even more money after repossessing the car.
• Close Loopholes to Ensure Consistent Regulation. States that permit title lending should close loopholes that exempt some loans from the law and ensure that laws apply to all lenders, including those operating across state lines.
• Monitor Lenders Better. States should closely monitor lenders through strong licensing, bonding, reporting and examination requirements.
• Ensure Borrowers Can Exercise Their Rights. Borrowers should be able to sue title lenders and void contracts that violate the law. Binding mandatory arbitration clauses that deny borrowers a fair chance to challenge abuses in court should be eradicated.