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Car Title Loans: “There to Rip You Off”

Posted by Larry Doyle on July 18, 2011 9:10 AM |

What is your mental image of a business which earns a 300% annualized rate of interest?

Did somebody say, “shady characters hanging out on a street corner with a large wad of bills”?

Who said, “guys driving around in cars with dark tinted windows”?

How about, “typical loan sharks”? Perhaps all of the above?

Is there a legitimate business in our nation today which might be able to charge a 300% annualized rate of interest? Well, I guess that would depend on how one defines legitimate. I think it would be safe to say that if you are doing business with somebody who charges a 300% annualized rate of interest, you would want to be VERY CAREFUL. What type of business has got these kind of rates? 

Car-title loans. Really? How do these work? Let’s ‘lift up the hood’ and ‘check out the engine’ of this industry.

Thanks to the Center for Public Integrity for doing some fabulous investigative work and highlighting how people need to be exceptionally careful in ‘going down this road’ or otherwise they may find themselves ‘taking the bus’. Let’s navigate.

CPI highlights, Borrower Nightmares: $700 Costs Family Its Car,

When Mildred Morris’s son won a coveted spot at the New York drama and performing arts college that trained singer-songwriter Jason Mraz and TV actor Jessie Tyler Ferguson of “Modern Family,” she was overjoyed. The drama, however, extended beyond school.

Morris started the process of securing a college loan to pay tuition for her son, Jonathan, to attend the American Musical and Dramatic Academy, but she was caught off guard by an unexpected and sudden $700 fee to hold a dormitory room for him.

A single mother of two in the town of Martinsburg, W.Va., 90 minutes northwest of Washington, D.C., Morris works in the technical support branch for the Coast Guard office that issues merchant seamen the equivalent of a driver’s license. Although she had a steady federal job, Morris didn’t have any savings or credit cards, and with the tough economy couldn’t scrape together the $700 fee from friends.

She did, however, own a sporty, green 2002 Pontiac Sunfire free and clear.

A friend told her about a place that gave quick cash if borrowers put up their cars as collateral. Obtaining the loan took just 30 minutes, she said, mostly to check her references. Morris signed a contract with Fast Auto Loans, took her check for $700 and gave the company the title to her car, which Fast Auto Loans could repossess if she fell behind in repayments.

It wasn’t until later that she realized how high the interest rate on her loan was — 300 percent annually.

“I should have taken time to go over it,” she acknowledged. “When I saw how large it was, and I was like, wow,” she said. At first she tried to pay more than the monthly minimum, but with the cost of getting Jonathan moved and settled in New York, she started to fall behind in payments to Fast Auto Loans. Some months she could only pay $210 and $175 of that went to interest, barely lowering the loan principal.

Many months and over $1,000 later, Morris called it quits, according to a complaint she filed with the West Virginia attorney general. The office is now investigating Fast Auto on behalf of Morris and other consumers.

When Morris fell behind on her payments, Fast Auto Loans employees began calling the references she had listed on the loan paperwork. “On the day the payment was due they would start calling people. It was ridiculous,” she said. Her sister, her adult daughter, her friends — even her supervisor at work — got repeated calls from Fast Auto Loans.

Frustrated, Morris finally gave up and told the company it could take the car, according to a statement she filed with the West Virginia attorney general. One night, two men from Fast Auto Loans drove up to her townhouse on the edge of town. One hopped out and drove the car away. “I felt sick,” Morris said. Kelley Blue Book estimates a car of the same make and model from that year would be worth at least $2,000.

“I ended up losing my car over $700,” she said. “I didn’t want to let my car go, but I didn’t have a choice.”

Consumer protection advocates have long raised concerns about this kind of credit.

Car-title loans, which are now regulated differently in each U.S. state, are on the list of priorities of the new Consumer Financial Protection Bureau (CFPB), which officially opens for business on July 21. Policing non-bank financial services “will be a crucial piece” of the bureau’s business, Elizabeth Warren, who has been in charge of setting up the agency so far, told reporters at a June briefing.

However, the bureau is expressly prohibited from setting limits on interest rates. And the still-leaderless CFPB cannot propose any new regulations until the U.S. Senate confirms a presidential nominee as director. Senate Republicans have threatened to block any nominee until the CFPB is restructured to weaken its power.

An important first step, said Ira Rheingold of the National Association of Consumer Advocates, is for the CFPB to use its research capacity to gather facts and data about car-title lending. “After they determine whether or not there’s a social utility to this, or whether this is simply a predatory product, they then can craft rules and rulemaking based on that,” he said.

Morris is all for it.

“I know there’s a lot of single moms out there and how hard the economy is,” Morris said, “but those people are not there for you; they’re there to rip you off.”

I fully appreciate that there are risk-based models for different types and levels of lending. I also appreciate that credit is currently very tight.

That said, how is it that our state and federal governments have been so ill-equipped to prevent this form of predatory lending. As a nation, are we supposed to simply let the market work and allow predatory business models of this sort to perpetuate? In the process, do we allow our fellow citizens who do not have the financial literacy or wherewithal to protect themselves to be fodder for predators?

Will the Consumer Financial Protection Bureau effectively root out and expose businesses such as these? Do those people who want the CFPB neutered have an appreciation for this sort of predatory lending?

Perhaps somebody from Fast Auto Loans may care to weigh in and defend their business and industry. Perhaps somebody who has little desire to see an effective CFPB develop may care to weigh in as well.

America is supposed to be better than this but until we witness proper consumer protections implemented and practiced, I encourage you to navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

 

 

 

  • Peter S.

    It is stunning to think that there are members of Congress obstinately opposed to the creation of the CFPB. Equally stunning is that the U.S. Chamber of Commerce spent millions of dollars lobbying Congress to thwart the bureau’s abilities to protect mom and pop consumers. What’s wrong with this picture? What happened to the business model of value/volume?

  • Jeff S.

    I never really liked the title pawn business but let me ask you this Larry, what is the annualized APR when I withdraw $20.00 from a foreign ATM machine and get banged a $4.00 service charge to access my own money? Oh right that is a service charge versus an interest charge right? So because those bastions of capitlisim the holy grail banks are hitting me for 4 bucks when I withdrawl 20 that is okay right? I think 4 bucks to withdraw 20 is a huge expense Larry to take my own money isn’t it? As banks no longer do any consumer lending and credit unions have even exited the small loan business just give your cash strapped, credit impaired readers an alternative and I am sure they would be glad to hear it. America is also supposed to be better than bailing out Citi, AIG etcetera, and better than funding those bottom less pits FNMA and Freddie but we are not better are we Larry?

    • LD

      You are singing to the choir. In regard to the ATM fees, I vomit every time I take money out BUT I would venture to say that the fee is not “predatory”.

      Your points about bailing out the banks and GSEs are well served and you will be very busy reading all the commentaries here in which I address hwo capitalism has been assaulted in the process.

      All this said, NONE of this justifies the predatory nature of this loan sharking.

      Does it?

  • I have been around the hard money real estate business where rates can legally be up to 25%.

    People will invoke the loan shark moniker at those “reasonable” rates yet I know pawn shops can be in the upper 30’s.

    The type of loan in your article is a new one on me.

  • James

    At the hedge fund I was an analyst at, we invest in a car title lending company’s sr secured bonds. It was amazing to see the financials of this company and the APR they charged (half of its competitors but still extremely outrageous). Although I don’t support taking advantage of people like this, as an investor we took the risk based on such an attractive yield for a single B name (I think it was at a little over 13% YTM) and our comfort from the collateral on the bonds (the car titles over collateralized the bonds 1.1x on a distressed scenario).

    It was defintely sad to learn (while I was doing my research on the regulatory environment) that there were no caps or bans on these loans in many states. At least some states have banned this type of predatory lending, but many do not. Hopefully state officials or federal officials will soon recognize that something needs to be done to protect the borrower.

    James






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