Car Title Loans and Another Assembly Study

It’s the Virginia legislative way. If a nagging problem doesn’t present an obvious solution, the course of action is to study it a bit longer. And then study it again.

A panel of legislators looking into ways to regulate the virtually unregulated car-title loan industry found themselves unable to make a decision on the predatory loan practice during a meeting late last month. So, in the Virginia way, the seven members opted to study the matter further and reconvene in September.

Car title lenders, who typically charge 300 percent to 350 percent annual interest, operate under various laws in about half the states. Twenty-four states and the District of Columbia ban them or limit interest rates to those allowed on consumer loans. In Virginia, interest rates on those loans are capped at 36 percent.

But not for the car-title lenders. In Virginia, they fall under the state’s open-end credit law, which allows them to charge whatever they want as long as they don’t charge finance charges or other fees for the first 25 days of the loan.

Borrowers turn over the title of their car and a copy of their keys in exchange for a loan that is usually up to half the car’s value. The lenders charge up to 350 percent annual finance charges and if the borrower falls behind, the lender repossesses the vehicle. The lender then sells it at auction or charges the borrower costly fees to get it back.

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Advocates for the poor say the short-term, high interest loans can be even more disastrous than payday loans. “They can both trap borrowers in long-term debt, but with the payday loan, the collateral is a personal check,” Leslie Parrish, a senior researcher for the Center for Responsible Lending, has said. “With a car title loan, it’s probably the family’s most important asset.”

The most obvious solution to bring the predatory loan practice under control would be to cap the interest rate on the loans at 36 percent annually. But the legislators put off the issue for further study this summer.

A vast corps of lobbyists for the loan industry has contributed some $1.1 million to legislators since 2002 with the hope that new state laws won’t threaten their sumptuous profits. The car-title loan industry is so unregulated, in fact, that nobody knows how many lenders operate in Virginia or how many loans they issue each year.

Joe Face, commissioner of the state Bureau of Financial Institutions, said his agency has received more than 260 complaints against car-title lenders in the past five years, but he has no authority over them.

The attorney general’s office has prosecuted about a dozen lenders for various violations in the same time span.

Jay Speer, executive director of the Virginia Poverty Law Center, acknowledged that many of those who get car-title loans can’t get traditional credit from a bank or other lending institution. “People do need money,” he told the legislators. “But to saddle people with 300 percent interest loans, in our mind, is not the solution.”

Most of those who oppose the industry’s practices believe the solution lies with bringing the title lenders under laws that regulate other consumer loans that are capped at 36 percent annual interest.

One must hope that the legislative panel charged with examining this issue reaches that solution when it meets again in September. That recommendation would then go the 2010 General Assembly session. Meanwhile, the car-title lenders continue to prey unabated on the poor.