Stand guard against predatory lenders

State lawmakers were at a disadvantage last week as they opened hearings on car title loans because the only experts in the room were the lenders and their lobbyists.

Industry representatives stated that about 20 percent of their borrowers fall behind on loan payments, and only 5 percent of those defaults result in repossession of a car or truck used to secure the debt.

Legislators had to take title lenders' word for it because the state doesn't regulate those businesses. Officials with the state Bureau of Financial Institutions don't even know how many operate in Virginia.

A solution to that problem seems obvious, and title lenders were quick to suggest that the state adopt regulations modeled after a Tennessee law.

But lawmakers shouldn't allow themselves to be fooled twice. In 2002, they approved a similar law for payday lenders that legitimized those rapacious businesses without applying adequate consumer protections. The law touched off an explosion of predatory lending in Virginia.

Realizing their mistake, legislators are starting to clamp down on payday lenders, but many of those businesses have responded by offering unregulated title loans to avoid the modest restrictions now imposed on payday loans.

The real solution - one that would target abuses by both payday and title lenders - is a 36 percent annual interest rate cap for all consumer loans.

Although payday lenders have attracted most of the bad press in recent years, title lenders are even more brazen in their tactics. Borrowers must turn over the title to their vehicle and a set of keys in order to qualify for a loan. Despite that substantial collateral as a back-up, borrowers are still charged punishing annual interest rates of 300 percent or more.

Jay Speer, executive director of the Virginia Poverty Law Center, noted that a person who borrows $1,000 from a title lender and pays six monthly installments of $250 would still owe the original $1,000. When borrowers fall behind, lenders can seize their vehicles and auction them off.

Only about a dozen title lenders have been prosecuted out of more than 260 complaints filed with the state over the past five years because Virginia law merely requires that the businesses charge no fees for the first 25 days of a loan. After that brief grace period, title lenders are free to impose unlimited finance charges on desperate customers.

Twenty-four states and Washington, D.C., have already adopted interest rate caps or banned title lending altogether. Virginia legislators should use this summer's study to draft their own rate cap law. It's the simplest and most effective way to make sure state regulators have the upper hand over predatory lenders.