Lawmakers finally put limits on car title lending

For years, certain lenders in the state have provided quick cash to people willing to surrender their car's title and a spare set of keys.

And year after year, consumer advocates have called on the General Assembly to crack down on the costly, unregulated source of credit. Borrowers, the critics argued, routinely find themselves trapped by the rapidly mounting interest expense on the loans, which carry annual rates of 300 percent or more. Those who can't keep up with their payments lose their vehicles.

A bill regulating car-title lending in Virginia finally emerged from the General Assembly last week. The measure, sponsored by state Sen. Richard Saslaw, Democratic majority leader from Fairfax County, imposes a ceiling on the interest rates that can be charged and requires lenders to be licensed by the state's financial regulators.

How much protection will the bill provide for borrowers?

"I'm fearful that this won't do much," said Jennifer Johnson, an attorney in Washington, D.C., with the Center for Responsible Lending.

That's because the permitted rates will still surpass annual percentage rates of more than 260 percent.

The bill imposes a ceiling of 22 percent per month on the first $700 borrowed. For a loan balance of $700 to $1,400, the rate ceiling drops to a still hefty 18 percent per month. For a balance that exceeds $1,400, the ceiling falls to 15 percent per month.

"The interest-rate caps are way too high," said Jay Speer, executive director of the Virginia Poverty Law Center in Richmond and a longtime advocate for regulating title lenders.

Still, the General Assembly's regulations include some significant changes that will probably benefit borrowers, he said. The biggest of these converts title lending from an open-end line of credit - the kind available from a credit card - to fixed-term lending. The minimum length of a title loan will be 120 days, and the maximum will be one year.

Title loans have typically been made for one month and are routinely rolled over.

As a way to skirt Virginia's annual -rate ceiling of 36 percent for small consumer loans, title lenders resorted to a loophole that allowed them to treat their loans as open-end credit. T he state doesn't impose a rate ceiling on such credit.

Virginia's situation isn't unique. Fifteen states expressly allow car-title lending, and another five, including Virginia, have title lending because lenders take advantage of a loophole, according to the Center for Responsible Lending.

The shift to fixed-term loans is important, Speer said, because users of title loans often don't understand the open-end nature of their loans or the cost. That's partly because the cost is marketed as a monthly interest rate rather than an annual one.

The bill also requires lenders to collect equal parts of the loan's principal each month, not just the interest payment as they currently do.

"This is going to be more like a regular loan," Speer said.

Lenders will be barred from electronically debiting a borrower's bank account. In addition, the bill prohibits lenders from extending a loan or rolling one over into a new loan.

Title lenders will be allowed to lend no more than 50 percent of the vehicle's value, a level routinely used in the business. They cannot impose prepayment penalties.

One feature in the General Assembly measure is a prohibition against lending on a car that already carries a lien, including a lien for an outstanding purchase loan. Because the owners of many cars have yet to pay off their auto loans, this provision is likely to reduce the pool of eligible borrowers, Speer said.

One drawback for borrowers, he said, is the absence of a prohibition in the bill against lenders requiring arbitration to settle any disputes. Another is the lack of consumer safeguards that the General Assembly put in place for users of payday loans, a different form of short-term, high-cost credit, said Johnson, of the Center for Responsible Lending.

If the bill is signed by the governor, the new regulations will take effect Oct. 1.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com