Virginians risk repossessions for quick - and costly - loans

When his girlfriend needed help paying rent, Travis Wood figured he could borrow $500 quickly by using his 1989 Mercury as collateral.

Fifteen minutes after turning over the car's title to a title lender in Suffolk, he emerged with the cash his girlfriend needed.

That was in late August.

Today, Wood regrets being in such a hurry. After paying more than $700 so far for the $500, he still owes $1,265, much of it interest, and is behind on his monthly payments, he said.

If he fails to pay what he owes, the 20-year-old Suffolk resident likely will lose his car, which is essential for getting to work and running errands for his girlfriend, Wood said.

In Virginia, tens of thousands of cash-strapped individuals have been willing to risk having their car or truck repossessed for a quick, but costly, loan. In its first report on car-title lending in the state, Virginia's Bureau of Financial Institutions said in May that lenders extended $21.15 million in loans to 22,725 borrowers between October and Dec. 31.

After years of being lightly regulated, Virginia's title lenders had to comply with an array of new rules on Oct. 1: They had to be licensed by the Bureau of Financial Institutions and had to structure their customers' repayments in equal monthly installments of principal and interest rather than require just minimum monthly payments of interest.

Loan terms had to extend at least four months, but no longer than a year, and lenders were barred from extending credit to active-duty military, their spouses or their dependents.

In addition, lenders had to use a tiered set of maximum interest rates that begin at 22 percent a month for balances up to $700 and drop to 15 percent on balances that exceed $1,400. That combination of rate ceilings worked out to an average annual percentage rate of 214 percent for title loans made in Virginia between October and December.

That figure was less than the annual percentage rate of 311 percent that Wood agreed to pay in August, before the interest-rate cap was imposed.

The new rules haven't dampened lenders' enthusiasm for doing business in Virginia. Since year-end, the number of title lenders licensed by the Bureau of Financial Institutions has climbed to 24 from 15, while the number of lending locations has jumped 40 percent - to 258 from 184.

Title lenders have taken a particular interest in Hampton Roads, where the number of lending facilities has more than doubled in less than six months, to 88 from 41. A third of Virginia's title-lending locations are in Hampton Roads.

The same pattern of rapid expansion occurred in 2002 when Virginia began regulating another form of high-cost credit - payday lending - said Jean Ann Fox, director of financial services for the Consumer Federation of America.

"Once a state legislature provides official recognition of car-title lending, it creates regulatory certainty" for the industry, said Fox, a longtime critic of payday and car-title lending. "The state is setting out the welcome mat."

Community Loans of America, a title lender that was already doing business in Virginia, took the new regulations in stride because they embodied what the company believed were the best practices, said W. Scott Johnson, a Richmond lawyer who lobbied on behalf of Community Loans before the General Assembly.

The regulations haven't prompted the company, which does business in Virginia as Fast Auto Loans, to consider "shutting any doors or opening any new ones," Johnson said.

Title lenders, whose brightly colored stores are located along well-traveled thoroughfares, emphasize speed and convenience.

In Suffolk, the sign on a Loan Max store declares, "Instant Approval." At a Title Max store a few doors away, a sign lets prospective borrowers know that their having filed for bankruptcy won't be a problem.

But data gathered by the Bureau of Financial Institutions suggest that the difficulty Wood has had repaying his loan may not be unusual. Of the 22,725 individuals who took out a title loan between Oct. 1 and year-end, more than 3,500 - 15 percent - failed to make a payment for at least 60 days, the bureau's report said.

Such a high percentage of delinquencies within a three-month period "tells me that this is a flawed product," said Jay Speer, executive director of the Virginia Poverty Law Center, a Richmond-based organization that has campaigned to curb title and payday lending in the state.

The expansion by title lenders comes in the wake of a sharp falloff in payday lending, which amounted to a billion-dollar-a-year business three years ago.

Payday loans enable individuals who have a checking account, an ID and a steady source of income to borrow as much as $500, usually for as long as a month. To do that, they write a postdated check for the loan amount and the interest, which the lender holds until the loan matures.

After surpassing $1.3 billion in 2006, 2007 and 2008, the volume of payday lending in Virginia plunged to $166 million two years ago and barely increased last year. The number of individuals using the loans fell from 437,000 in 2008 to 167,600 in 2009 and dropped again last year.

The declines were due partly to regulatory changes that barred lenders from rolling over an existing loan into a new one or extending a payday loan to someone who already had one. The changes also made extended payment plans available to some borrowers.

However, Speer said, the bureau's numbers don't reflect the shift by some payday lenders to unregulated, and more lucrative, open-ended lines of credit. Open-ended credit, the kind made available by credit-card lenders, does not require fixed repayments of principal, as closed-end loans do.

Virginia's efforts to regulate payday and title lending run counter to the trend elsewhere in the country, said the Consumer Federation's Fox. After trying to rein in payday lending, neighboring states either barred this lending or reimposed the interest-rate ceiling that they earlier applied to small consumer loans, she said. The caps on small loans range from an annual percentage rate of 24 percent in Washington to 31 percent in West Virginia and 36 percent in North Carolina.

Rather than tailor rules allowing interest-rate exceptions for payday and title loans, Virginia's General Assembly should do the same, Fox said.

"The legislature," she said, "should not be encouraging cash-strapped Virginians to write postdated checks when they have no money in their checking accounts."

Proponents of payday loans and title lending insist that the loans provide a valuable service for individuals faced with financial emergencies, such as unexpected auto repairs or medical bills. And imposing an annual interest-rate ceiling of 36 percent on what title lenders can charge has the effect of banning the loans because lenders can't afford to do business at that rate, Johnson said.

Addressing consumers' emergency needs requires encouraging individuals to accumulate personal savings rather than allowing lenders to promote costly forms of quick credit, Fox argued.

Speer of the Virginia Poverty Law Center said some title lenders were lending in Virginia earlier this year but failed to comply with the state's new licensing regulations. Companies that made title loans after Oct. 1 without being licensed by the Bureau of Financial Institutions were breaking the law, he said, and those customers weren't bound by their agreements to repay. The situation came to light after the center received a steady stream of phone calls from borrowers who had difficulties with lenders, Speer said.

Mike Duman, president of Mike Duman Auto Sales in Suffolk, said he began to notice the proliferation of title lenders and the cost of their credit when Wood sought his help a few weeks ago. Wood, an employee who reconditions vehicles at Duman's used-car store, described having difficulty keeping up with his loan payments, and "I said, 'Bring me your paperwork,' " Duman recalled.

Bold print on the first page of his loan agreement declared that the interest and annual fees "are high compared to other forms of credit that you may be able to obtain."

"You should only open an account if you have an urgent need for credit and you have considered the costs and benefits of all alternatives, such as going without credit and/or getting lower-cost loans from friends, family members, banks, credit unions or other lenders," cautioned the agreement, dated Aug. 28.

Still, there should be a way to protect unsuspecting borrowers from the burden of paying triple-digit interest rates, said Duman, a member of the Suffolk City Council. "There needs to be pressure on the legislature to be more diligent about looking out for citizens," he said.

There's almost no way that Wood could pay what he owes without some help, said Duman.

He described Wood as a good employee and said he planned to lend Wood the money to pay off his loan.

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