WASHINGTON – There's a new form of high-cost small loan that's quickly becoming popular throughout the U.S., and a new report from the Center for Responsible Lending and Consumer Federation of America says it's potentially as dangerous to consumers as payday loans. Car title loans – short-term high-interest loans secured by title to a used car usually for a period of 30 days with a lump sum payment due at the end of the term – trap borrowers in cycles of debt, the CRL and CFA allege. Borrowers who put their cars on the line to borrow a few hundred dollars for one month become trapped into a cycle of repeated loans with interest rates often around 300% (according to the report in states without rate caps, borrowers have reported rates of 800% or more.) The lender may also demand a copy of the keys to facilitate repossession of the vehicle in case of default of the loan. If the borrower is unable to repay the loan at maturity, the lender often renews the loan while adding on additional charges. If the borrower is unable to keep up with this "debt treadmill," the lender can repossess the car. To exacerbate the situation, lenders often insert binding mandatory arbitration clauses in the car title loan contract to prevent borrowers from challenging the lenders' actions in court or through a class action. "Car title lenders are taking a page out of the payday lender playbook by making very short-term loans without considering the borrower's ability to repay the loan," said CRL President Mark Pearce. "Emergency loans should help families out of trouble, not keep them in it," he added. The CRL/CFA report – "Car Title Lending: Driving Borrowers to Financial Ruin" – describes the title loan product and industry, illustrates predatory aspects of these loans, and makes recommendations for stronger protections for consumers. Title lenders sometimes refer to the loans as "sales and leasebacks," "title pawns," or "motor vehicle equity liens of credit," but the CRL and CFA state in their report that the re-naming is really "an effort (by title lenders) to sidestep usury laws and other protections." "Title loans drag low- and moderate-income borrowers into a cycle of debt that results in tremendous expenses and can strip borrowers of their most valuable possession. Losing a car because of a title loan can make it impossible for borrowers to keep a job, attend school, or obtain health care," the report states, adding that, "Unfortunately, title lenders often target borrowers who can ill afford such high-cost short-term balloon loans, virtually guaranteeing that many of the loans will fail. Low-income individuals are frequent borrowers of title loans.Military service members are another target for car title loans. Military officials have raised concerns that the nation's military preparedness has been adversely affected because young service members are worried that their cars will be repossessed due to title loans." The CRL and CFA are not encouraging states to legalize small loans based on vehicle titles, but they advocate states implement legal protections that should apply to car title loans, including: * establish Fair and Affordable Loan Terms – title-secured loans should be repayable in affordable installments rather than a lump sum. Rates should be limited, and lenders should be required to consider the borrower's ability to repay the loan. Borrowers should have the right to cancel loans within a reasonable time and to prepay them without penalty at any time. This right is analogous to the three-day right of rescission that the Truth in Lending Act provides for home loans; * protect borrowers after a default – states should bar abusive practices such as seizing cars without notice, pocketing the difference between the sales price and what the borrower owes or pursuing the borrower for even more money after repossessing the car. State laws that allow title lending should provide borrowers with post-default rights, including adequate notices concerning repossession and sale, a right to redeem the car, and the return of surplus from the sale proceeds. States should prevent repossession abuses, and title loan borrowers should have a right to redeem their vehicles by paying off the debt; * close loopholes to ensure consistent regulation – states that permit title lending should close loopholes that exempt some loans from the law and ensure that laws apply to all lenders, including those operating across state lines; * monitor lenders better – states should closely monitor lenders through strong licensing, bonding, reporting and examination requirements; * ensure borrowers can exercise their rights – borrowers should be able to sue title lenders and void contracts that violate the law. Binding mandatory arbitration clauses that deny borrowers a fair chance to challenge abuses in court should be eradicated. "In its short history, the title lending industry has deftly side-stepped laws that are plagued with exceptions regarding what loans are covered.loopholes of this nature should be closed to protect borrowers from title lenders who do not hesitate to ignore the intention of these laws," the report states. "Title lenders should not be permitted to operate in the dark and out of the public eye. State lawmakers, regulators, and the public will benefit from closer scrutiny of the car title lending industry in all its permutations to inform policymakers about industry practices, the impact on vulnerable borrowers, and the collection tactics used," it concludes. -

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