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WASHINGTON – There’s a new form of predatory lending in town, and like other markets where it’s prevalent such as mortgages, this latest, fast-growing form is just as abusive and also targets cash-strapped consumers. This new form of predatory lending, according to a survey released by the Consumer Federation of America, is called cash loans. It also goes by various other names such as car title pawn, car title loans, title pledge loans, or motor vehicle equity lines of credit. Regardless what it’s called, the practice is the same: storefront and online lenders advance a few hundred to a few thousand dollars based on the titles to paid-for vehicles. Loans are usually for a fraction of the vehicle’s value and must be repaid in a single payment at the end of the month. The loans are made without consideration of the borrower’s ability to repay, resulting in many loans being renewed month after month to avoid repossession. Like payday loans, states “Driven into Debt: CFA Car Title Loan Store and Online Survey,” title loans charge triple digit interest rates, threaten a valuable assets and trap borrowers in a cycle of debt. The CFA’s survey is based on information gathered in 11 states and a review of 17 online title lenders and provides information on consumer protections that apply to car title loans or pawns in all 50 states. Among some of the key findings: * Title loans are extremely expensive. They assess a median 25% per month finance charge, which comes out to 300% annual interest, plus additional fees that average $25 per loan. Online title lenders quote rates of 24% to 651.79% APR for loans fully secured by the title to the borrower’s paid-for car. But the low rate is charged by a lender that charges high fees for additional products. * Title loans trap borrowers in perpetual debt. Lenders don’t run credit checks or base loans on the borrower’s ability to repay. The loans are generally due in one month, with interest only renewals available. Since most lenders hold a duplicate set of car keys, non-judicial repossession is easy. * Title lenders structure their loans to evade state usury or small loan rate caps. According to the study, for example, in California and South Carolina loans start at dollar amounts just about the cut-off for small loan rate caps. In Virginia, Iowa and Kansas, title loans are claimed to be open-ended credit to benefit from the deregulation of credit cards in those states. The study also says title lenders making loans via the Internet export high cost loans to consumers in protected states by using questionable choice of law claims from states with no rate caps. * Title loans are over-secured. Title lenders loan a fraction of the value of the car used to secure the loan, with the most frequent loan-to-value set at 50-55% of the car’s value. In Virginia, though, many title lenders will loan up to 100% of the value of the car. * Information necessary to make an informed credit decision is hard to find. Only four title loan Web sites evaluated for the survey disclosed an annual percentage rate prior to applications being submitted, and store personnel often quoted monthly finance charges as an interest rate instead of the federally required Annual Percentage Rate. * Rate regulation is necessary to reduce the price of the loans. Store surveys found the lowest rates in Arizona where rates are capped at a maximum of 17% per month on loans up to $500 and lower rates for larger loans. In states with high rate caps, most title lenders charged the legal maximum, and rates were highest in states with no rate caps. Among these states were Illinois where the annualized rates ranged from 300% to 470%, or New Hampshire where title loans cost 300 to 366.9%. * Permissive state laws and lender exploitation of loopholes and gaps in protections leave vulnerable consumers exposed to high-risk title loans. Almost half the states permit predatory title lending either through weak authorizing laws or failure to close loopholes. * State laws set the stage for title loan “debt traps” by setting high maximum loan ceilings and permitting one-month balloon payments. Tennessee and Mississippi, for example, allow loans as large as $2,500 to be due in 30 days. Georgia sets a 30-day loan but doesn’t limit loan size. * Internet title loans may deprive consumers of home state law protections. Some online lenders claim choice of law contract terms from states, such as New Mexico and Delaware, with lax credit laws. According to CFA, the only federal legislation action to date concerning car title loans was a non-binding resolution that only passed one House of Congress and was offered by Florida Rep. Clay Shaw in 2000. That resolution, the survey report states, “expressed Congress’ request that the Federal Government and States should exercise greater oversight of title loan and title pawn transactions, work cooperatively to address abuses by prohibiting title pawn transactions and by prohibiting usurious interest rates in title loan transactions, and ensure that any Federal legislative effort preserve the ability of the States to enact stronger protections for consumers.” The U.S. Senate didn’t take up a similar resolution. On the state level, over two dozen title lending bills were filed during the 2005 state legislation season, as of April 2005. Additional legislation had already been defeated in several states. Meanwhile, the title loan industry is backing model legislation being developed through the American Legislative Exchange Council. The ALEC Task Force on Commerce, Insurance and Economic Development reportedly adopted a model Title Pledge Act that is pending approval by the Council’s National Board of Directors next month. -

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