Auto ti­tle loans snag the un­wary

High-cost firms are push­ing con­sumers to bor­row against their cars as rules on other lend­ing are tight­ened.

Los Angeles Times - - FRONT PAGE - By Jim Puz­zanghera

Cash-strapped con­sumers are be­ing shown a new place to find money: their drive­ways.

Short-term lenders, seek­ing a de­tour around newly tough­ened re­stric­tions on pay­day and other small loans, of­ten are push­ing Amer­i­cans to bor­row more money than they need by us­ing their debt-free au­tos as col­lat­eral.

So-called auto ti­tle loans — the mo­tor ve­hi­cle ver­sion of a home eq­uity loan — are grow­ing rapidly in Cal­i­for­nia and 24 other states where lax reg­u­la­tions have al­lowed them to flour­ish in re­cent years.

Their hefty prin­ci­pal and high in­ter­est rates are cre­at­ing another av­enue that traps un­wary con­sumers in a cy­cle of debt. For about 1 out of 9 bor­row­ers, the loan ends with their ve­hi­cles be­ing re­pos­sessed.

“I look at ti­tle lend­ing as le­gal­ized car thiev­ery,” said Rose­mary Shahan, pres­i­dent of Con­sumers for Auto Re­li­a­bil­ity and Safety, a Sacra­mento ad­vo­cacy group. “What they want to do is get you into a loan where you just keep pay­ing, pay­ing, pay­ing, and at the end of the day, they take your car.”

Jen­nifer Jor­dan in the Cen­tral Val­ley town of Le­moore, Calif., lived that fi­nan­cial night­mare, though a le­gal glitch later res­cued her.

Jor­dan, 58, said she needed about $400 to help her pay bills for ca­ble TV and

other ex­penses that had been pil­ing up af­ter her mother died.

She turned to one of a pro­lif­er­at­ing num­ber of store­front ti­tle lenders, Al­lied Cash Ad­vance, which prom­ises to help “get the cash you need now.”

But Jor­dan said it wouldn’t make a loan that small. In­stead, it would lend her $2,600 at what she later would learn was the equiv­a­lent of 153% an­nual in­ter­est — as long as she put up her 2005 Buick Ren­dezvous sport util­ity ve­hi­cle as col­lat­eral.

Why would the com­pany want to lend her much more money than she needed? The key rea­son is that Cal­i­for­nia has no limit on in­ter­est rates for con­sumer loans of more than $2,500, and it oth­er­wise doesn’t reg­u­late auto ti­tle loans.

“She never said any­thing about the in­ter­est or noth­ing,” Jor­dan said of the em­ployee who made the loan in 2012.

Six months later, un­able to keep up with the loan pay­ments, Jor­dan said, she was awak­ened at 5 a.m.

“My neigh­bor came pound­ing on my door and said, ‘ They’re tak­ing your car!’ ” she re­called.

As a re­cent trend, auto ti­tle lend­ing is tak­ing off, ac­cord­ing to data compiled over the last four years.

In Cal­i­for­nia, the num­ber of auto ti­tle loans jumped to 91,505 in 2013, the lat­est data avail­able, from 64,585 in the previous year and 38,148 in the first year, 2011, that was tracked by the state De­part­ment of Busi­ness Over­sight.

Na­tion­wide, more than 2 mil­lion peo­ple a year, on av­er­age, take out auto ti­tle loans, ac­cord­ing to a study re­leased in March by the Pew Char­i­ta­ble Trusts.

The study, one of the first com­pre­hen­sive looks at the is­sue, found that the av­er­age loan was for $1,000 and a typ­i­cal bor­rower paid $1,200 in fees a year on top of the prin­ci­pal.

Loan sizes and fees vary by state, but the most com­mon an­nual per­cent­age rate on a one-month loan was 300%, ac­cord­ing to Pew, which sur­veyed bor­row­ers and an­a­lyzed reg­u­la­tory data and com­pany fil­ings.

TitleMax Inc. boasts that it alone makes a to­tal of 2,500 loans a day from its 1,350 lo­ca­tions in16 states.

“In about 30 min­utes, a TitleMax car ti­tle loan can put up to $10,000 in your pocket and get your life back on track,” the TitleMax web­site says.

The in­crease in Cal­i­for­nia came as the num­ber of more pop­u­lar pay­day loans lev­eled off, and it so alarmed state of­fi­cials that they pub­licly warned con­sumers in De­cem­ber that bor­row­ing against a ve­hi­cle should be “a last re­sort.”

“Your auto is in many cases one of your only as­sets. Be care­ful sign­ing away the own­er­ship of that car for some short-term cash,” said Jan Lynn Owen, the state’s com­mis­sioner of busi­ness over­sight.

The state has be­gun fo­cus­ing reg­u­la­tory scru­tiny on the lenders to make sure they are prop­erly dis­clos­ing the terms of auto ti­tle loans, she said.

In Fe­bru­ary, the de­part­ment took the first step to­ward re­vok­ing the lend­ing li­cense of Car Cap­i­tal Fi­nan­cial Inc. The Or­ange County ti­tle lender al­legedly un­der­stated in­ter­est rates and fi­nance charges and mis­stated late fees on many loans, the agency said.

Gary Rhodes, the com­pany’s owner, said that the state was us­ing “bad in­for­ma­tion” and that he hopes to re­solve the dis­pute at an up­com­ing hear­ing.

The in­creas­ing num­ber of auto ti­tle loans shows there’s a de­mand from con­sumers, par­tic­u­larly those with bad credit, Rhodes said.

“They prob­a­bly have zero op­tions, other than pawn­ing their car, and then they don’t have use of the ve­hi­cle and that puts them in a worse po­si­tion,” he said. “If peo­ple use it for a bridge loan to get them over the hump and pay it back, it re­ally isn’t a bad way to go.”

The terms of auto ti­tle loans vary widely by state. But they all cen­ter on us­ing the ve­hi­cle’s ti­tle, also known as the pink slip, as col­lat­eral. The bor­rower usu­ally must have full own­er­ship of the ve­hi­cle, and its value must be­well above the amount of the loan.

Some states re­quire the loan to be re­paid, in­clud­ing fees, in a sin­gle lump-sum pay­ment af­ter 30 days. Oth­ers, in­clud­ing Cal­i­for­nia, al­low the loan to be re­paid over time.

Be­cause the loan is se­cured by the ve­hi­cle, lenders of­ten don’t con­sider a con­sumer’s in­come or abil­ity to re­pay. If the bor­rower falls be­hind, the car will be re­pos­sessed and sold to pay off the loan.

A quirk in Cal­i­for­nia law has led ti­tle loans to boom.

State law lim­its pay­day loans to $300, mi­nus a max­i­mum fee of $45. Cal­i­for­nia also caps in­ter­est rates on con­sumer loans of less than $2,500 on a slid­ing scale that av­er­ages about 30%. Con­sumer loans above $2,500 have no in­ter­est rate limit.

For that rea­son, es­sen­tially all auto ti­tle loans in the state are above that level, ac­cord­ing to the state’s busi­ness over­sight de­part­ment. Most range from $2,500 to $5,000. Of those, about 45% car­ried an­nual per­cent­age rates of at least 100%, ac­cord­ing to state data for 2013.

“It may solve their im­me­di­ate cash prob­lem, but in the long term, it could starta cy­cle of debt,” Owen said.

In that­way, ti­tle loans are sim­i­lar to more preva­lent pay­day loans. Pay­day lenders op­er­ate in Cal­i­for­nia and 35 other states, and about 12 mil­lion peo­ple use them each year, ac­cord­ing to Pew.

The ris­ing pop­u­lar­ity of

pay­day loans dur­ing the Great Re­ces­sion and its af­ter­math drew the at­ten­tion of reg­u­la­tors. At the urg­ing of con­sumer ad­vo­cates, Ari­zona, Ohio, Virginia and other states— but not Cal­i­for­nia — tight­ened re­stric­tions or banned the loans out­right.

So some lenders turned to auto ti­tle loans, catch­ing the eye of reg­u­la­tors.

In March, the fed­eral Con­sumer Fi­nan­cial Pro­tec­tion Bu­reau pro­posed rules gov­ern­ing pay­day and auto ti­tle lenders. Some con­sumer ad­vo­cates, though, said the rules were fo­cused more on pay­day lend­ing.

Owen said she would like to see some changes in Cal­i­for­nia law, in­clud­ing an in­ter­est rate cap on auto ti­tle loans. But a 2011 bill in the Cal­i­for­nia Leg­is­la­ture that would have capped auto ti­tle loan in­ter­est rates at 36% was de­railed by op­po­si­tion from auto ti­tle lenders, said former Assem­bly­man Roger Dick­in­son (D-Sacra­mento), who spon­sored the leg­is­la­tion.

A wa­tered-down ver­sion that elim­i­nated the cap but in­cluded re­quire­ments for lenders to as­sess the bor­rower’s abil­ity to re­pay also failed to ad­vance in the As­sem­bly’s Bank­ing and Fi­nance Com­mit­tee, which Dick­in­son chaired at the time.

“They’ve got ef­fec­tive, well-known lob­by­ists, and they are gen­er­ally po­lit­i­cally ac­tive,” he said of auto ti­tle lenders. “They know how to play the game.”

Wil­liam Krieg, a con­sumer pro­tec­tion lawyer in Fresno, said the Cal­i­for­nia Leg­is­la­ture “doesn’t seemto have the stom­ach to im­pose any reg­u­la­tions or lim­its” on auto ti­tle loans.

Although he reg­u­larly gets calls from con­sumers whofeel they were abused by auto ti­tle lenders, Krieg said he takes very few cases be­cause they are dif­fi­cult to win.

Jen­nifer Jor­dan’s case was dif­fer­ent, he said.

When Al­lied Cash Ad­vance said it couldn’t lend her less than $2,600, Jor­dan asked if she could just re­pay some of the money im­me­di­ately. She said she was told she could — as long as she waited 24 hours, Krieg said.

Two days later, she paid back $1,000, but only $668 was ap­plied to the prin­ci­pal, Krieg said. Had the com­pany con­sid­ered Jor­dan’s in­come, which was about $900 amonth from dis­abil­ity pay­ments, it would have re­al­ized that a $345 monthly pay­ment on her auto ti­tle loan would not be af­ford­able, he said.

“Never one time was I asked how much money I made,” Jor­dan said.

Al­lied Cash Ad­vance did not re­spond to emails and calls for com­ment.

Krieg said Jor­dan caught a break. The em­ployee who made the loan for­got to have Jor­dan sign a stan­dard form man­dat­ing that any dis­pute would have to go to ar­bi­tra­tion. That meant Jor­dan was free to sue and pos­si­bly file a class-ac­tion suit, Krieg said.

Al­lied Cash Ad­vance agreed to re­turn Jor­dan’s ve­hi­cle.

“I’m one of the lucky ones,” Jor­dan said. “My friend, he never got his car back.”

Ge­naroMolina Los An­ge­les Times

JEN­NIFER JOR­DAN, 58, of Le­moore, Calif., is happy to have her 2005 Buick Ren­dezvous back. It was con­fis­cated af­ter she was un­able to keep up with loan pay­ments to a store­front ti­tle lender, Al­lied Cash Ad­vance, which had lent her­much more money than she needed.

Ge­naroMolina Los An­ge­les Times

JOR­DAN, right, hugs neigh­bor Freda Blair. Her ve­hi­cle was re­turned to her be­cause of a le­gal glitch.

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