Loans Secured by Car Titles Trap Borrowers in Cycle of Debt, According to National Consumer Experts

CRL/CFA Report Calls for Stronger State Protections

Washington, April 14 -- Cash-strapped families risk losing their cars in the latest form of high-cost small lending spreading across America, according to a new report from the Center for Responsible Lending (CRL) and Consumer Federation of America (CFA). 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 percent.

Borrowers often find themselves "rolling over" these loans repeatedly -- paying huge amounts in interest and fees while barely touching the principal. In many cases, the lender repossesses the car after the borrower has made substantial payments. That can be devastating because a car is often the borrower's largest asset and his or her only way to get to work.

"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 Mark Pearce, CRL's President. "Emergency loans should help families out of trouble, not keep them in it."

Today CRL and CFA issued a first report on the car title pawn/loan industry, titled "Car Title Lending: Driving Borrowers to Financial Ruin," which describes the title loan product and industry, illustrates predatory aspects of these over-secured small loans, and makes recommendations for stronger protections for borrowers.

To get a title loan, borrowers sign over the title to a paid-for car and, in some states, provide the lender with a spare set of keys. The loan is usually due within a month in a lump-sum payment, making it difficult for families to repay the loan. Since car title loans are typically made for a fraction of the value of the car, the lender is well-protected if the borrower fails to make the full payment at the end of the month. In some states, title lenders are allowed to keep the surplus from the sale of the car, allowing title lenders to reap a windfall from the borrower's default.

"Some title lenders claim their secured loans are 'pawns,' 'sale leasebacks,' or open end credit to evade state usury and small loan protections," stated Jean Ann Fox, CFA's director of consumer protection. "State legislatures should close loopholes and protect consumers' assets from unfair lender terms and practices."

While CRL and CFA do not encourage states to legalize small loans based on titles to vehicles, the report spells out an extensive set of legal protections that should apply to car title loans.

-- 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. Borrowers should have a right to cancel loans within a reasonable time and to prepay without penalty at any time.

-- 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.

-- 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.

For additional information and the full report "Car Title Lending: Driving Borrowers to Financial Ruin," visit www.responsiblelending.org and www.consumerfed.org.

The Center for Responsible Lending is a national nonprofit, nonpartisan research and policy organization dedicated to protecting home ownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, the nation's largest community development financial institution.

Consumer Federation of America is a nonprofit association of 300 consumer groups, established in 1968 to advance the consumer interest through research, education and advocacy.