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Car title lenders under the radar of predatory lending debate
MONTVALE, Va. (AP) -- The Dodge pickup has rust on the tailgate and a Harley-Davidson sticker on its back windshield. Beside it sits a Honda Accord with a big, white butterfly on the windshield and American flag butterflies on each side of the trunk.
There's the minivan sporting a tattoo parlor bumper sticker and a miniature San Francisco football jersey suctioned to a window of a red Cougar with a scuffed-up driver's side.
They all have one thing in common: Their owners didn't pay off a car title loan, and now they're getting ready for auction.
For years payday lenders have been the bad guy in the predatory lending debate while their close cousin, car title lenders, have cruised along unnoticed -- and perhaps more disturbing for some -- unregulated in several states. Many efforts to regulate the industry have failed as the lenders pour hundreds of thousands of dollars into legislative campaigns.
Advocates for the poor say they don't have the resources to fight both industries at the same time. Once the payday lenders are in check, they vow to go after car title lenders.
They claim title loans -- short-term, high interest loans secured by a car title -- can be even more disastrous than payday loans.
"They can both trap borrowers in long-term debt, but with a payday loan the collateral is a personal check. With a car title loan, it's the family's probably most important asset," said Leslie Parrish, senior researcher for the Center for Responsible Lending.
Car title lenders operate in nearly half the states, about a dozen of which have specific laws regulating how much the lenders can charge, Parrish said.
Where there are no laws specific to the industry title lenders operate under regulations governing pawn shop brokers or other lenders, except in Virginia, where car title lenders have clinched onto laws that regulate credit cards.
By structuring their loans as open-end credit, the lenders can charge triple-digit interest and whatever terms they wish as long as they don't charge anything for 25 days. In most states, the entire loan is due in one month, but can be rolled over and new fees charged.
This year, legislation was introduced in at least eight states, from Florida to South Dakota. Last year, 16 states took on car title lenders, and six of those -- Iowa, Mississippi, Nevada, Montana, Oregon and Utah -- passed some sort of regulations.
Some have taken on both payday and car title lenders at once. New Hampshire legislators are close to an agreement on a 36 percent interest rate cap on payday and car title loans, and the governor there has said he would support it. Congress also banned payday lenders, car title lenders and tax refund anticipation loan companies from charging members of the military or their families more than 36 percent interest.
The lenders have fought hard against regulations.
In Virginia alone, four car title lenders contributed more than $280,000 to legislators in 2007. One company, Anderson Financial Services, which does business as LoanMax and several other lenders, donated more than $185,000, according to the Virginia Public Access Project, an independent, nonprofit tracker of money in state politics.
Repeated calls to LoanMax officials were not returned.
Jeff Smith, a lobbyist for Community Loans of America, one of the nation's largest car title and payday lenders, said car title loans aren't as problematic as payday loans because borrowers can't get more than one at a time unless they have multiple cars. Many payday borrowers take out numerous loans, sinking deep into debt.
"A lot of the consumer protection issues that are debated in regard to payday lending don't exist in title lending," Smith said.
Here's how the loans usually work: A borrower gives the title to his vehicle and a copy of its keys to a lender in exchange for a loan up to about half of the car's wholesale value. The borrower agrees to repay the loan plus triple-digit annual interest and other fees and often must pay back the loan in a month or two. If the borrower falls behind, he could lose his car.
There is no nationwide data on the industry. Because the lenders are unregulated in several states, officials have no way of keeping track of the loans.
"We know they are operating in Virginia, I just couldn't tell you how many or who they are," said E. Joseph Face Jr., commissioner of the state's Bureau of Financial Institutions.
There also is no way to know how many borrowers are losing their cars.
Many of those repossessed in Virginia wind up at Bryan Buchanan Auto Auction near Roanoke. The auction runs through about 100 car title loan repos each month.
On a chilly February night, about 20 repossessed by LoanMax were auctioned, most bringing between $750 and $2,500.
That's good news for Lorenzo Gill, 28, and Kisha Hunter, 20, both of Roanoke. They were there to find a reasonably priced car, placing the winning $2,200 bid on a 2000 Chrysler LHS.
"It's sad," Gill said as he looked out over the line of cars in the gravel lot. "But one man's loss is another man's gain."
Bruce Johnson is trying hard not to lose his 2000 Dodge Neon. He and his wife, Helen, took out an $800 loan from Fast Auto Loans Inc. near Richmond. They've paid three payments -- $533 -- and still owe more than $900.
Johnson is paying about $40 per month on the principal and about $200 in interest. If he stops, he'll lose the car. If he continues, he'll sink more money into the car than it's worth.
"I'm paying $5,000 for a car that cost me $1,300, and if I get sick and miss a payment or can't make a payment they're going to come take my car away," Johnson, a 67-year-old retired carpenter, said in a telephone interview.
Johnson now wishes he'd just gotten a payday loan. At least then, he says, he would have known what he owed. Either way, he said, legislators need to protect families like his from predatory lenders.
While industry opponents want caps on the amount car title lenders can charge, they fear regulating the industry will legitimize it the way it has payday lenders.
States that have regulated payday lenders have seen a proliferation of the storefront cash advance shops. Last year, 24,000 payday lenders made about $40 billion in loans nationwide, according to The Center for Responsible Lending.
Republican Delegate Harvey Morgan championed the 2002 law that opened Virginia's doors to payday lenders and now regrets it. He hopes car title lenders will simply go away as legislators pass stricter regulations on payday lenders, but he's not optimistic.
"There's always going to be one more standing in line to come in and separate people from their money," he said.