Cross-border collateral

Virginia car title lenders could extend their reach to out of state customers under a bill that moved one step closer to becoming law today. All surrounding states except Tennessee have either banned the car title lenders as usurious or capped interest rates so low that the companies don't operate there.

The House voted Monday 51-47 to approve the measure. It removed a provision that it take effect immediately, so the proposal went back to the Senate, which approved the amendment 37-3.

The move comes four months after a law took effect that for the first time regulated Virginia car title lenders, which charge triple-digit interest rates on loans made with the borrower's vehicle held as collateral.

Last year the legislature limited, effective Oct. 1, the simple interest rates car title lenders can charge: 22% monthly on the first $700, 18% on the next $700, and 15% on the balance over $1,400. Lenders must also tell customers up front how much the loan will cost over the term. Previously annual rates of over 300% were common.

Supporters said lawmakers never intended to limit the loans to those with vehicles registered in Virginia. Opponents say companies are looking for a back door into giving money to people in neighboring states where such loans are unavailable.

"What we are doing now is creating a loophole for the citizens of those states to get around the public policy that their legislators have set," said Del. Jennifer McClellan, D-Richmond.

"It was my observation in the last election there was a massive amount of people in this country and in this state that went to the polls and said 'We don't want government telling us what to do. We don't want government telling us what products we have to buy. We want government to let us be and let us make decisions for ourselves,'" said Del. David Albo, R-Fairfax.

Loan sharking?

Critics of car title lenders, payday lenders, and others in the so-called sub-prime, short-term lending industry charge that they prey, mostly, on the working poor who don't understand what they're getting into. Many, finding themselves unable to pay back their original loan, take out more loans and end up trapped in a "cycle of debt."

One elderly couple in the Winchester area, for example, "Bill" and "Sarah," took out a $1,200 car title loan in June (WORLD Virginia agreed to keep their names confidential). They left the lender with the impression that their monthly payments would be $90. Two months later their lender was demanding $300 minimum payments.

They checked their contract and realized their error; $300 was just the interest. On their $700 monthly Social Security check, they said, this winter they would have to choose between heating oil and food.

Their contract, signed before the limits came into effect in October, stated that their annual interest rate would be 300%. That, "Sarah" said, is "way too high."

But when asked if they realized how much interest they would pay annually at 300%, they both looked blank. Informed that it would require them to pay over $2,500 in interest in addition to their original $1,200 loan, their shoulders slumped. "I don't see how they can charge that much interest," Sarah said. "It's worse than loan sharking."

The industry sees itself in more positive terms, emphasizing that car title loans let people keep the use of their vehicles. Osjha Domenicone is Director of Government Affairs for LoanMax, a car title outfit based in Alpharetta, Ga., with outlets all over the state. "Our customers are smarter than people think," she said.

Her firm has always had a policy of disclosing to customers more than state or federal regulations require. Its agents quote customers the annual percentage rate, the finance charges for the loan in dollars, and the total amount due on the due date.

Domenicone points out that for many people a short-term loan, even at annual rates over 200%, is a better option than bouncing checks and paying overdraft fees, late fees, and so on. "That's why people [use our service]," she said. "It actually is cheaper."

Likely to become law

During 40 minutes of lively debate this week in the Senate, lawmakers quoted the Bible and English author C.S. Lewis, told stories of borrowers who pay back three times as much as they borrowed and still lose their cars and of others who have nowhere else to turn for cash in a pinch. Del. Glen Oder, R-Newport News, held up a stuffed shark with money hanging from its neck and the license plates of neighboring states hanging from its mouth in denouncing the lenders.

"I will not use words like exploitive and taking advantage of pray if the other side doesn't use words like nanny and big government," said Del. Joe Morrissey, D-Henrico. "... Call it whatever you want, put as much lipstick on it as you want, that's usurious."

Car title lenders fought against regulation for years, even as the Legislature voted twice to crack down on their close cousin payday loans.

Car title lenders have donated nearly $1.2 million to legislators since 2005, including about $130,000 over the past year, according to the Virginia Public Access Project, a tracker of money in politics. Senate Majority Leader Richard Saslaw, who sponsored the legislation, has received more than $42,000 of that, including more than $17,000 over the past year.

The Senate is likely to accept the House amendment to the bill and send it to Gov. Bob McDonnell, who has supported the businesses in the past.

The Associated Press contributed to this report.

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