Losing Loans

Virginia car title lenders gave out 25,000 loans worth approximately $21 million from October to December last year, according to new data. The information was collected through a law put in place last year as part of an effort to regulate car title loans; the numbers suggest that the state is on its way to regulating the industry, which some say is usurious (see "Cross border collateral," Feb. 23), out of existence.

In October, the Virginia law began limiting the amount of money companies can loan and for how long. Since Virginia's legislature starting cracking down on lenders in 2008, the number of loans handed out has dropped from 3.5 million in 2007 to 435,000 in 2010.

According to the State Corporation Commission, over 3,500 borrowers failed to make payments for at least two months, while almost 200 cars were repossessed.

"We want to stress to everybody that no one should get these loans. They're not a good deal for anybody," said Jay Speer, executive director of the Virginia Poverty Law Center. Speer has worked with Virginia lawyers to bring lawsuits against fraudulent lenders.

When the law went into effect, Speer noted that he was pleased the industry would be watched by the State Corporation Commission: "At least the ones that don't take my advice and get one anyway are not going to get screwed so badly."

While borrowers will still lose their vehicles if they fall too far behind on payments, the Virginia law requires lenders to tell their customers initially how much time and money will be required to repay the loan.

Before the 2010 law, the car title industry went unregulated in Virginia, making it impossible to know how many lenders were in the state, while lenders frequently charged annual interest rates over 300 percent. Now lenders must apply for licenses at the SCC. Twenty-nine states have either banned car title lenders or chased them away with capped interest rates too low to make a profit.

Lenders argue that they provide valuable service to the state and that holding a vehicle as collateral is the only way to do business.

For several years, advocates have pushed for tighter regulations in Virginia. Since 2007, the Virginia Attorney General's Office has reached settlements with nine car title lenders who had broken state law, while other lawsuits were settled out of court.

"[The law] brings some semblance of order and regulation to an industry that right now is simply not being regulated and can do pretty much whatever they please," said Senate Majority Leader Richard Saslaw when the bill was passed in March 2010.

The process of making a loan is simple. The borrower gives the vehicle's title and a copy of the keys to the lender in exchange for a loan, worth up to half the vehicle's market value. If the borrower falls behind on his payments, the lender can repossess the vehicle. If the borrower cannot pay off the loan and the cost of repossession, the lender can sell the car at an auction.

Until October, lenders could set any interest rate they wanted. Often the interest rates were so high that borrowers made monthly payments only towards the interest, never paying off the loan itself. The new law set the monthly interest rates at 22 percent on a loan amount under $700, 18 percent on a loan amount between $700 and $1,400, and 15 percent for a loan amount over $1,400. All loans must be repaid within a year.

The law also requests that lenders hand out pamphlets that offer more affordable loaning options and that warn borrowers that they are likely to lose their vehicle.

The Associated Press contributed to this report.

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