It’s a decision Covington now regrets. With an interest rate of around 240 percent, Covington will pay nearly $4,100 to have borrowed $1,500. Worst of all, if she defaults, the lender can seize her truck, which was paid for before she took out the new loan.
“I can’t blame anyone but myself,” Covington, 61, of Manassas, said. “But it’s highway robbery.”
Virginia’s car title-lending business is booming, but consumer advocates say it’s nothing to celebrate. Since a change in Virginia law last year, the commonwealth has become a magnet for people who need cash but live in the District, Maryland or another neighboring jurisdiction where laws capping interest rates have effectively driven such lenders out of business.
In 2010, Virginia lawmakers — led by Sen. Richard L. Saslaw (D-Fairfax), who received more campaign donations from the consumer finance industry than anyone else in the Virginia General Assembly — imposed new regulations on car-title lenders but allowed them to operate in the commonwealth. A year later, legislation sponsored by Saslaw ensured that car-title lenders could extend credit to nonresidents. Since then, the number of licensed car-title lenders has almost doubled in Virginia, along with complaints about high costs and collection tactics.
But some are pushing back against the industry, including West Virginia’s attorney general and a Roanoke County borrower. After investigating complaints from people who said debt collectors for Fast Auto Loans Inc. pestered them in the hospital or used other aggressive tactics, West Virginia Attorney General Darrell V. McGraw Jr. sought to block the firm from writing new loans to West Virginians or seizing their cars, court documents say.
Fast Auto Loans and its Atlanta-based parent, Community Loans of America Inc., denied wrongdoing and, in any case, ceased making loans to West Virginians a year ago, court papers say. Norman A. Googel, a West Virginia assistant attorney general handling the case, said his office is investigating additional Virginia car-title lenders.
“It’s really unbelievable,” Googel said. “We’re having a border war here with Virginia.”
In a separate case in Roanoke County, Tracey M. Underwood sued Fast Auto Loans in federal court over an April 2011 loan. In court papers, Underwood says the firm illegally seized her 2001 Ford Taurus without providing required notice.
Calls to Fast Auto Loans’s owner Robert I. Reich at the Atlanta headquarters and the firm’s attorneys in West Virginia were not returned.
Car-title loans — cash loans based on the equity in a vehicle — topped $125 million in Virginia in 2011, the first full year monitored by by the Virginia State Corporation Commission. While reforms by the General Assembly since 2008 have contributed to a two-thirds decline in the number of Virginia’s licensed payday lenders, the number of car title-lending outlets has more than doubled.
There were 184 locations operated by 15 state-licensed car title-lending companies at the end of 2010; a year later, there were 378 locations operated by 26 companies. The state regulator’s annual report also says 8,378 vehicles were seized.
250 percent interest
Consumer advocates view car-title lending as a form of predatory lending. Like short-term payday loans, car-title loans often carry exorbitant interest rates that trap people in a cycle of debt. A typical 12-month car-title loan of $1,000, for example, can come with an effective annual interest rate of 250 percent.
Car-title loans may even be worse than payday loans, consumer advocates say, because borrowers risk losing their vehicles. That can put them at risk of losing their jobs, especially in rural or suburban areas with limited mass transit.
“Once you get in, it’s very hard to get out,” said Dana Wiggins, director of outreach and financial advocacy at the Virginia Poverty Law Center in Richmond.
The proliferation of car-title lenders in low-income areas can trap struggling neighborhoods in the same downward spiral. Del. Scott A. Surovell (D-Fairfax) said six of the 16 licensed car-title lenders in Fairfax County have set up shop in the Route 1 corridor, where many recent immigrants and poor working families live. The businesses also are a short drive from similar neighborhoods in Prince George’s County and the District.
“I consider these things blight,” said Surovell, who voted against allowing such loans to nonresidents. During the floor debate, then-Del. Glenn Oder (R-Newport News) waved around a stuffed shark and warned against setting loose predatory lenders in the region.
Consumer advocates also hammered Saslaw, saying he is too close to the industry. Between 2010 and 2012, Saslaw received nearly $73,000 in campaign donations from payday lenders, car-title lenders and consumer finance firms, according to records collected by the nonpartisan Virginia Public Access Project.
In an interview, Saslaw defended the legislation, saying Virginia should regulate such loans rather than outlaw them.
Saslaw also argued that his legislation includes several important consumer protections. The law caps interest at 22 percent per month on loans up to $700; 18 percent per month on loans between $700 and $1,400; and 15 percent per month above that. Lenders also cannot write a loan for more than half a vehicle’s book value or seize a vehicle without giving borrowers 10 days’ written notice.
Saslaw also rejected charges by consumer advocates that the lending industry’s generous campaign donations have sheltered them from stricter regulations.
“That’s a little insulting. If that’s the case, we wouldn’t have changed the payday lending law, which essentially drove them out,” Saslaw said.
Del. Mark Sickles (D-Fairfax), who backed Saslaw’s 2011 bill, said such lending serves people who need money but lack sufficient credit to obtain small loans from banks or other traditional institutions.
“I think there are people who actually like this. They’re not feeling enslaved at all,” Sickles said. “At some point, we have to say, ‘People, you’re grown-ups.’ ”
But some of those grown-ups said that although they knew the loans were unwise, they saw no alternative.
Don L. Crawford Jr. of Peterstown, W.Va., said he needed money after he was laid off from his job with a flooring company. As bills kept mounting — for rent, car insurance, and his teenage daughter’s eyeglasses — Crawford heard a radio ad for Fast Auto Loans and visited its branch in Wytheville, Va. But then he missed a payment and debt collectors started badgering him. They pestered friends and family members too, he said.
“It aggravated me to death,” Crawford, 43, said. He asked family members for money to pay off the loan. But the total cost — $3,000 to pay back $1,500— has made him think twice about taking such a loan again.
“They just put you in a bad spot and you can’t get out of there,” Crawford said.
Researchers Magda Jean-Louis and Julie Tate contributed to this article.