Advocates Advise Consumers Against Costly Borrowing

Ella Butler got some fast cash last year to pay her back rent, but all it did was land her in more trouble.

Butler took out an $1,800 loan in October 2007 using her 2000 Toyota Camry as collateral. Almost immediately she fell behind in payments, and by February, she owed nearly $5,000 in interest and fees, she said. She still owes $2,500.

Consumer advocates say Butler is one of the estimated thousands of people in the Washington region who have turned to the dozens of auto title lenders that have popped up in Virginia.

Under the arrangements, people looking for quick cash who own vehicles offer them as collateral for loans of up to several thousand dollars. Many of the borrowers have moderate incomes and less-than-stellar credit and do not qualify for traditional loans.

There is no credit check, just an appraisal of the borrower's vehicle that helps determine the amount of the loan. The lender takes the vehicle's title and sometimes a duplicate set of keys. But as with most things that sound too good to be true, borrowers who cannot repay the loan -- most are due in 30 days -- end up even deeper in debt because of interest and fees, and some lose their vehicles.

Consumer advocates plan to join loan customers today in front of about 10 loan stores across Virginia, including one in Alexandria, to discourage consumers from taking out the loans.

"We're trying to rescue people who are trying to get these loans," said Jay Speer, executive director of the Virginia Poverty Law Center. "We'll be . . . trying to educate people what they really might be spending and that they could get their car taken away."

Title lending is one of several nontraditional loan businesses gaining popularity in Virginia. Like payday lending, in which customers can borrow up to $500 against a future paycheck, the practice is under increasing scrutiny in the state from a broad coalition of religious and consumer advocacy groups.

The advocates are concerned that the services prey on desperate consumers and say their exorbitant interest rates -- as high as 360 percent on an annualized basis -- should be capped.

"I've learned my lesson -- they get you on the interest. But when I saw that I was going to be way behind on my rent, I just went for it," said Butler, 63, who lives in Montgomery Village.

The practices are illegal in the District and Maryland, sending many consumers across the Potomac River for the services. Consumer advocates worry that the worsening economy will drive more people to the businesses.

When the Virginia General Assembly convenes next month, advocates will push for legislation that would regulate title loan businesses under the state's Consumer Finance Act by limiting annualized interest rates to 36 percent, as is the case for the other two dozen companies in the state that offer unsecured loans.

"All we want is for them to play by the same rules as other businesses that offer small loans," said LaTonya Reed, a policy analyst for the Virginia Interfaith Center for Public Policy, a consumer group spearheading the regulation effort.

Title loan lenders counter that they offer an honest service to moderate-income families that are stretched financially. They compare their service to a home equity loan, in this case lending money based on the value of a vehicle.

The businesses are able to operate in Virginia because they offer what are considered open-end loans, similar to credit card arrangements, which exempt them from the regulations that consumer advocates are seeking.

A lobbyist for LoanMax, the second-largest auto loan company in Virginia, said that reducing the interest rate would effectively put the company out of business and that the arrangements should not be compared to other kinds of loans.

"We're willing to compromise on some regulations, but this is a short-term, small-dollar loan that you can't compare with other types of multi-year products," said Osjha Anderson, director of government relations for the company. LoanMax has 38 stores in Virginia, and 5 percent of its loans led to repossessions, she said.

There are about 150 title loan stores in Virginia, compared with about 800 payday lending stores.