Car-Title Lender Reform Effort Fails in Virginia General Assembly; Senator Says New Limits Will Come

By Fredrick Kunkle
Washington Post Staff Writer
Thursday, March 5, 2009

Car-title lenders evaded an attempt by Virginia's General Assembly this year to regulate their business, but they have been put on notice that new limits could be around the bend.

During a contentious hearing over payday loans in the Senate Commerce and Labor Committee, Sen. Richard L. Saslaw (D-Fairfax) warned car-title lenders:

"We will rein you in. Count on it."

Saslaw said that he had not decided on a plan for limiting the lenders but that he thinks something needs to be done to curb their business.

"You got a secured loan -- what do you need 300 percent interest for?" Saslaw said in an interview. A committee made up of three House delegates and three senators has been created to study the issue.

Consumer advocates have been urging more limits on car-title lenders. The businesses provide loans to people who pledge their vehicles as collateral, a practice that has been likened to pawnbrokering for cars.

"We've heard from a number of borrowers who say they cannot deal with the sheer weight of these interest payments," said LaTonya Reed, a policy analyst for the Virginia Interfaith Center for Public Policy.

The General Assembly has not weighed in on the practice, which goes largely unregulated in Virginia. Under current law, car-title lenders can make loans of up to 50 percent of a car's value. If paid back within the 25-day grace period, the lenders collect fees of $50 to $100 but cannot charge interest. Loans that are rolled over can collect as much as 20 or 30 percent interest a month.

Reed said people who borrow against their cars can effectively wind up with annual interest rates of as much as 360 percent. Those who cannot pay risk losing their cars. And because losing a car can mean losing a job, borrowers sometimes find themselves on an almost irreversible downward slide. Virginia has no data on how many people have lost their cars. But in Tennessee, an agency found that more than 17,000 borrowers lost their vehicles to repossession by car-title lenders in 2004.

Phil Kent, a spokesman for Fast Auto Loans of Virginia, a unit of Atlanta-based Community Loans of America, disputed those numbers.

Kent said Fast Auto Loans does not charge a fee for a loan repaid during the 25-day grace period. As a result, the company receives nothing from the 30 percent of customers who pay off their loans during the grace period. But about 20 percent default and the company charges interest of about 25 percent a month to cover its risks and costs for high-risk lenders.

"These are people with no access to credit," Kent said. He also said that the company is in no rush to repossess vehicles when the cost of towing and auctioning can cost more than $500.

A bill sponsored by Sen. Mark R. Herring (D-Loudoun) would have capped interest on car-title loans at 36 percent a year and placed car-title lenders under the jurisdiction of the Virginia Consumer Finance Act, which governs loans of up to $2,500 and requires lenders to offer a 25-day interest-free grace period for repayment. That measure died in committee.

Companies that offer payday loans have been lenders of last resort for Virginians since former governor Mark R. Warner (D) opened the door to them in 2002. This year, the General Assembly tweaked a law passed last year that put new limits on payday lenders.

Faced with restrictions that took effect in January on how often they could make loans to a customer and other rules, payday lenders had moved into the business of open-ended loans. Under current law, lenders cannot charge interest for a loan repaid within 25 days, but they can set any interest rate they want on a loan that has not been repaid within that period.

Bills sponsored by Saslaw and Del. G. Glenn Oder (R-Newport News) that passed the House and Senate would force payday lenders to offer either short-term, regulated loans up to $2,500 or open-ended loans, but not both. Under the measure, which has gone to the governor's desk, a company that surrendered its payday-lending license to make larger, open-ended loans would forfeit the right to return to making payday loans for 10 years.

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