This story has been updated.
Virginia car title lenders doled out nearly 25,000 loans worth more than $21 million in the last three months of 2010, according to data collected for the first time since the state started regulating the lenders.
Car title lenders were unregulated in Virginia until October, when a new law took effect that limited how much the companies can charge, how much they can lend and for how long. Despite the protections, more than 3,500 borrowers missed payments for at least 60 days during those three months, and nearly 200 had their vehicles repossessed.
Meanwhile, the new State Corporation Commission data shows that laws enacted in 2008 to curb the repeated use of their close cousin, payday loans, have dramatically reduced their use.
Both are short-term loans that charge borrowers triple-digit interest rates. Payday loans hold a paycheck as collateral for a loan, whereas a car title loan uses a vehicle.
"We definitely consider it a step forward getting this law passed," said Jay Speer, executive director of the Virginia Poverty Law Center and a leading advocate against car title and payday lending. "Without a doubt, we still think these are a very, very bad idea for anybody."
Title lenders argue the number of loans shows there is a legitimate need for such short-term credit. They argue that those with bad credit and struggling small businesses have nowhere else to turn for small loans.
"It shows that it's needed," said Scott Johnson, who represents Community Loans of America. "It shows that you still have a large number of Virginians that don't have other means of credit."
The number of car title loans could increase dramatically, because Virginia lawmakers voted this winter to allow companies to extend loans to those in other states even if those states have banned the practice. All of Virginia's neighbors except Tennessee have either banned car title lenders or capped the interest rate so low that they don't operate there.
Maryland's Attorney General's Office had reached out to Virginia before the law was passed, but its concerns were ignored.
"Our state legislature's done a good job of keeping payday lending and car title lending out of Maryland, and we're concerned about surrounding states who would basically allow Maryland consumers to cross the border to get them," said Steve Sakamoto-Wengel, deputy chief of Maryland's consumer protection division.
For years, Virginia lawmakers had no idea how many car title lenders operated in the state, how much interest they charged or how many loans they issued. The companies flew under the radar while advocacy groups fought for stricter regulation on payday loans, which before the 2008 crackdown was a $1.3 billion business.
Once the legislature passed the payday lending reforms, the focus shifted to car title lenders, who critics argued were worse because those who fall behind repaying the loans lose their vehicles. Borrowers often would pay for months, sometimes thousands of dollars, and never touch the principle. If they fell behind, their vehicles were repossessed and often sold at auction.
The new State Corporation Commission data shows that of the 200 repossessed since October, only two were sold.
"I think that's indicative that if a car is repossessed, the title lender works with the customer to try to work things out," he said. "That's a good sign."
Speer and others worry that there will be a proliferation of car title lenders now that they have the state's blessing to operate here.
That's what happened to payday lenders, who were authorized to do business in Virginia in 2002. By 2007, there were more than 800 payday lending stores. After the crackdown, many changed over to other products, including car title loans. Last year, there were 288 payday lenders statewide.
The number of payday loans issued fell from more than 3.5 million in 2007 to about 435,000 last year.
The legal changes have curbed repeat borrowing. Before the reform was passed, more than 94,500 borrowers received 13 or more payday loans in 2007. Last year, only one borrower took out as many payday loans.
"We're very pleased that those numbers have gone down so there's a whole lot less people getting caught up in this," Speer said. "It shows that some of the reforms definitely worked."
While they won the reforms, fights to cap the interest rate that both types of lenders can charge at 36 percent have been unsuccessful. The average interest rates for car title loans remained 214 percent, while payday lenders charged an average 281 percent.