WASHINGTON — A federal watchdog agency slammed the auto title lending industry Wednesday, warning consumers that the short-term loans leave borrowers worse off than where they started.

The Consumer Financial Protection Bureau report comes on the heels of proposed regulations aimed at reining in small-dollar, short-term financial products like payday loans, auto title loans and consumer installment loans. If adopted by the government, the rules will require lenders to assess the ability of consumers to pay back loans and adjust loan amounts accordingly.

The report found that repeated loans that generate high interest and fees account for two-thirds of the auto title lenders’ overall business. Only 12 percent of borrowers repay the initial debt – around $700 dollars on average with annualized interest of 300 percent — within the loan term, making up 20 percent of the lender’s business.

“It is evidence of the long-term pitfalls of this form of borrowing and another sign that so-called single-payment loans are often anything but that in reality,” CFPB Director Richard Cordray said in a statement.

The CFPB analyzed nearly 3.5 million anonymous, single-payment auto-title records from nonbank lenders from 2010 to 2013. It found that 80 percent of the loans were reborrowed on the same day a previous loan was repaid.

Nearly one-in-five borrowers have their car or truck seized by the lender, and more than half the auto title loans result in borrowers taking out four or more consecutive loans, according to the CFPB report.

But critics of the proposed regulations complained about nanny-statism, saying compliance with the regulations could become so costly for the lenders that it would push the financial products out of the marketplace altogether, ultimately hurting low-income working people.

“The people using this product are choosing between this, selling their car or pawning personal possessions,” said Professor Todd Zywicki at the George Mason University School of Law. “It is
tragic that there are people in this country that have this choice set.”

It’s an expensive product with potential for misuse, Zywicki acknowledged. But he said the CFPB misunderstands that consumers are well aware of the risks associated and choose auto-title loans over other, more expensive — and less viable — options.

For example, he said in many cases a small-business owner will use a modest auto-title loan to cover operating costs for a week, an amount unavailable from traditional banks.

“We need to be very careful about taking away choices from people who already have limited choices,” Zywicki said. “And here, the most stark choice the CFPB is pushing people toward is forcing them to sell their car.”

Molly Fleming, a payday lending expert at PICO National Network, a national organization that advocates for consumers, said the report proved the importance of establishing a federal rule that “ends the abuses of payday and car title lending by requiring that loans be affordable for borrowers.”

She said that a model for responsible lending already exists in credit unions and responsible banks that offer affordable low-dollar loans. It’s “nuts” to cling to a product that essentially cheats people, she said.

A proposed rule for payday, vehicle title and similar loans is expected to be issued in the coming weeks, according to a CFPB spokesperson, and will be open for public comment before a final rule is announced.


 

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