Car Title Loan Reform

Governor Tom Vilsack called for car title loan reforms which would drastically cut the 264% interest rate for loans secured by the borrower's car.  Vilsack was joined by Tom Miller, Iowa's Attorney General, and a bipartisan group of legislators.  From left to right, Representative Bob Kressig (D-Cedar Falls), Senator Brad Zaun (R-Urbandale), Jeff Murray (car title loan borrower), Representative Joe Hutter (R-Davenport), Senator Joe Bolkcom (D-Iowa City), Governor Vilsack, Attorney General Miller, Brianne Leckness (car title loan borrower), and Senator Roger Stewart (D-Clinton).

Car Title Loan Links:

• Reforms pass Iowa Senate, March 1
• Governor Vilsack's Release on January 30th
• Statement from Attorney General Tom Miller  (Consumer Advisory)
• Statement of Rep. Kevin McCarthy (Des Moines)
• Car Title Loans: A New Form of Abusive Lending
• A Loophole Big Enough To Drive Hundreds Of Cars Through
• Link to Legislators

Car Title Loans: A New Form of Abusive Lending

In recent months, a new form of abusive lending has sprouted in Iowa, car title loans.

Car title loans are loans with extremely high interest rates (up to 360%) that are made to consumers. To receive a loan, the consumer must sign over their car title as collateral. Set up as open-ended credit, car title loans are not subject to an interest rate limit or a maturity date.

The Iowa Banking Division has licensed at least one car title lender as a finance company. The Iowa licenses were issued to Anderson Financial Services LLC, doing business as LoanMax. LoanMax is operated by Rod Aycox, LoanMax president of Alpharetta, Georgia.

Starting in May of 2004, LoanMax applied for licenses and have opened 5 locations in Iowa over the past six months.

How It Works:

 A customer enters the LoanMax office and is asked how much money they would like to borrow. With no credit check and no delay, the borrower can obtain a loan by exchanging their car title and an extra set of keys to their vehicle as collateral. The loans are typically less than $1,000.

 The borrower makes the first payment after 15 days and then every 30 days thereafter. The borrower pays one percent interest per day and must pay a minimum of ten percent of the loan principal with each payment, excluding the first payment.

 Every loan has an APR of up to 360%. While the loan can be paid off early with no penalty, the vehicle can be repossessed with one missed payment.

 Many borrowers are losing their transportation: At only one auction house in eastern Iowa, nearly 150 vehicles have been re-sold after being repossessed by LoanMax. No data is currently being collected on the number of Iowans losing their cars and trucks.

 Additional information regarding the licensing of financial companies can be obtained from the Iowa Department of Banking, Rod Reed, Finance Bureau Chief, 515-281-4014, rod.reed@idob.state.ia.us.

$400 Car Title Loan Repayment Worksheet

Day 1   Customer borrows $400 from LoanMax

Day 15  $10 fee is due, along with 15 days of interest at 1% a day

Day 45   10% of the principal is due, along with 30 days of interest at 1% a day

Day 75  10% of the principal is due, along with 30 days of interest at 1% a day

Bottom Line: 

After two and a half months, a borrower, making the minimum payments, would have paid $374 on a $400 loan and still owe $300.

A Loophole Big Enough To Drive Hundreds Of Cars Through: Car Title Lending In Iowa

Subject: Car Title Loans 

• Exorbitant Interest Rates.  The one car title loan business in Iowa currently charges 360% APR on all of its loans.  That APR is 10 times higher than what any other secured lender is charging.  

• Secured Lending Should be Cheaper.  Secured lending is supposed to be cheaper for borrowers than unsecured lending, because the lender can look to collateral in the event of default.  That security means that it is a kind of lending that is in a vastly different category than payday loans – and should not be compared to it. 

• Not the purpose of Open-end Credit.  The car title lenders have avoided interest rate limitations by structuring the debt as open-ended credit, like credit cards.  Open-end credit was deregulated in Iowa because federal law let out-of-state card issuers export their no-cap law.  The legislature has never decided that secured, small loans should be deregulated.  (The current maximum allowable on a loan secured by the equity in a car would be 36%, available to Consumer Loan licensees under Chapter 536 and 21% available to Credit Unions.)

•  More secure title loans are charging 29 times the rate charged on unsecured credit cards:  Credit cards are unsecured, and therefore more risky than secured loans.  Despite the greater risk, the current average interest rate charged by credit card companies is 12.5% .  Yet car title loans in Iowa, which are secured by cars which are owned free and clear by the title loan borrowers, are being charged rates that are 29 times the rate being charged on credit cards. (credit card rate is the national average November,  2004, FRB Statistical release G.19 2/7/05).  

• Due to Astronomical APR, High Repossession Rate. The first payment on these loans is due a scant 15 days after borrowing the money.  Failure to make the first payment or any one payment thereafter results in repossession.  While no data is currently available on repossessions in Iowa, at one auction house in eastern Iowa over 150 vehicles have been sold after being repossessed. 

• Iowans Access to Transportation.  Most Iowans are forced to rely on their cars as a means of transportation to and from work, to healthcare facilities, and to educational institutions.  The 360% APR risks Iowans ability to get to work, hospital and school.

• No Credit Checks.  These companies are able to charge excessive interest, but do not have to run a credit check in order to ascertain if the consumer is able to afford such a costly loan. The one indicator of “predatory lending” that everybody agrees on is making a loan without regard to ability to repay.   Indeed, with the first payment due just 15 days after the loan it is very likely that the consumer who didn’t have the $300 two weeks ago now does not have the approximately $330 to pay off the loan.  The result is that most consumers are on the down escalator as soon as they sign the loan papers, and while this poses a great risk to consumers, the car title loan company with the vehicle as collateral is risking nothing. 

• Loss of Equity.  For many Iowans their car is their most valuable asset.  Car title loans put this asset at risk, and Iowans are losing all of their equity to the astronomical interest rates.  For the unfortunate Iowans who lose their car to repossession any excess equity they may have built is eaten by the repossession costs and interest rate charges.

• Inability to Escape the Loan. The “financial emergency” that necessitated the desperate loan for these consumers is rarely as short-lived as the loan terms, so the interest quickly mounts as paying the loan off with a balloon payment is commonly impossible.   In Oregon, 1 in 5 title loans was renewed six times prior to payoff.  In Illinois, the extensions typically keep these loans afloat for over 4 months. (www.cbs.state.or.us/external/dfcs/activity_reports/cf/renew2001.htm; Illinois DFI 1999 Short Term Lending Report, pp. 8, 30).  The result is that those Iowans able to pay off these loans often end up paying more that the value of their car in interest payments alone.

• The bankruptcy rate in Iowa has doubled in the last 10 years.  Loan-sharking that puts Iowan’s jobs at risk – can only make things worse.