- Cash-strapped families risk losing their cars in the
latest form of high-cost small lending spreading across America, according
to a new report from the Center for Responsible Lending (CRL) and Consumer
Federation of America (CFA).
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- Consumers who put their cars on the line to borrow a
few hundred dollars for one month become trapped in a cycle of repeated
loans with interest rates often around 300 percent.
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- Borrowers often find themselves "rolling over"
these loans repeatedly -- paying huge amounts in interest and fees while
barely touching the principal. In many cases, the lender repossesses the
car after the borrower has made substantial payments. That can be devastating
because a car is often the borrower's largest asset and his or her only
way to get to work.
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- "Car title lenders are taking a page out of the
payday lender playbook by making very short-term loans without considering
the borrower's ability to repay the loan," said Mark Pearce, CRL's
President. "Emergency loans should help families out of trouble, not
keep them in it."
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- CRL and CFA have issued a first report on the car title
pawn/loan industry, titled "Car Title Lending: Driving Borrowers to
Financial Ruin," which describes the title loan product and industry,
illustrates predatory aspects of these over-secured small loans, and makes
recommendations for stronger protections for borrowers.
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- To get a title loan, borrowers sign over the title to
a paid-for car and, in some states, provide the lender with a spare set
of keys. The loan is usually due within a month in a lump-sum payment,
making it difficult for families to repay the loan.
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- Since car title loans are typically made for a fraction
of the value of the car, the lender is well-protected if the borrower fails
to make the full payment at the end of the month. In some states, title
lenders are allowed to keep the surplus from the sale of the car, allowing
title lenders to reap a windfall from the borrower's default.
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- "Some title lenders claim their secured loans are
"pawns," "sale leasebacks," or open end credit to evade
state usury and small loan protections," stated Jean Ann Fox, CFA's
director of consumer protection. "State legislatures should close
loopholes and protect consumers' assets from unfair lender terms and practices."
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- While CRL and CFA do not encourage states to legalize
small loans based on titles to vehicles, the report spells out an extensive
set of legal protections that should apply to car title loans.
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- Establish Fair and Affordable Loan Terms. Title-secured
loans should be repayable in affordable installments rather than a lump
sum. Rates should be limited, and lenders should be required to consider
the borrower's ability to repay. Borrowers should have a right to cancel
loans within a reasonable time and to prepay without penalty at any time.
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- Protect Borrowers After a Default. States should bar
abusive practices such as seizing cars without notice, pocketing the difference
between the sales price and what the borrower owes or pursuing the borrower
for even more money after repossessing the car.
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- Close Loopholes to Ensure Consistent Regulation. States
that permit title lending should close loopholes that exempt some loans
from the law and ensure that laws apply to all lenders, including those
operating across state lines.
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- Monitor Lenders Better. States should closely monitor
lenders through strong licensing, bonding, reporting and examination requirements.
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- Ensure Borrowers Can Exercise Their Rights. Borrowers
should be able to sue title lenders and void contracts that violate the
law. Binding mandatory arbitration clauses that deny borrowers a fair chance
to challenge abuses in court should be eradicated.
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- http://www.consumeraffairs.com/news04/2005/car_loans.html
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