You get to keep your car! (sort of) How auto-title loans REALLY work

The ad sounds like every other ad for a PayDay lender.  Hot models look into the camera and talk about how they can get money into your account today with no credit check and no hassles.  “It’s easy.  Get the extra cash you need.  In just 20 minutes or less!  Got a clean & clear car title and a photo ID?….That’s all you need!” they say.  “No credit check AND  you get to keep your car.”

Editor’s Note of phrase-coining: Henceforth, there is to be an adage: If ANYbody wants to lend you money and tells you that you can get the money super-fast with no credit check, run away! It’s because they know they’re gonna charge you a ton of fees; a jaw-droppingly high interest rate and trap you into a cycle of debt – or all three.

We’ve talked in this space before about how the PayDay industry has taken to using mistruths in their ads;  and about an in-depth report by the Center for Responsible Lending that showed how despicable auto-title loans really are.  (If you want a report from 2015, the Pew Center for Charitable Trusts just completed another in-depth report on auto-title loans.)

Today, we look at a lawsuit that was filed last week and see how the auto-title lending model works, when compared to the imaginary world that is created by their advertisements.

And you get to keep your car…

This is the tag-line for (nearly) every auto-title loan ad we’ve ever seen.  The reality is that you DO get to keep your car – that is, as long as you keep taking out a loan every two weeks to repay the first loan that you can’t afford.  But, if your payments are late your car goes el-disappear-O.  You see that’s the whole point of making you use your car as collateral in the first place.  If they have your car title, you’re way more likely to sign up to keep paying them fees and such when the loan comes due in two weeks.  (if they did NOT have your car title, you might be tempted to say “Um, I can’t pay, sorry,” and hang up.  But if they HAVE your car title, you’ll say “Oh. I’m so sorry. I’ll be right in to sign another loan!”)  The guess here is that they don’t really want your car as much as they want is a guarantee that you’ll continue to take out a new loan again and again and again. 

This is the part where we should type which law covers these nasty loans

The problem in Ohio is: there are too many laws that apply.  You read that right. In Ohio, there are so many laws that apply to a consumer loan it’ll make your head spin. We have the Small Loan Act (SLA); the Short-term Loan Act (STLA); the Second Mortgage Loan Act (SMLA)  and the (federal) Truth-in-Lending Act (TILA) which has a separate set of regulations.  We also have the Mortgage Broker Act (MBA)  which makes rules for how somebody is supposed to act if they are just the broker for your loan and the Credit Service Organizations Act (CSOA), which tells them how to act if all they do is charge a fee to introduce you to somebody else who will lend you money or help you fix your credit.

If you only use the table of contents for these laws, it’ll seem pretty simple: the Short-Term Lender Act (STLA) applies to any loan that is for less than $500.00 and has a repayment term that is more than 31 days; the Small Loan Act (SLA) is for any loan that is less than $5,000.00; the Second Mortgage loan Act (SMLA) is for any loan that is for more than $5,000.00; the Truth-in-Lending Act (TLA) is for loans that you use to buy or refinance your house, credit card debt and reverse mortgages.

Unfortunately, it’s not always exactly clear which of these laws applies to which loan.  That’s mainly because of the many exceptions that were created for each of these laws (usually) years after the laws were first created.  So now, lenders can pick and choose which of these laws to be licensed under.  That’s not such a bad thing on paper.  The problem is that along with the exceptions have come reductions to consumer rights.  By this point Ohio is very nearly an “anything goes” state in terms of consumer lending. 

Editor’s example of how anything goes: Ohio has a usury statute that says the highest interest rate a lender can charge is 25%.  But payday and auto-title lenders have interest rates that are almost always near 400%.  See what we mean?

So what’s this actually look like?

As it turns out, auto-title loans do NOT work like they say in the commercial.  In addition to a very friendly statutory environment from which to lend, the auto-title folks can’t keep themselves from breaking the few laws that DO exist.  According to a lawsuit filed last week by the Legal Aid Society of Greater Cincinnati, LoanMax did quite a few things that violated Ohio law.  (BOLD print is from the press release that was put out to describe the lawsuit, or from the complaint that was filed)

    • The borrower was 61 year old Ruby Williams, a disabled widow whose only source of income is a monthly $714.00 social security check.
    • LoanMax is licensed as a Credit Services Organization (CSO).  A CSO is somebody who charges you money to help you fix your credit report or help you arrange to borrow money from SOMEONE ELSE.  A CSO agency is not allowed to actually lend you money or tell you that they are lending you money.  According to LoanMax’s ads, they are in the business of lending money. They don’t mention any of the services that they are licensed to do under Ohio’s CSO law.
      • So what does LoanMax do? They call themselves the lender; handle all of the paperwork – like the lender; take your car title and have a box in their stores marked “Integrity Funding” where you put the payment.  “Integrity Funding” is the actual lender. 
      • How do you get ahold of Integrity Funding if you have a question?  (we’re not making this up) There is a pay phone in LoanMax’s lobby.  We’re not sure whether this pretend scheme to make you think that Integrity and LoanMax are not in cahoots will pass legal muster.  Hopefully, this lawsuit will answer that question for us.  
    • The percentage interest rate on their auto-title loan? More than 300%.  This actually is perfectly legal.
    • Like any other lender that uses the phrase “No credit check” in their ads, LoanMax and Integrity Funding don’t much care if you can actually pay the loan back. 
      • How do we know this?  The repayment amount for this loan was MORE than the borrower’s monthly income. 

Editor’s note that makes you say hmmmmm: every public statement, piece of testimony, newspaper quote or talking point from the PayDay lending industry we have ever heard has denied that these short-term loans trap people into a cycle of debt. (That’s when you have no choice when the loan comes due but to take out a new loan)  But, if they lend money to an old lady who makes less in an entire month than what the payment amount is, how does she NOT get trapped into the cycle of debt?

    • The LoanMax employee intentionally misled Mrs. Williams as to how she could repay the loan, telling her that she could make “minimum payments” when in reality the loan was due in a single payment, and was refinanced each time she made the “minimum payment.”  This one’s truly a whopper. 
      • Ask a hundred people what they think the phrase “just make the minimum payment” means.  If any of them say “Why that means that you borrow the entire loan amount over and over again when you are supposed to make a payment,” call LoanMax.  They could probably use them as expert witnesses. 
    • (Keep in mind that all she wanted to borrow was $600.00) Mrs. Williams unknowingly refinanced this loan 5 times. She was loaned $1,400, but incurred fees of over $1,800. When she could not afford to continue refinancing the loan, LoanMax repossessed her car and claims to have sold it for $1,700, far less than its market value.
      • Need $600 – get stuck with loans totaling $3,200.00! 
    • LoanMax refuses to tell her when they sold the car or for how much.  In case you’re wondering, Ohio does have a law that governs repossessions, when the borrower is late on their loan payments.  (the lender has to give you a chance to pay the past-due amount, tell you when the auction is and let you know if the car sold) But, since this loan was not used to purchase the car, those rules don’t apply to auto-title loans.

We’re not sure how this all will play out.  But we can highlight how it should strike you, if you’re considering getting an auto-title loan.  Whatever the ad says: you are giving someone you’ve never met, the right to take your car.  If you don’t need your vehicle, then we suppose this idea might make some sense.  But, if what you don’t need is to:

  1. pay a lender more than $3,000.00 for a $600.00 loan;
  2. have them lie to you about making “minimum payments”;
  3. have them swipe your car and sell it (without telling you how much they got or who bought it)

…then maybe you should change your mind about using an auto-title lender.

Posted by: Mark Wiseman (who wonders how anybody could lie to a little old lady and then take her car.  Don’t these people have Nanas?)  

Why would I lie about a thing like that? (Testimony in support of payday lenders)

This week’s action comes to us from the theater of the bizarre.  There was a hearing a few weeks ago before the Senate Financial Institutions Committee in Columbus.  The testimony was given by the Ohio Consumer Lenders Association (OCLA).    Their name sounds friendly enough.  But, they are not in the business of helping consumers.  They are what’s known as a trade association.  Meaning to say: they were created, funded and run by industry players – the lenders – or in this particular case the short-term lenders. 

What is a short-term loan?

A short-term lender gives money to consumers.  But unlike a regular loan, a short-term loan has to be paid in full within two weeks or a month.  At first blush their business plan might evoke sympathy, or at least tolerance.  They claim to be filling a need. (“These folks can’t get loans from banks.  So we make money available to them.”)  The problem is that because the money is due in such a short time, almost everyone who borrows it has to take out another loan right away.  This creates what is called the “cycle of debt.”  The lenders claim that the idea of a cycle of debt is overblown.  But most of the folks who get caught up in this mess have no choice but to re-borrow.

The bread & butter product of the short-term lending industry is a Payday loan.  (there are other product names, to be sure: Auto-title loans; check-cashers, etc.) Payday loans got their name because on the day you get the money, you write the lender a post-dated check for the entire payback amount.  The date on the check is the day the loan is due.  That is also the date of your next paycheck.  Industry hacks will tell you that payday loans are NOT designed to force the person who gets the money to re-borrow again and again. But, who’s kidding whom? (The average borrower spends over half of the entire year borrowing and re-borrowing)  Whatever “helping you out of a jam” looks like, this isn’t it)

What do these folks really stand for?

The website for the OCLA paints an interesting picture. They are (confused isn’t the word…..) painting themselves with an awfully broad brush.  Look, we’re not naïve, short-term lenders are in the business to make money.  They lend money to people who don’t have (or at least THINK they don’t have) any alternatives.  The loans are an incredibly bad choice for consumers.  And despite what the industry will tell you (or our legislature) the products are designed to force you to re-borrow, so that you have to keep paying the outrageous interest rates and fees for much longer than you ever wanted. 

 

Who is the OCLC

The mission of Ohio Consumer Lenders Association (OCLA) is:

To promote the common business interests of consumer financial services organizations operating in Ohio and to provide a forum for industry-wide consideration of the means for making credit available to middle class Ohioans on reasonable terms and conditions. OCLA works to promote laws and regulations that balance strong consumer protections while preserving access to a diverse credit market.

There is also other language on the site that sounds like they are incredibly reasonable folks. But, knowing what we know about payday lending, it sounds like they are talking about a different industry altogether.  It talks about “a code of best practices that provide appropriate safeguards for Ohio consumers,” and “appropriate debt collection practices.”  I wonder if what Ace-cash Express did to have to pay $10 Million in fines & penalties to the Consumer Financial Protection Bureau (CFPB), or what Cash-America did to incur fines & penalties of nearly $20 Million is what they are referring to when they say best practices?  (In case you’re wondering, these are two of the charter-members of the OCLA) 

They also trumpet the fact that they believe in “honest advertising.”  All we can say is: you have to make a pledge to use honest advertising?  Why is that even a thing? Yikes.

Editor’s new rule: Anytime you hear someone say that they are using “honest advertising” it means that you need to find somebody else to deal with. 

Let’s take a microscope to a typical payday loan transaction:

    • Step 1: I don’t have money today, so I go to a Payday lender.
    • Step 2: I borrow the money and give the lender a check for the entire loan amount (plus fees and costs) to pay them back.  The check is post-dated for my next payday. 
    • Step 3: The check that I wrote to the lender will clear, because it’s my payday. 
    • Step 4: Two seconds after my check to the lender clears, I am once again without money to pay the set of bills & expenses that came to my house in the meantime.
    • Step 5: Needing money to pay my bills, I take out another payday loan. We don’t know many people who can go without their next paycheck.   

Testimony

At the hearing that we mentioned above, the OCLA gave testimony extolling the virtues of short-term lenders.  As is the case with their website, the testimony had several moments that were interesting and some that were downright laugh-track worthy.   Their representative synthesized their mission into 3 bullets points:

    • The common business interests of consumer financial services organizations operating in Ohio;
    • To provide a forum for industry-wide consideration of the means for making credit available to middle class Ohioans on reasonable terms and conditions;
    • OCLA works to promote laws and regulations that balance strong consumer protections while preserving access to a diverse credit market

Point 1: seems simple enough – we work for the companies that lend money to consumers.

Point 2: starts out OK – we are here to teach everyone what our member-companies want.  It’s the last few words that lose us – “reasonable terms and conditions.”  Whatever you can say about payday lending and its spawn (check-cashing; auto-title lending; pension-advance loans) they are most-assuredly NOT “reasonable.”  I guess that reasonable-ness is in the eyes of the beholder. But, how is a loan that you KNOW you are not going to be able to pay back reasonable? 

And don’t get us started on interest rates.  If you are paying back $5,000 so you can borrow $3,000 that’s just too much money in interest (or fees, or whatever you want to call what it is costing you to borrow the money).  The industry plays this game by saying that the fees are not really interest.  Give the fees any name you want.  Here’s a trick: the next time you borrow money, write down what you are borrowing and then right next to that number write down the total amount that you will be paying the lender when it’s all over.  We’ll bet anyone a nickel that the you’ll be paying the payday folks more than any other lender.

Point 3: “…balance strong consumer protections while preserving access to a diverse credit market” is where the laugh-track should be running.  In Ohio, there are no such things as “strong consumer protections.” 

Editor’s note of jadedness: OK, we actually DO have the Consumer Sales Practices Act (CSPA), which USED to be one of the best laws in the country at protecting consumers.  But, in December, 2006 one of the last acts of Governor Taft was to mess with the damages provision of the CSPA to make it one of the weakest in the country and the legislature has been ice-picking away at its foundation ever since.  Pardon our skepticism.

Whatever you say about the state of consumer protections in Ohio and who really wants them to exist: the idea that the payday lending industry is in favor of protecting consumers is just made up.  We would bet that the member companies for the OCLA all have contracts that contain forced-arbitration clauses.  (these are the paragraphs in consumer contracts that make you give up your right to a jury trial, to discover information about how nasty the company really is, to tell anyone else about what happened, or to take part in a class action).  Forced-arbitration clauses are “consumer protections” the same way that solitary confinement can be described as one of the “perks of being a prisoner.” 

Other industry claims 

Since we seem likely to hear more about the virtues of the payday lending industry (after all, what’s the point of creating a new industry trade group if you’re not going to be blabbing all over the state about how great you are?), let’s review some of the arguments we know are coming to a legislative hearing nearest you: 

“We are just providing a service.  People want to borrow this money” – perhaps that is so.  But the same can be said about a crack dealer who is arguing for you to let him stay in business.  At the point where the product is too dangerous and causes damage to society, we need to step in.

“People would have nowhere to go to get money for their needs.” – Let’s take a look at what the folks at the Pew Charitable Trusts found when they asked payday borrowers what they would do for the money that they need:

Alternative source of $$  % of people who would use this source
Cut back on expenses 81 %
Delay paying some bills 62
Borrow from family/friends 57
Sell/pawn personal possessions 57
Get loan from bank/credit union 44
Use credit card 37
Borrow from employer 17

So, folks really do have other resources for funds to help them out of a jam.  And, notice that none of the choices above say: “take out the same loan again and again for 8 months.”

“We follow the law, when it comes to collecting money from our borrowers.”   Really?  Threatening borrowers with criminal prosecution, collection fees or non-existent negative reports to the credit bureaus; or calling employers & relatives and revealing personal financial information are all illegal.  Yet, is these very behaviors that have industry players paying hefty fines to the Consumer Protection Bureau.    

“It’s quick & easy! No credit check; No hassles.  You’ll have the money by the end of the day!”  These are all true. You will have your money quickly and they don’t much care if you have bad credit; good credit; or no credit.  Instead of seeing this as good news (“They’re gonna give me money!”) borrowers should see this as the ultimate red-flag.  Why? If somebody is going to lend you money without taking the time to see whether you can afford to pay them back, it’s because: 1) the interest rate and fees are so big, they’re gonna make at ton of money off of the folks that are able to pay; 2) they have you over a barrel and are sure they are getting it back one way or the other; or both.  In the situation with so many short-term lenders, it’s both. 

Hold onto your wallets everyone.   We haven’t seen the last of this.

Posted by: Mark Wiseman (who wants a law that requires a payday lender to ask “do you know a good bankruptcy attorney?” whenever they lend you money – just to make you think)   

Auto-title loans: Finally – a way to lose your car AND your money!

There is a new fantastic report out from the Center For Responsible Lending in North Carolina, called “Driven to Disaster: Car-title lending and its impact on Consumers,” which explains why Auto-title lending is a horrible idea and why the only people that those loans benefit are the people who own the storefronts.  What is an auto-title loan?  Simply put, it’s when someone who cannot qualify for a loan anywhere else (because they have bad credit, not enough income, ZERO income, too many debts, prior bankruptcy, etc.) can get cash, just because they own their car.  The auto-title lender determines how much the car is worth and then lends the borrower money, based on that amount. The borrower only has to give them the title to the car and an extra key (the key is so that they can threaten to take the car, unless you do whatever you can to pay the loan back in 30 days)

There is a Seinfeld Episode where Jerry accuses his dry-cleaner (with whom Jerry has stored his Mother’s fur coat for the summer) of letting his wife wear the coat out, as if it were her’s.  The dry-cleaner says to Jerry, innocently, “Jerry, we can’t wear the coat.  It’s against the Dry-cleaner’s code!”  to which Jerry replies “You need a code to tell you not to wear other people’s clothes?” 

That’s the way I feel about this report from the CRL.  “We need a report to tell us that Auto-title loans are a bad idea?”   Sadly, we do.  Unfortunately, there is no law in Ohio that prevents Auto-title lenders from operating.  (They are not given specific permission to do this, either.  But, the laws that govern short-term lending in Ohio are so intertwined and convoluted, the loopholes have become the rule, rather than the exception) 

The CRL report, shed light on how insidious these loans really are. (Click HERE for a full PDF of the report) The most alarming fact is the revelation about the actual size of the auto-title lending industry.  There are almost 8,000 auto-title lenders in the U.S.  The yearly interest payout for all of these loans combined is $3.6 Billion.  This figure isn’t shocking by itself.  But, when you consider that the total principal amount for the loans is only $1.6 Billion, this shows that the average interest rate is at least 225%! 

How anyone can justify an interest rate that is over 200% is beyond the understanding of anyone at Consumer Courage.  (Side Note: The CRL study does not list Ohio as one of the 21 states that permits Auto-title lending.  Probably because there is no specific law that sanctions the practice and because it is such a new phenomenon within our borders) Incredibly, one of the things that this report found was that the lenders typically will only lend somebody an amount up to 25% of the value of the car!  So, the borrower isn’t even getting his money’s worth.  

Want more outrage?  The CRL also found that the typical borrower renews their auto-title loan eight times, while paying $2,142 in interest for a mere $951 in credit !  So much for the industry claims that these loans are available to help people through bad times and cash flow problems.  And, what is the fate that awaits 1 out of every 6 borrowers of an auto-title loan?  Repossession.  That’s right, 17% of everyone you see walking out of an auto-title lender with a wad of cash will be saying good-bye to their car in short order.

Here are a list of CRL’s policy recommendations (in the author’s own words): 

• States should not grant exemptions to their existing annual interest rate limits on car-title loans.

• Car-title lenders often argue that their loans are short-term, making annualized limits inappropriate.

• According to our findings, most loans are renewed multiple times and last nearly a year. There is little direct evidence that access to high-cost, long-term debt is beneficial to the borrower.

• Like any consumer loan, car-title loans should be structured and priced based on an evaluation of the borrower’s ability to repay the loan. Some lenders appear to underwrite based solely on the value of the asset—in this case a car—which is a well-established indicator of predatory lending.

• Borrowers should have adequate protections in the event of a default. Such protections include notice prior to repossession or sale of the vehicle, a right to redeem the vehicle, and a ban on deficiency balances.

• Policymakers must remain vigilant in enforcing their state lending laws. Like payday lenders, car-title lenders are often aggressive in exploiting any legal ambiguity to push their defective product into the market.

Posted by Mark Wiseman