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From Banking and Finance Law Daily, May 18, 2016

CFPB: Auto title loans steer borrowers into ‘cycle of debt’

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has completed a study on auto title loans and found that more than two-thirds of auto title loan business comes from borrowers who take out seven or more consecutive loans and find themselves “stuck in debt for most of the year.” The bureau’s report illustrates how the single-payment auto title loan market works and explains borrower behavior in this market.

The CFPB said that the auto title loan business is similar to the payday loan business. Payday borrowers get hit with steep bank penalties and risk losing their checking accounts because of repeated attempts by their lender to debit payments. With auto title loans, consumers risk their car or truck and a resulting loss of mobility and becoming caught in a “cycle of debt.” The CFPB said it is considering proposals to put an end to payday debt traps by requiring lenders to take steps to determine whether borrowers can repay their loan and still meet other financial obligations.

Report highlights. Auto title loans are high-cost, small-dollar loans borrowers use to cover an emergency or other cash-flow shortage between paychecks or other income. Borrowers use their vehicles for collateral, and the lender holds their title in exchange for a loan amount. If the loan is repaid, the title is returned to the borrower. The typical loan is about $700, and the typical annual percentage rate is about 300 percent. For the auto title loans covered in the CFPB report, a borrower agrees to pay the full amount owed in a lump sum plus interest and fees by a certain day, generally within 30 days. These single-payment auto title loans are available in 20 states. Five other states allow only auto title loans repayable in installments, according to the report.

The CFPB found that:

  • one in five borrowers has a vehicle seized by the lender for failure to repay the loan;
  • four in five auto title loans are not repaid in a single payment; and
  • more than half of all auto title loans become long-term debt burdens.

Cordray press call. In his prepared remarks for a press call on auto title loans, CFPB Director Richard Cordray noted, “Most borrowers resort to rolling over loans through repeated reborrowing, paying high fees each and every time.” The fact that about two-thirds of the auto title business comes from borrowers “mired in debt for most of the year” is evidence that “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.”

Cordray added that the bureau “has consistently recognized that consumers may need affordable credit to cover emergency expenses. If a product is structured to make repayment realistic, then the loans may help consumers. But if the payments are not affordable, those in a financial jam with nowhere else to turn may find themselves on a perpetual treadmill of debt, laden with mounting costs that disrupt the precarious balance of their financial lives. Although these products are usually marketed for short-term financial emergencies, the long-term costs of such loans often just make a bad situation even worse.”

MainStory: TopStory CFPB ConsumerCredit Loans

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