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For an estimated 2 million people every year, the title to their car becomes a pawn in their bid to stay financially afloat — a move that doesn't always work out.
As the Consumer Financial Protection Bureau sorts through public input on its proposal to relax its pending so-called payday-loan rule, which covers auto-title loans, consumer advocates say these arrangements are a debt trap.
"They're marketed to people experiencing financial distress," said Diane Standaert, director of state policy for consumer advocacy group Center for Responsible Lending. "But really, car-title loans send people in a debt spiral that leaves them worse off."
While a small piece of the overall lending market, auto-title loans fall into a category of consumer borrowing outside the regular banking world. They work how you'd expect: You hand over the title to your car for a set amount — the average is $1,000 — and you get to keep driving your car. You get the title back when and if you pay off the loan.
"At the end of the loan term, the borrower either loses their car to repossession or — what most do — they let the fees get collected and extend the loan in hopes of holding on to their car," Standaert said.
With interest rates that can reach the equivalent of as much as 400 percent or more annually and the full amount borrowed typically due in one month, more than 80 percent of borrowers roll over the loan, according to various research.
A small share — in the neighborhood of 10 percent to 20 percent — ends up having to turn over their car because they can't pay what's owed.
Under the payday-loan rule issued in 2017 by the consumer agency — led then by Obama-appointed Richard Cordray — lenders would be required to verify the borrower's ability to repay without upending their ability to meet their daily expenses and obligations.
Now, under the leadership of new director Kathy Kraninger — appointed to the position by President Donald Trump — the bureau wants to rescind that requirement. Kraninger says there was insufficient evidence to support the need for the provision and that it could reduce people's access to credit.
Consumer advocates disagree.
"Car-title lenders will keep doing business as usual and keep people in unaffordable loans," Standaert said.
The other part of the rule, which is less likely to affect auto-title loans, would remain in place: Providers of short-term loans such as payday loans would face limits on how many times they can try to withdraw payment from a customer's bank account if the charge doesn't go through. The effective date for that provision is scheduled for August.
Auto-title loan providers generally get less federal oversight than payday lenders.
While state laws govern auto-title loans, the Dodd-Frank Act of 2010 granted some authority to the bureau (which the legislation also created) to regulate such lenders. Before that, they had largely flown under the radar of federal lawmakers and regulators.
"The CFPB has jurisdiction to a certain extent," said Alan Kaplinsky, a partner at the national law firm Ballard Spahr and an expert on the agency. "They can investigate and bring enforcement proceedings against [a title-loan provider] if they feel that they're in violation of any federal consumer law.
"But they are only really supervised at the state level."
Overall, consumers spend about $30 billion on short-term loans such as title loans and payday loans, according to Pew Charitable Trusts. The average customer spends about $1,200 in fees per year on auto title loans, with loan amounts that average $1,000.
While title loans are not legal in all states, some states allow them to incur interest equal to more than 300 percent or 400 percent annually. Other states cap that amount at 36 percent or lower and impose other limitations.
"Car-title loans tend to be larger than payday loans," Standaert said. "So that's larger debt.
"But they both prey on the same communities, the same low-income borrowers."