By Jeff Bater
May 18 — One in five borrowers who take out single-payment auto title loans have their vehicle seized by the lender for failing to repay the debt, the Consumer Financial Protection Bureau (CFPB) said as it considers proposals to end debt traps that ensnare consumers.
The watchdog agency released a report May 18 on auto title loans, which are used to cover an emergency or other cash-flow shortage between paychecks. A borrower puts up a car, truck or motorcycle for collateral, and the lender holds the title in exchange for a loan amount.
The study emerges as the CFPB considers a long-awaited plan to address payday loans. The agency is concerned lenders are offering small-dollar, short-term products — such as payday loans — without assessing the consumer’s ability to repay, and it has been working a long time on a proposal addressing payday, auto title and similar lending products.
In April, the bureau released a study finding that borrowers who go online for payday loans are incurring an average of $185 in bank penalties because of debit attempts that result in overdraft or failure (77 BBD, 4/21/16).
Last year, the CFPB published an outline of payday lending proposals under consideration and has since been gathering feedback from industry (59 BBD, 3/27/15). The agency has said it expects to issue a proposed rule this spring.
“At the consumer bureau we're working to ensure consumers have a marketplace for short-term and longer-term credit products that have affordable payments and are free of debt traps,” CFPB Director Richard Cordray said during a conference call on the auto title lending research. “We are weighing the findings in this report on single-payment auto title loans, as well as the results from our previous studies on payday loans and deposit advance products, as we prepare new rules to address issues facing consumers in the marketplace for small-dollar loans.”
In its study, the CFPB found the auto title loans often have issues similar to payday loans, including high rates of consumer reborrowing, which can create long-term debt traps. Reborrowing occurs when a loan is rolled over by paying a fee to extend the loan another 30 days — or when a subsequent loan is taken soon after repayment.
“Instead of repaying their loan with a single payment when it is due, most borrowers wind up mired in debt for most of the year,” Cordray said in a news release. “The collateral damage can be especially severe for borrowers who have their car or truck seized, costing them ready access to their job or the doctor’s office.”
Aside from risking vehicle seizure for default, the CFPB also found that four in five auto title loans are not repaid in a single payment. Instead, the loans are renewed on the due date. Repeated borrowings pile up additional fees and interest to the original sum owed.
“What starts out as a short-term, emergency loan turns into an unaffordable, long-term debt load for an already struggling consumer,” the CFPB said.
The study found that more than two-thirds of title loan business is generated by consumers who reborrow six or more times. “In contrast, loans paid in full in a single payment without reborrowing make up less than 20 percent of a lender’s overall business,” the CFPB said.
The new report examined nearly 3.5 million single-payment auto title loan records from nonbank lenders from 2010 through 2013. The median loan size was just under $700, with the typical annual percentage rate around 300 percent.
Borrowers of this type of loan agree to pay the full amount owed in a lump sum plus interest and fees by a certain day. The single-payment auto title loans are available in 20 states, the CFPB said, with five other states allowing only auto title loans repayable in installments.
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