November 28, 2015
Las Vegas Review-Journal
Retired mover Wayne Fischer lives mostly on $489 a month from Social Security.
Retired mover Wayne Fischer lives mostly on $489 a month from Social Security.
So how did the Las Vegas man qualify for a 30-day loan of nearly $2,500?
He borrowed against his 2006 Ford Ranger, taking out a type of loan so controversial that it's illegal in 25 states. Fischer's car-title loan ultimately cost him far more than the truck, which the lender seized when he couldn't pay.
"I can't get anywhere. I can't get to jobs,'' Fischer said. "If I need to do things bureaucracy-wise, to try to fight what's happening to me, it takes forever using the bus. It's just additional stress."
Largely unregulated in Nevada and most other states, the $4.3 billion-a-year title loan industry drives thousands of consumers over the financial edge, even when they make their payments. In states with limits, lenders exploit legal loopholes to skirt consumer protections.
The consequences are shared by all.
"It is an enormous cost to society that is basically transferred from the corporations exacting this money to you and me, because people at the bottom can't pay for it," said Nevada Sen. Tick Segerblom, D-Las Vegas. "They're stuck in a vicious trap. They try to get a job. They can't keep their car. They can't get to their job. All of these issues are tied into the lower rung of the economic ladder, and those are the people we want to become self-sufficient."
Money to be made
Title loans once were rare. Virtually no one loaned to low-income people in the 1980s, said Jay Speer, executive director of the Virginia Poverty Law Center.
"The feeling was, there was not a lot of money to be made ripping off poor people," Speer said. "But people started coming to the realization that you can make money ripping off poorer people by taking a little bit from a lot of them. It snowballed from there."
The snowball accelerated after a 1978 U.S. Supreme Court decision that lifted restrictions on interest rates lenders could charge across state lines. Nevada, South Dakota and other states also eliminated anti-usury laws to attract call centers of lenders such as Citibank.
Today, about 1 million U.S. households take out title loans each year, according to the Federal Deposit Insurance Corp. They borrow up to $15,000 per loan and hand over their car title as collateral. If they can't pay, the lender repossesses the car.
States with the fewest protections include Nevada, Illinois, Texas and Virginia — all allow triple-digit interest rates or have no cap on charges.
But title loans cause problems even in states that limit or ban them. Ohio doesn't explicitly allow them, but companies lend through the state's Mortgage Loan Act. In Florida, where a 15-year-old law holds annual interest at 30 percent, lenders tack on insurance "fees" equal to a triple-digit annual rate.
High rates are just the beginning: Lenders can roll over loans for months, draining borrowers financially.
"Continually churning borrowers is the core of the business model," said Diane Standaert, director of state policy at the Center for Responsible Lending in Durham, North Carolina.
The 64-year-old Las Vegan was barely making it in 2013. He stretched his income by taking a roommate in his $425-a-month mobile home and picked up odd jobs moving light furniture.
But his roommate's unemployment benefits ran out in late 2013, leaving Fischer on his own to cover rent, $250 a month for utilities, rent on a storage unit, medical expenses and other bills. He quickly fell behind.
So he borrowed $2,490 against his truck in January 2014 through EZ Money Payday & Title Loans on South Valley View Boulevard. EZ Money told Fischer he could repay the loan by March or make an interest-only payment and have another 30 days to pay off the loan. Nevada lenders can roll over title loans six times.
Fischer's interest-only monthly payment of $373 for six months equaled an annual interest rate of 182 percent — eight times more than the 22 percent a borrower with poor credit might pay on a high-interest credit card.
Fischer said he skipped other bills to scrounge up $746 in March and April but "couldn't make any more money to give them."
EZ Money took Fischer's truck in July 2014.
Fischer's case is a classic example of how title loans crush the poor: Unlike virtually any other loan, they're not based on income and ability to repay. That's because lenders know they can take the car to satisfy the debt, said Tom Feltner, director of financial services at the Consumer Federation of America in Washington.
Title loans, and their high-interest cousin the payday-loan, set consumers up to fail, Feltner said. But title loans are worse because they can cost consumers their transportation lifeline.
"Borrowers are losing what for many of them is their largest asset, as well as the abilty to get the best job for which they're qualified," Feltner said. "It's ultimately both an abusive credit risk as well as an employment risk. Everything becomes more difficult and more expensive."
The average U.S. car-title loan is rolled over eight times. Lenders can collect at least twice as much in interest and fees as the original loan amount, Standaert said. The loans bleed more than $4.3 billion a year in fees from low-income earners nationwide.
"Basically, they're trying to get as much money out of you as possible, for as long as possible, and they still take your car in the end," said Fischer's attorney, Christine Miller of the Legal Aid Center of Southern Nevada.
It's difficult to pin down how Nevadans end up like Fischer. Like most states, Nevada doesn't collect data beyond the number of lenders licensed. Nor is there much urgency to track the issue: Nevada's Financial Institutions Division offers no deadline for the database it's building to track defaults and repossessions.
Figures from other states show punishing fees and high failure rates are common.
In Texas, up to 55 percent of borrowers who took out single-payment title loans in 2014 had to refinance, the state's consumer credit commissioner said. And that's where lenders really made their money: The dollar value of new loans was $368.1 million, while the dollar value of refinances tripled that, at more than $1 billion. Fees totaled $242 million.
In all, Texas title lenders made 299,868 new single-payment title loans and seized 40,799 vehicles, 13.6 percent repossession rate.
Title-pledge lenders in Tennessee made 243,598 loans worth $215.5 million in 2013. Nearly a quarter — 22 percent, or 53,829 borrowers — fell behind. Nine percent lost a car.
The Consumer Federation of America found a national repossession rate averaging 17 percent. That compares with a nationwide home repossession and sale rate of 3 percent, according to California research firm RealtyTrac. By comparison, credit card delinquencies run 2 percent, the Federal Reserve reports.
Studies by the Virginia Poverty Law Center show 25 percent of borrowers fall 60 days behind on title loans. That's compared with 0.5 percent delinquency on primary auto loans.
"The fact that title-loan default rates are 50 times higher tells me they're absolutely unaffordable," Speer said. "They're a disaster."
Nevada's biggest title lender, TitleMax of Georgia, didn't respond to requests for comment. Nor did Fischer's lender, Texas-based EZ Money.
But industry advocates say consumers should get to choose title and payday loans.
In a recent Las Vegas Review-Journal opinion piece, the Nevada Policy Research Institute said proposed industry reforms would have the "devastating consequences" of eliminating a financial "godsend" for consumers in financial straits. The institute cited high customer-satisfaction rates and said alternatives — including bounced-check fees — are far more costly in annual percentages.
The think tank, which champions limited government, also said short-term borrowers lack choices because traditional banks won't lend to them.
"Banning payday loans will force low-income folks to rely on much worse ways to get cash," the institute said. "Adults should be allowed to control their finances however they please. No one is forced to take out a payday loan — just as no one is forced to take out a new credit card or home mortgage. These are products freely chosen on the open market."
Consumer advocates disagree.
A bounced check costs more in interest terms, but the fee is charged only once per check, Speer said.
Plus, title lenders target low-income consumers with bad credit who may be unaware of other options, said Linda Cook, an Ohio Poverty Law Center senior attorney in Columbus.
"Our government has a responsibility to the entire public to ensure that the marketplace is safe and affordable for people to participate in," Cook said. "Everybody should care if a class of people is being victimized or subject to abusive practices."
Few checks on industry
States have done little to rein in title lenders.
"It's a very entrenched industry," Feltner said. "(Lenders) have a strong relationship with lawmakers. They have invested heavily in building support for a product that doesn't work as advertised."
Barbara Buckley, executive director of the Legal Aid Center of Southern Nevada, said lawmakers were lukewarm on reforms when she was in the state Assembly from 1994 to 2011.
"There was very little support for a usury law," Buckley said. "Lawmakers would say things like, 'We don't need one,' or, 'It will hurt lending in our state.'"
But the federal Consumer Financial Protection Bureau plans to curb the worst abuses, and some lawmakers say they see more interest in local fixes.
Assemblyman Ira Hansen, R-Sparks, said he unofficially broached reforms in the 2015 legislative session and found receptive ears, although no anti-usury laws emerged in a session dominated by education funding and reform.
But Hansen said reforms are "very likely" with some "momentum."
"You need that groundswell. With that, there's a good possibility we could get something going," he said. "There's a basic morality in this. The rest of us have to protect the most vulnerable."
Where lawmakers fail to act, voters can move.
Consumer advocates put a referendum on Montana's 2010 ballot to cap annual interest rates at 36 percent. The question passed with 71.8 percent of the vote. In Ohio, 63.6 percent approved a 28 percent cap.
"When you take it to the public, you win every time," Speer said.
Cities are acting, as well.
Henderson has mostly barred short-term lenders from its downtown redevelopment area. The Dallas City Council voted to limit payday and title loans based on income. Sacramento, California, prohibits payday and title lenders in some commercial zones.
But for sweeping change, consumer advocates look to the Consumer Financial Protection Bureau, which is expected to release a draft of new short-term lending rules in coming weeks. Under consideration are $500 limits, verification of ability to repay based on income and an outright ban.
The regulations would "ensure that lenders have better incentive to underwrite for success rather than overrely on ability to collect," Feltner said. "It's a real opportunity to set minimum standards for states that have been unable to crack down on the worst abuses, and it promises to dramatically reshape the market."
Still, federal law bars what consumer advocates say would work best: A 36 percent nationwide rate cap.
What's more, title lenders are nimble, Cook said.
They flout Ohio's ceiling through third-party "credit service organizations" that charge fees of as much as 30 percent of principal. They circumvent Florida's cap through mandatory insurance fees. They dodge Virginia's restraints by registering under a different type of lending license. Some Nevada lenders fudge on ability-to-repay laws by using six-month income estimates when making a 30-day loan.
"It is discouraging. It's like a hydra. You chop off one head, and it grows more," Cook said. "The industry morphs. How do you craft a set of rules that you don't constantly have to revisit to address new business models? The challenge is making regulations that are going to be effective over a period of time."
Until that happens, Fischer and other borrowers will struggle.
EZ Money auctioned Fischer's truck to satisfy his $2,490 loan. The dealer who bought the truck flipped it for $8,000. Fisher got nothing back.
He said his living situation is "fluid," his future "unclear." He since has left his mobile home and pays $75 per week to live with a friend. He may move into a homeless shelter to save money.
"I don't know what I'm going to do," he said. "It's really up in the air. If I can save my money for a few months, maybe I can get another vehicle."