CFPB tackles auto title loans

The Consumer Financial Protection Bureau (CFPB) has turned its sights on the auto title loan market after in-depth research found that one-in-five borrowers who take out a single-payment auto title loan have their car or truck seized by their lender for failing to repay their debt.

According to the federal agency, more than 80% of these loans are renewed the day they are due because borrowers cannot afford to repay them with a single payment.

It says more than two-thirds of auto title loan business comes from borrowers who wind up taking out seven or more consecutive loans and consequently are stuck in debt for long periods.

“Our study delivers clear evidence of the dangers auto title loans pose for consumers,” said CFPB director Richard Cordray. “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. 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.”

The research suggests the typical loan is about $700 and the typical annual percentage rate is about 300%, far higher than most forms of credit. 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. These single-payment auto title loans are available in 20 states; five other states allow only auto title loans repayable in installments.

Debt patterns

The CFPB’s report examined nearly 3.5 million anonymized, single-payment auto title loan records from nonbank lenders from 2010 through 2013 relating to more than 400,000 borrowers. The auto title research analysed loan use patterns, such as reborrowing and rates of default.

The CFPB study found that these auto title loans often have issues similar to payday loans, including high rates of consumer reborrowing, which can create long-term debt traps. A borrower who cannot repay the initial loan by the due date must re-borrow or risk losing their vehicle. Such reborrowing can trigger high costs in fees and interest.

According to the study, single-payment auto title loans have a high rate of default, and 20% of borrowers have their car or truck seized or repossessed by the lender for failure to repay. This may occur if they cannot repay the loan in full either in a single payment or after taking out repeated loans. This may compromise the consumer’s ability to get to a job or obtain medical care.

Auto title loans are marketed as single-payment loans, but most borrowers take out more loans to repay their initial debt. In only about 12 % of cases do borrowers manage to be “one-and-done” – paying back their loan, fees, and interest with a single payment without quickly reborrowing.

More than half of auto title loans become long-term debt burdens, with borrowers taking out four or more consecutive loans.

The CFPB calculates that borrowers stuck in debt for seven months or more supply two-thirds of title loan business. In contrast, loans paid in full in a single payment without reborrowing make up less than 20% of a lender’s overall business.

Future legislation

The CFPB 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., and says in its views auto title loans share similar characteristics and would be included in its plans.

“The bureau has consistently recognized that consumers may need affordable credit to cover emergency expenses. If the product is structured to make repayment realistic, then such loans may help tide consumers over in their time of need,” Cordray said.

“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,” he warned.