On May 18, the Consumer Financial Protection Bureau issued a 24-page report regarding consumer usage and default patterns for vehicle title loans. Such loans are made to borrowers who sign over their car titles as collateral, and are commonly made to individuals with poor credit histories in need of fast cash. Although the borrower retains use of the vehicle during the term of the loan, the lender can repossess and sell the vehicle if the borrower defaults.
The CFPB analyzed nearly 3.5 million anonymous records of vehicle title loans, representing approximately 400,000 borrowers, originated by lenders in storefronts from 2010 to 2013. The report focused on single-payment loans, which typically have terms of approximately one month and are available in 20 states. The median size of such loans is just under $700, with the average loan at $959 with an APR of 291%.
The analysis found that only about 12% of such loans are repaid within the initial term. If a car title loan is not repaid in full, a borrower must re-borrow in order to avoid a repossession of the vehicle. In more than half of the loans reviewed, borrowers end up taking out at least four consecutive loans. Given the high rate of default, one in five borrowers have their vehicle repossessed for failure to repay.
The CFPB, which expressed concern about borrowers “becoming swamped in a cycle of debt,” expects to release regulations for auto title loans, in addition to payday loans and other similar credit products, “in the next several weeks.” Such regulations are likely to require title lenders “to determine whether consumers have the ability to repay without default or reborrowing.”
Troutman Sanders LLP has extensive experience representing vehicle title loan lenders, and will continue to monitor CFPB and other regulatory activity in this area.