What We Know

The CFPB Issues Report Condemning Auto Title Loans

May 26, 2016 | by Caren D. Enloe

In advance of issuing its rulemaking on pay day loans and other short term loans, the CFPB has issued a scathing report on Single-Payment Vehicle Title Lending. Last year, the CFPB issued its pay day proposal to end ‘debt traps’. In that proposal, the CFPB proposed eliminating or significantly curtailing short-term credit products secured by liens on the consumer’s vehicle. Today’s Report is likely to be used in support of the forthcoming rulemaking. Approximately 25 states across the U.S. allow the practice of vehicle title loans where consumers secure a short-term single payment loan using their vehicle’s title as collateral. The vehicle must be owned free and clear, and typically, the loan amount corresponds to the vehicle’s value.

The basis of the report is CFPB’s examination of nearly 3.5 million loans made in ten states between 2010 and 2013 (the height of the economic crisis). In the report, the CFPB makes the following key findings:

  • The average loan was $959 and carried an APR of 317%;
  • Of the loans studied, 87% were reborrowed within 60 days;
  • The loans have a high rate of default. A majority of the loans are reborrowed and of those, roughly 20% default and end up as repossessions;
  • More than half of the loans become long-term debt. In other words, over half roll over the loan four times or more;  and
  • As a result of the high percentage of rollover, loan sizes increase exponentially due to additional fees and interest.

The CFPB is considering a proposal which sets forth two alternative paths for lenders when dealing with short-term credit products as defined by those credit products that require the consumer to pay back the loan in full within a 45-day period. For these loans, lenders can take their pick of two alternative paths: prevention and protection.

PREVENTION

The “prevention” path focuses on the consumer’s ability to repay the loan. This option requires the lender to make a good faith determination at the outset of the loan as to whether the consumer can repay the loan when due, including all associated fees and interest, without reborrowing or defaulting. For each loan, the lender would be required to verify the consumer’s income, major monthly financial obligations, and borrowing history (with the lender, its affiliates, and possibly other lenders). A lender would generally have to comply with a 60-day cooling off period between loans. A second or third loan could only be made within the 60-day cooling off period where the lender could document a change in the borrower’s financial condition. In any event, after three covered short-term loans, a mandatory 60-day cooling off period would have to elapse before the lender could make a covered short-term loan to the consumer.

PROTECTION

The “protection” alternative focuses on the repayment options and limiting the number of short-terms loans a buyer could take out in any twelve month period. Under this alternative, a lender would not be required to determine the consumer’s ability to repay. Instead, the loan could not: (a) exceed $500; (b) be secured by the consumer’s vehicle; (c) carry more than one finance charge; (d) rollover more than twice; and (e) any rollover would have to taper off. The CFPB is contemplating two “tapering” alternatives. Under the first, the amount of principal on each rollover would taper in such a manner as to prevent an unaffordable balloon payment when the third payment is due. Under the second, the lender would be required to provide a no-cost extension to the consumer if the consumer was not able to pay off the loan in full at the end of the third loan.

Caren Enloe leads Smith Debnam’ s consumer financial services litigation and compliance group. In her practice, she defends consumer financial service providers and members of the collection industry in state and federal court, as well as in regulatory matters involving a variety of consumer protection laws.  Caren also advises fintech companies, law firms, and collection agencies regarding an array of consumer finance issues. An active writer and speaker, Caren currently serves as chair of the Debt Collection Practices and Bankruptcy subcommittee for the American Bar Association’s Consumer Financial Services Committee. She is also a member of the Defense Bar for the National Creditors Bar Association, the North Carolina State Chair for ACA International’s Member Attorney Program and a member of the Bank Counsel Committee of the North Carolina Bankers Association. Most recently, she was elected to the Governing Committee for the Conference on Consumer Finance Law. In 2018, Caren was named one of the “20 Most Powerful Women in Collections” by Collection Advisor, a national trade publication. Caren oversees a blog titled: Consumer Financial Services Litigation and Compliance dedicated to consumer financial services and has been published in a number of publications including the Journal of Taxation and Regulation of Financial Institutions, California State Bar Business Law News, Banking and Financial Services Policy Report and Carolina Banker.  ...LEARN MORE

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