Editorial: Lenders fashion new subprime loan trap



Last modified: Saturday, December 27, 2014

’Tis the season when people spend more money than they have. It’s never the right time, though, to fall victim to loans that trap borrowers in cycles of debt. One in particular is causing heartache across the country and is, thankfully, prohibited in Massachusetts. Companies that prey on financially stressed Americans through high-interest “payday” deals are shifting to loans secured by cars.

It’s the latest way to beat up on the little guy.

While these loans are illegal here, they are offered. Search online for “Massachusetts ‘title loan’” and you’ll find companies ready to ship you cash without conducting a credit check, provided you own a car of almost any vintage. These lenders say they help people whose poor credit disqualifies them for personal loans from mainstream banks. Don’t be ashamed of that, some of these companies say. Get what you need and deserve.

What these outfits do, however, is charge exorbitant rates that borrowers struggle to pay under the threat of losing something key to their livelihoods — their cars.

A recent series of New York Times articles looked under the hood at title loans, sometimes known as “title pawns.” They are growing in prominence as states crack down on payday loans —short-term advances secured by the borrower’s next paycheck.

The Times reports that title loans are a booming business for lenders that swim in subprime waters, just years after an explosion of subprime mortgage borrowing nearly brought down the American economy. Title loans accounted for 27 percent of new auto lending in 2013, compared to 20 percent in 2009. More than 1.1 million households used them in 2013, according to the Federal Deposit Insurance Corp.

The newspaper reviewed three dozen title loan agreements and found that annual interest rates ranged from 80 to 500 percent. Though the costs of the loans are high, people fight to pay what they owe because they can’t afford to lose their cars. Even so, the Center for Responsible Lending, in Durham, North Carolina, says one in six of the loans ends with repossession.

The loans are so lucrative to lenders that bond funds are investing in companies like TitleMax, a unit of TMX Finance, and even major banks, still cautious after the 2008 housing bubble, are stepping into the subprime auto loan market. “Turn your car into holiday cash,” one TitleMax TV commercial declared this year. The ad showed a Christmas stocking overflowing with money.

After seeing Arizona crack down on payday loans, ACE Cash Express changed its retail outlets there to promote title loans. ACE Cash Express is one of the biggest providers of title loans, operating 1,500 storefronts in 36 states.

In a FAQ section on its website, the company notes blandly that it may pursue delinquent loans by calling, texting or emailing borrowers. “We may also exercise any of our rights under our loan or credit services agreement with you,” it states. That means repossession, a step some companies now pull off by disabling vehicles through remote electronic devices.

Last summer, the Consumer Financial Protection Bureau hit ACE Cash Express with a $5 million penalty and made it refund another $5 million to customers for subjecting payday loan borrowers to illegal collection tactics that included false threats of lawsuits and criminal prosecution.

Those tactics, the government says, forced borrowers into new loans that left them in even deeper financial holes.

Some states are fighting for consumers. Montana set a 36 percent annual interest rate limit on title loans in 2010. New Hampshire did the same in 2008, but repealed the law, under pressure from the industry, four years later.

Desperate people fall victim to these loan scams. ACE Cash Express boasts that it’s been around since 1968 “serving consumers who seek an alternative to traditional banking relationships to gain convenient and immediate access to financial services.”

The $10 million secured by the federal government won’t slow it down and borrowers must beware.


 


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