For years, payday lenders have been the bad guy in the predatory-lending debate, while their close cousin, car-title lenders, have cruised along unnoticed and — perhaps more disturbing for some — unregulated in several states.
Many efforts to regulate the industry have failed as the lenders pour hundreds of thousands of dollars into legislative campaigns.
Advocates for the poor say they don't have the resources to fight both industries at the same time. Once the payday lenders are in check, they vow to go after car-title lenders.
They say title loans — short-term, high-interest loans secured by a car title — can be even more disastrous than payday loans.
"They can both trap borrowers in long-term debt, but with a payday loan the collateral is a personal check. With a car title loan, it's the family's probably most important asset," said Leslie Parrish, senior researcher for the Center for Responsible Lending.
People are also reading…
Car-title lenders operate in nearly half the states, about a dozen of which have specific laws regulating how much the lenders can charge, Parrish said.
Where there are no laws specific to the industry, title lenders operate under regulations governing pawn-shop brokers or other lenders, except in Virginia, where car-title lenders have clinched onto laws that regulate credit cards.
By structuring their loans as open-end credit, the lenders can charge triple-digit interest and whatever terms they wish as long as they don't charge anything for 25 days.
In most states, the entire loan is due in one month, but can be rolled over and new fees charged.
This year, legislation was introduced in at least eight states, from Florida to South Dakota.
Congress also banned payday lenders, car-title lenders and tax-refund-anticipation loan companies from charging members of the military or their families more than 36 percent interest.
The lenders have fought hard against regulations. Jeff Smith, a lobbyist for Community Loans of America, one of the nation's largest cartitle and payday lenders, said title loans aren't as problematic as payday loans because borrowers can't get more than one at a time unless they have multiple cars.
"A lot of the consumer- protection issues that are debated in regard to payday lending don't exist in title lending," Smith said.
Here's how the loans usually work: A borrower gives the title to his vehicle and a copy of its keys to a lender in exchange for a loan up to about half of the car's wholesale value.
The borrower agrees to repay the loan plus triple-digit annual interest and other fees and often must pay back the loan in a month or two. If the borrower falls behind, he could lose his car.
There are no nationwide data on the industry. Because the lenders are unregulated in several states, officials have no way of keeping track of the loans. There also is no way to know how many borrowers are losing their cars.
Although industry opponents want caps on the amount car-title lenders can charge, they fear regulating the industry will legitimize it the way it has payday lenders.
States that have regulated payday lenders have seen a proliferation of the storefront cash-advance shops.
Last year, 24,000 payday lenders made about $40 billion in loans nationwide, according to The Center for Responsible Lending.
local angle
In Arizona, car-title lenders are regulated by the Department of Financial Institutions under the category of "sales finance companies."
The lenders themselves are referred to as "secondary motor vehicle finance companies," and the Arizona Revised Statutes define them as entities that take a vehicle lien that's not connected to the sale of the vehicle.
As of Thursday, there were 478 total sales finance licenses in the state.
"Anybody who has a sales- finance license can do title loans," said Jack Hudock, a state Insurance Department spokesman.
"If they do title loans, they're required to tell us they do that."
The license does not place a cap on how much a company can loan against a person's vehicle.
Rather, the statutes spell out how much interest a company may charge on such a loan.
"The cap effectively is what the market will bear, and there's a cap on the interest rate," Hudock said.
"That protects the consumer, and the licensee is protected by his business judgment," he said.
ARS 44-291 states that secondary motor vehicle finance contracts may charge the following rates depending on the original loan amount:
Loan Maximum monthly Which equals amount: finance rate: this annually:
$500 or less 17 percent 204 percent
>$500 to $2,500 15 percent 180 percent
>$2,500 to $5,000 13 percent 156 percent
>$5,000 10 percent 120 percent