Don’t Make Virginia Do Tenn. Two-Step

In the coming months, as health insurance reform moves down on the front page, Congress will redirect its attention to reforming our nation’s financial regulatory system, which is rife with weaknesses — most notably fragmented oversight and inefficiency. Causing further concern are the gaps in regulation that routinely leave Americans vulnerable to deceptive lending practices.

For example, financial institutions classified as non-banks operate free and clear of federal regulation and oversight. What is a non-bank financial institution?
Think payday or car title lender. The products and services offered by these outfits fall beyond the reach of many federal consumer protections and expose borrowers to abusive lending practices, espe´cially consumers with limited means. For these lenders, it’s the Wild West, and anything goes.

In Virginia, a similar gap in regulation exists with respect to open-end credit transactions. Although the state Bureau of Financial Institutions (BFI) is authorized to regulate banks, credit unions, consumer finance companies, and other lenders, the BFI has no jurisdiction over open-end credit. This gap in regulatory oversight allows deceptive lenders to skirt state consumer protec´tions by reclassifying their products as open-end credit. The car title loan industry has mastered this sleight of hand and now offers consumers unregulated, open-end, secured loans that seem legit on the surface, all the while reaching further into the borrower’s pockets.

This industry poses a signifi´cant threat to low-and moderate-income consumers in Virginia. Car title loans carry triple-digit annual interest rates, ranging from 300 percent to 360 percent. Moreover, car title lenders issue these loans without assessing a borrower’s ability to repay. The high interest rates and lack of underwriting translate to default and/or repossession for many consumers with limited means.

The absence of government oversight for car title lending has prompted state lawmakers to seek reform. Right now, legislators are looking to Tennessee for guidance on how to regulate the industry. But the Tennessee approach would offer little relief to borrowers here in Virginia. In fact, it would permit the very practices that already give rise to lending abuses. At the most recent meeting of the legislative subcommittee studying this issue, the Tennessee Department of Financial Institutions and the Attorney General’s Office here in Virginia noted that Tennessee’s law allows car title lenders to charge triple-digit annual interest rates. And, unsurprisingly, that’s precisely what car title lenders do. The annual interest rate for title loans in Tennessee is around 264 percent. Admittedly, that is lower than the rates charged by Virginia’s car title lenders, but it’s hardly a win for consumers, as some suggest.

In addition, Tennessee’s law permits title loan renewals (meaning a borrower can obtain a new loan to repay an outstanding one), which routinely place consumers in a perpetual cycle of debt. In 2006, the most recent year for which data is available, one out of every four agreements was renewed at least seven times. Moreover, 88 percent of outstanding loan agreements were renewed at least one time.

Because Tennessee allows these abusive lending practices, many car title loans there ultimately result in repossession. Data collected by the Tennessee Department of Financial Institutions suggests that more than one in every seven loans ends with repossession.

While title loan borrowers struggle with overwhelming debt, the title loan industry is thriving in Tennessee. In 2006, car title lenders generated over $72 million in revenue. Moreover, between 2006 and 2007, the industry picked up 27 stores, growing from 703 locations to 730.

As car title lending expands in Tennessee, so will the number of disadvantaged borrowers. That is not what we want for the future of Virginia. Our consumers deserve better and we are literally surrounded by better options. With the exception of Tennessee, each of the states bordering Virginia imposes a usury cap on small loans. Moreover, 26 other states take similar action. Interest rate caps limit the spread of dangerous financial products and help strengthen the financial security of low- and moderate-income families.

As legislators continue to grapple with this issue, it is imperative for them to seriously evaluate the financial interests of consumers, particularly those with limited means. Discussions can no longer start and end with the safety and soundness of the title loan industry. After all, the existing economic crisis has shown us the dangers of financial policies that value profitability above all else.

The time for balanced reform has arrived. And Virginia’s low- and moderate-income consumers are waiting.

LaTonya Reed is a consumer finance policy analyst with the Virginia Interfaith Center for Public Policy. Contact her at .