A report by the Tennessee Department of Financial Institutions -- which found car title lenders illegally charging rates as high as 360% APR -- shows that the states need to protect borrowers from this predatory business, says the Center for Responsible Lending.
Title lenders, who make small loans at extremely high interest rates to people who put up their cars as security, took 17,313 vehicles from Tennessee borrowers in 2004, the report found.
More than a quarter of the lenders the department surveyed charged illegal fees, including late fees and fees when the lenders repossessed cars. Some lenders charged 30 percent a month, far higher than the 22 percent allowed by Tennessee law, which still amounts to an annual percentage rate of 264 percent.
Strapped borrowers, who often can't pay the high cost of these loans at the end of each month, may find themselves trapped in a cycle of debt. Borrowers rolled over their debt an average of seven times, which means they likely paid more in fees and interest than they borrowed. At least one borrower rolled over a loan 105 times, the report found.
The Center for Responsible Lending, a nonprofit research and policy organization that promotes responsible lending practices, says states that allow car title lenders to operate at all should enact strong protections for borrowers and enforce them stringently. Regulators must monitor lenders vigilantly through licensing, bonding, reporting and examination requirements.
"The Tennessee report shows how expensive and dangerous car title loans are," said Amanda Quester, senior policy counsel at the center. "States must protect consumers from abusive car title loans now."
The department found about 900 shops making title loans in Tennessee, and other states have reported hundreds of locations as well.
The Tennessee report is at http://www.tennessee.gov/tdfi/admin/GeneralAssemblyReportTitlePledge.pdf.
For more information on car title lending, see recent reports by Consumer Federation of America and the Center for Responsible Lending at http://www.responsiblelending.org/issues/auto-loans.