The Oregonian
Bill Graves
July 2, 2006
Interest, fees New state limits on payday loans don’t apply to car title lenders or check cashing servicesThe Legislature’s crackdown on payday lenders in April will not stop some of the same quick-cash stores from charging 300 percent interest on loans to borrowers who put up their cars as security.
Nor will it stop the lenders from repossessing those cars when borrowers fail to repay.
Car title and other lenders who charge soaring interest rates on small loans continue to thrive in Oregon.
The law passed in the Legislature’s special session this past spring has no effect on car title lenders, unregulated check cashing services or conventional consumer lenders who sometimes charge high interest on small installment loans. That law goes into effect in July 2007.
Legislators said they took action against the state’s 363 payday loan stores because the lenders commonly charge 520 percent annual interest and repeatedly renew or roll over loans that some desperate borrowers can’t repay, trapping some in whirlpools of debt.
But the same difficulties also face some people who give up their car titles to borrow money.
Car title lenders often charge more than 300 percent interest on small loans secured by the titles to borrowers’ cars. If a borrower doesn’t pay, the lender can repossess the car and sell it. Oregon is one of seven states with no legal cap on the interest rates charged by car title lenders.
The Rev. Ed Evans, who recently retired as pastor of First Congregational United Church of Christ in Vancouver, said he was stunned when he saw the contract a member of his congregation signed last year with a Milwaukie car title lender.
Wendyfraw Wereta, a refugee from Ethiopia, had agreed to pay $129 a month for 12 months --a total of $1,548 to pay back a $400 loan secured by the title to his 1990 Cadillac.
Those terms equal 372 percent annual interest, printed boldly on the contract with Northwestern Title Loans. Though he lives in Vancouver, Wereta went to Oregon for the loan because Washington effectively bans car title loans.
Evans said Wereta, who fled Ethiopia decades ago after his father and brother were killed by the government, was having trouble paying rent because of payments on the title loan. Evans helped pay off the loan and then filed a complaint with the state of Oregon.
"It is just outrageous," Evans said. "They are preying on people who are least able to pay. . . . I don’t think the Mafia could get that much interest."
About a third of payday lenders also make car title loans, but title loans generally are a small part of their business. In 2004, short-term lenders made 22,350 car title loans, compared with 732,069 payday loans. All but one of the 99 stores offering short-term car title loans in Oregon also make payday loans.
Short-term car title lenders make loans for up to 60 days, typically charging $25 per $100 for 30 days, or about 300 percent annual interest. If the borrower cannot pay when the loan comes due, the lender can roll it over, again charging $25 per $100. After six rollovers, Oregon’s legal limit, the borrower would pay $825 back on a $300 loan.
A state report on 10,398 car title loans for the first four months of 2002 found that about one in five was rolled over six times.
If the borrower is unable to pay after six rollovers, the lender can get a court judgment to repossess the car, sell it at auction and take the amount owed plus auction, court, and administrative costs. Whatever is left, if any, must go to the borrower. The state has no recent information on how many cars lenders have repossessed.
In 1998, the year car title stores began emerging in Oregon, the state counted repossessions. It found that of 8,049 short-term car title loans, 376 borrowers lost their cars. If that rate held in 2004, short-term title lenders would have repossessed about 1,050 cars.
Conventional loans
Oregon has 205 consumer lenders with conventional rather than short-term licenses that can make installment loans over periods longer than 60 days. Many of them, including Northwestern Title Loans, make loans using car titles as collateral.
Conventional lenders made 45,143 loans secured by car titles in 2004 --double the number of loans made by short-term title lenders.
Costs triple obligations
One was an $800 loan to Miranda Herrera, 31, a state case manager, and her husband, Hedilberto Herrera-Campos, 39, who works for a contractor. After Hedilberto rushed to Mexico to be with his ill father, the couple, who have five children, found themselves short on rent money.
So they used the title to their 1996 Ford Mustang to take out an installment loan with payments of $278 a month for nine months. The total added up to more than three times the loan amount, Miranda said.
"We knew there was high interest, but I didn’t know it was that high," she said.
Her husband returned, they pooled their money, put off some utility bills and spent more than $1,000 to pay off the loan.
Jennifer and Jason McCabe, who live near Olympia, became desperate for rent money two years ago and drove to Portland to borrow $500 against the title on their Ford Ranger pickup, which is more than 16 years old. Jennifer, 24, stays home to care for their two young boys, and Jason, 31, worked in construction.
They knew interest on the title loan was high --more than 300 percent --but planned to pay it off in the following month. After their first payment, however, Jason lost his job. They couldn’t make the second payment of about $150, let alone pay off the loan, Jennifer said. The couple offered the lender the truck, she said, but the company refused it and continued to charge interest on the loan.
Today, Jennifer figures the McCabes owe more than $2,000 on their $500 loan. She complained about the high interest to the Oregon Division of Finance and Corporate Securities, which told her the contract was legal.
"I don’t know what to do," she said. "It is already thousands of dollars owing for a truck I could maybe get $500 for. . . . We were already in a bad situation, and this put us in an even worse one."
When borrowers get in trouble, credit counselors offer no help because most won’t take on problems connected to secured loans, including car title loans, said Aaron Barrett, financial counselor for Monytek Foundation Inc. in Beaverton. Barrett, however, said he does help people with car title debt.
"It is difficult to get on the phone and try to negotiate with (car title lenders) because they are so hard-nosed," said Barrett, who sees about five troubled car title borrowers a month. "I’ve had several of my clients come to me and say the title lender came and picked up their car at work."
Jean Ann Fox, a director for the Consumer Federation of America, said car title lenders cannot justify charging such high interest rates.
"Consumers are paying through the nose for loans that are completely secured by cars they’ve already paid for," she said. "People get caught up in the same vicious cycle to keep paying and paying to keep the loan from defaulting without paying down the principal of the car loan."
But most cars used as collateral are at least 10 years old, and many of the borrowers have poor credit ratings, said Rod Aycox, of Alpharetta, Ga., owner and president of 300 title loan stores in 23 states, including the 16 Northwestern Title Loans stores in Oregon.
"My product is very, very fairly priced," he said. "There are so many options for people today, you have to be competitively priced. . . . We are very consumer friendly."
Further state action
State regulators might be able to extend the Legislature’s new payday loan reform law to cover short-term car title lenders, said David Tatman, administrator for the Division for Finance and Corporate Securities. The law limits payday loan charges to $10 per $100 on an original loan, minimal loan periods of 30 days, and no more than 36 percent annual interest on subsequent rollovers, which are limited to two.
The state will probably schedule rule making hearings within the next four months to consider bringing short-term car title lenders under the law, Tatman said.
But only the Legislature has authority to impose new rules on conventional lenders. For now, they are free to make high-interest car title installment loans. Services that charge people fees to cash checks also remain unregulated in Oregon.
"I think you will see a movement, an attempt, to bring all of these short-term lenders into compliance across the board," said Sen. Floyd Prozanski, D-Eugene, chairman of an interim Senate consumer protection committee that has investigated the lenders.
The Rev. Evans said he worries about what becomes of trapped borrowers who don’t have family, church or friends to bail them out from debts to the high-interest business of car title loans.
"If it is not criminal," he said, "it should be."
Payday Loan Fairness: [x] Yes, [] No
©2006 Our Oregon. All rights reserved. Photos by Leah Nash.