How Much Have We Lost?

Wednesday, June 24, 2015

Weekly Column: Predatory Lending Continues Its March Through Virginia and U.S. 1

The following is my column that will appear in the Mt. Vernon Gazette and The Mt. Vernon Voice in the week of June 23, 2015.
Predatory Lending Continues Its March Through Virginia and U.S. 1
The Virginia’s State Corporation Commission latest annual report says that predatory car title lending is thriving in Virginia .  With nearly three dozen car title lenders between Alexandria and Quantico on U.S. 1, this is troubling news, except to the lenders out to make big profits.    You can read the full report on my online newsletter –The Dixie Pig – at scottsurovell.blogspot.com 
Car title lending began in our state in 2010 after Virginia limited interest rates on payday loans and predatory lenders argued that a new option was needed.  Virginia law authorizes lenders to lend money at rates up to 30% per month which equates to around a 297% annual percentage rate (APR).  A consumer can  borrow up to 50% of their vehicle’s equity and the loan term is limited.   

First, the good news from the report.  The total amount lent declined from $206 million to around $162 million and the total number of loans dropped from 177,775 to 155,128.  This reduction could have resulted from several factors such as more cautious lenders, more informed consumers and an improved economy. 
However, the largest lender in Virginia, Title Max,co-located a second business in their car title loan stores and licensed them as relatively lightly regulated "consumer finance companies."  Title Max has been promoting these alternate loans, which have higher interest rates, longer terms and marginally smaller monthly payments.  I introduced legislation  to ban evasion of consumer protections by co-location illegal, but it was killed in committee.  
Given the SCC’s reporting methods, it is impossible to determine whether predatory lending is really up or down. 
But there is clearly bad news.  The interest rates charged on these 177,775 loans ranged from 84% to 268% and the average APR was 222%.  Those are not typos. 
The number of Virginians who failed to make a monthly payment rose from 33,387 to 38,286.  That’s about 400 people per state delegate or nearly 1,000 people per state senator.  This means in Fairfax County’s U.S. 1 Corridor, there were probably about 1,000 people in default and probably another 1,000 to 1,500 in eastern Prince William and Stafford Counties.  
Out of those 38,286 defaults, 19,368 cars were repossessed and 14,949 were sold at public auction. Court judgments rendered totaled $150,593; the bulk of amounts owed were covered by repossession sales or debt collection tactics.  
If you convert those defaults to raw dollars (multiply the number of defaults against the average loan) it equates to about $40 million of defaulted loans or about 25% of the total loans made.   For comparison, Experian reports that loans to finance car purchases (not car title loans) have a default rate of 0.62%.  Predatory car title loans default forty times more often than traditional vehicle purchase loans. 
The small amount of judgments against the lenders also tells me is that this is a very profitable business.  If a title loan shop sells only one $1,000 loan per week and has $52,000 under management at the state-sanctioned 30% per month interest rate then the business is projected to earn $187,200 per year before expenses.  Given that loans cannot exceed 50% of the vehicle value, there is little risk to lenders if a consumer defaults, thus the tiny amount of reported judgments.  These profits are being made off people who are typically in extreme credit distress before they ever borrow the money.  
All of these statistics underscore the need for Virginia to step up and short of an absolute repeal of the law that allows these practices, to take action.  
The state legislature should pass(1) my legislation to prohibit title lenders from co-locating consumer finance companies in title loan shops and (2) legislation to reduce maximum interest rates from a 297% APR.  
Also, the Fairfax County Board of Supervisors is actively considering my suggestion to prohibit new car title lenders from locating in revitalization districts.  Chesterfield County enacted this two years ago.  Prince William and Stafford Counties needs to take action as well.  
However, more is needed.  Localities should also be able to prohibit these businesses from locating near clusters of their favorite targets – active duty military and low-income residents.    
With these steps, we can begin to limit the financial destruction and heartbreak that this industry is causing in Virginia.   
It is an honor to serve as your state delegate.  If you have any feedback, please contact me at scott@scottsurovell.org. 

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