The Consumer Financial Protection Bureau has found that one in five borrowers who take out short-term auto title loans have their vehicle seized because they cannot repay the loan.
In a study released early Wednesday, the CFPB found that few borrowers are able to repay an auto title loan within the term of 30 days. Rather, 80% of borrowers have to renew or take out another loan because they cannot pay the lump sum plus interest and fees when it is due, the agency said.
"Our study delivers clear evidence of the dangers auto title loans pose for consumers," CFPB Director Richard Cordray said in a press release. "Instead of repaying their loan with a single payment when it is due, most borrowers wind up mired in debt for most of the year. The collateral damage can be especially severe for borrowers who have their car or truck seized, costing them ready access to their job or the doctor's office."
The 24-page report on auto title loans comes just weeks before the CFPB is expected to issue the first national regulations of the $38.5 billion payday lending industry.
Auto title loans are less widely used than payday loans but are made for larger amounts, and the two products are similar in structure, cost and business model. The borrower provides the lender with the title to the vehicle, which generally must be owned. The vehicle's value is usually the primary consideration for the amount that can be borrowed. Moreover, a lender can repossess or sell the vehicle to satisfy the amount owed if loan payments are not made on time.
In a likely sign that the CFPB is targeting the auto title industry's business model, the agency found that loans paid in full in a single payment make up less than 20% of the a lender's overall business. Given the severity with which the CFPB views auto title loans in its study, it is probable the agency will seek to drastically curtail them in its payday lending proposal or via other means.
Auto title loans are $700 on average and must be repaid within a month plus fees and interest. The loans have an effective annual interest rate of 300% or more.
The CFPB analyzed nearly 3.5 million single-payment auto title loan records originated by nonbank lenders in storefronts from 2010 to 2013. There are 8,000 auto title lenders and the short-term loans are available in 20 states. An additional five states allow only auto title loans repayable in installments. The CFPB is expected to issue a proposal on installment lenders later this year.
The CFPB report analyzed patterns of reborrowing, when a loan is rolled over by paying a fee to extend the loan another 30 days, or a subsequent loan is taken out soon after a previous one is paid off. More than two-thirds of auto title loans are made to borrowers who take out seven or more consecutive loans in a year, the CFPB found.
Though auto title loans are marketed as so-called single-payment loans, most borrowers have to take out several loans to repay the initial one. Moreover, repeated reborrowings add more fees and interest to the original loan, turning a short-term emergency loan into what the CFPB calls "an unaffordable, long-term debt load for an already struggling consumer."
Roughly 2 million consumers, or 1% of the U.S. adult population, use high-interest auto title loans every year, according to a report last year by the Pew Charitable Trusts. Pew found that auto title loan payments consume 50% of an average borrower's paycheck.