Taming Title Loans

For the poor, credit is hard to come by, and cash nearly impossible. With little or nothing to secure a loan, it is easy to see why. An individual living hand-to-mouth has few possessions she can part with, even temporarily. Take a car for instance. Someone in need of quick cash is in no position to surrender what is likely her only mode of transportation, even if it is only as short-term collateral. But such borrowers are not completely out of luck. Enter title loans: With these transactions, the borrower does not physically surrender her car, and yet she may obtain a four-figure loan. Meanwhile, the lender is secured in the event of default. It is this phenomenon that has made title lending so attractive for underprivileged consumers and so lucrative for fringe-market lenders.

To understand this apparent paradox and the consequences it can spawn, consider the following hypothetical based on a congressional anecdote.You are like one of millions of Americans living paycheck-to-paycheck, and your rent is due in two days. Though usually responsible with your rent, some unexpected medical bills have made timely payment impossible this month. You do not have a credit card, and your landlord will not accept such a payment method anyway. You also do not have much in the way of collateral for a loan. You do, however, have a car. But, of course, you consider it essential. Without it, your ability to work is jeopardized. To your surprise, you find a lender willing to permit you to keep possession of your car while loaning you the $1,000 or so you need to make rent. The lender’s condition is simply that you repay the loan at a 300% annual interest rate in one month’s time.

You are smart enough to recognize that 300% APR would entail interest payments of $3,000 for a $1,000 loan—if the term were for a year. But because even the loan documents themselves contemplate a one-month term, you reason that this transaction will only cost you about $250. Yet, where things can go wrong, they often will. This maxim is particularly true for borrowers in fringe credit markets such as these. It happens that you are not able to make the full payment at the end of the month. Your lender is willing to accept an interest-only payment and roll over the loan for another month, an option you have no choice but to accept. But with a new $250 expense (in addition to the $1,000 owed in principal) built in to an already-fragile budget, you quickly find that you may never repay this loan. Yet, every month, you make those interest-only payments for fear of losing your vehicle and your livelihood. After months of dutifully making these backbreaking payments—indeed, after four months you will have paid back about as much in interest as you borrowed—you finally miss a payment and find yourself homeless and destitute, a victim of the repossession of the only asset you owned.

This scenario may sound outlandish, but it is all too common. Meanwhile, state legislators face a clear and consistent picture of the ills of this industry, yet across the nation they have prescribed inconsistent and ineffective regulatory schemes while largely grappling with the issue of whether title lending should exist at all. This debate misses the mark. Leaving these products unregulated is an abdication of legislative responsibility—an implicit nod to the industry that it is permissible to take advantage of the poor and the desperate. On the opposite end of the spectrum are those who would ban the products, but this approach is equally misguided. Title loans have the potential to produce consumer utility in the appropriate circumstances, and a flat ban is paternalistic and shortsighted. The federal government remains mostly silent on the topic. The problems with title loans are well understood, but a practical solution evades policymakers. Hiding in plain sight is a federal response to parallel problems and the corresponding creation of an entity with power—and indeed, a mandate—to regulate these transactions.

This Note will argue that the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or the “Act”) calls for a solution to many of the practices associated with title lending, and that the Consumer Financial Protection Bureau (the “CFPB” or the “Bureau”) was created with a compelling mandate to bring such solutions to life. Part I of this Note will provide an overview of title lending, and will then proceed to analyze the three most-cited problems prevalent in the industry. Specifically, these ailments include the failure of lenders to consider a borrower’s ability to repay the loan, the failure of lenders to adequately disclose to borrowers the risks of these transactions, and the enigmatic “debt treadmill” spawned by monthly rollovers.

Parts II and III will combine to offer a novel contribution to the literature on title lending. Part II will identify why the CFPB is the appropriate actor to regulate title loans. But Part II will not only identify that the Bureau is the appropriate regulator; rather, it will also argue that the Dodd-Frank Act actually mandates that the CFPB regulate to address the concerns this Note will highlight. That is because title lending’s infirmities as identified in Part I are major sources of focus in the Dodd-Frank Act’s consumer-protection provisions. Finally, Part III will show how the Bureau might implement a regulatory scheme and enforcement regime that is compatible with its broad empowerment in the Dodd-Frank Act. This final Part will explore the application of Dodd-Frank-inspired solutions to the trio of title-lending issues laid out in Part I while also remaining sensitive to the fact that title loans are a unique fringe-credit product. Accordingly, Part III will tailor ideas from Dodd-Frank such that they apply to the industry in the most practical way. Along the way, this final Part will address anticipated counters to these proposals and will submit a framework designed to please advocates of both consumer protection and consumer autonomy alike.