Don't do it, Virginia!
Our neighbor to the south is weighing legislation that would allow lenders there to make car-title loans with triple-digit interest rates to consumers in Maryland and other states. This only four months after Virginia lenders were banned from making such loans out of state.
Car-title loans, which allow you to borrow against the value of your vehicle, are such bad deals that more than half of the states, including Maryland, basically don't allow them.
Yet consumer protections are only as strong as the weakest laws in neighboring states. Even if one state bans the loans, its residents can drive across the state line and borrow at whatever loan terms are allowed there.
In Virginia, car-title loans can charge annual percentage rates of more than 260 percent — and that's after the state imposed rate caps in a half-hearted attempt at consumer protection last year. And if borrowers fall behind in payments — not hard to do with rates so high — they can lose their cars.
"Maryland should be concerned," says Jennifer Johnson, senior legislative counsel for the Center for Responsible Lending. "Maryland has taken steps to protect its consumers from predatory lenders, and Virginia is giving predatory lenders in its state carte blanche to go into Maryland."
Car-title loans are similar to payday loans. But instead of borrowing against a future paycheck, consumers who own their car outright can get a short-term loan using their car as collateral. Loans can be up to half the value of the car. Borrowers turn over the title to the lender, usually along with a spare set of keys. Lenders advertise that car owners can get their cash in 15 minutes, no credit check.
"They make the loans based on the value of the asset, not on your ability to pay," says Jean Ann Fox, director of financial services for the Consumer Federation of America. "It's a very dangerous form of credit."
Veronica Toliver of Laurel learned that the hard way. She took out a car-title loan in Virginia in July when Marylanders could still do so. She was behind on a utility bill when she saw the loans advertised on late-night TV. She made a short trip to an Alexandria lender that allowed her to borrow up to $2,300 based on the value of her 2002 Dodge Durango.
Toliver started with a $400 loan, repaid most of it and then borrowed more to pay other bills, bringing her balance to $1,900. She says her first monthly payment was $95 to cover the title and application fees; but the next bill jumped to $519 — for the interest only. Her annual interest rate is 360 percent.
Toliver says she was told the terms upfront but figured she would repay the loan quickly.
"Then you get into that cycle. Something unexpected comes up and bam, you're stuck. Then it's a race every month," the 51-year-old says. "The interest is what gets you in this cycle."
So far, she says she has paid about $2,765 in interest while her balance has climbed to $2,805. That's a total of $5,570 to pay off a $1,900 loan. Toliver says she has fallen behind on other bills. But she'll soon face a hard choice: making the car-title payment or next month's rent.
All of Virginia's neighbors, except Tennessee, have interest rates caps on small loans that discourage car-title lenders from setting up shop within their borders. Maryland's annual interest rate can't exceed 33 percent, while the District of Columbia's cap is 24 percent.
Car-title lenders operated in Virginia for years without any regulation. Borrowers usually paid annual interest rates of 300 percent or more. And many consumers quickly got overwhelmed by the interest.
In 2009, car-title loans accounted for one-third of second liens filed with Virginia's Department of Motor Vehicles but nearly 60 percent of all repossessions, says Dana Wiggins, coordinator for the Virginia Partnership to Encourage Responsible Lending.
Virginia finally added some consumer protections last year. As of October, car-title lenders must be licensed, loan terms can't be longer than a year and interest can't be charged after a vehicle is repossessed. Interest rates are capped based on the size of the loan, although the annual rate on the smallest loans still can be a hefty 264 percent.
When the new regulations were drawn up, they also limited lenders to making loans only to consumers whose vehicles are registered in Virginia.
But car-title lenders griped that the law the was never intended to stop loans to out-of-state residents. J. Christopher Jankowski, a lobbyist for one of the largest car-title lenders doing business in Virginia under the name of LoanMax, says those customers make up only a small portion of the lender's business, but the demand is there.
"Those customers, whether in Maryland or North Carolina, are finding their way to Virginia because they need short-term credit, and they can't get it in their home state," Jankowski says.
Last month, Senate Majority Leader Dick Saslaw introduced legislation to lift this restriction. It has already sailed through the Senate.
That worries Maryland regulators.
"We think the Maryland cap on the interest rate is adequate for any business," says Steve Sakamoto-Wengel, deputy chief of Maryland's consumer protection division. "We really aren't comfortable with customers paying more than that."
Sakamoto-Wengel says Maryland regulators have contacted their counterparts in Virginia to express their concern. Maryland regulators are also looking for ways to further protect consumers here, he says.
But there may be little Maryland can do.
Indiana tried without success. The Hoosier state doesn't allow car-title loans but tried to limit the loans by lenders in neighboring Illinois that advertised on Indiana TV stations. Indiana wanted the car-title lenders to comply with its 36 percent annual interest rate cap on small loans. Illinois lenders charge 300 percent annually.
"We've got pawnbrokers and payday lending. We don't need another layer of high-cost lending," says Mark Tarpey, supervisor of Indiana's consumer credit division.
But a lender challenged Indiana in the courts, and the state lost. The U.S. Supreme Court declined to hear the appeal in October.
If Virginia once more allows lenders to make car-title loans to Marylanders, consumers here should avoid them and explore other options. Some credit unions, for example, allow members to take out small personal loans that are secured by a vehicle at low rates, consumer advocates say.
In her case, Toliver last week turned to a hotline — 866-830-4501 — set up by the Virginia Poverty Law Center to assist consumers struggling with car-title loans. Toliver, who uses her SUV to drive to two offices she manages, said she's hoping to keep her keys.
"I'm definitely at risk of losing my car," she says.