Title Loans: The Problem? The Solution?

I commented here about the recent circuit court decision holding that failing to regulate the interest charged on title loans was an equal protection violation. The decision has apparently led to new efforts to eliminate “predatory lending.”

I don’t know what to think about these efforts. Some folks really get the shaft on these deals. Take the guy from the circuit case as an example:

In his Aug. 25 order, [circuit court judge] Robinson found in favor of James Waites, who sued Express Enterprise Inc. in February 2000 after he paid $900 in interest on a $400 title loan he took to buy medicine for his wife — and still had his truck repossessed for failure to pay down the principal. . . .

Waites, a St. Clair County resident, took out the loan against his truck title in 1998, agreeing to pay 25 percent interest a month, or 300 percent a year. Express Enterprise repossessed and sold the truck when Waites quit paying after making nine consecutive $100 payments, saying the $900 had only gone to interest.

No doubt this guy got a raw deal. But is “predator” the right word for the lender? Waites needed the money. He also might not have been able to get it any other way. In other words, these places do provide a necessary service: Allowing people with low income to obtain loans. Because low income equals high risk of non-repayment, the interest rate is going to be higher than it would be for a member of the middle class. There is nothing wrong with any of this.

I also have issues with calling someone a predator whose “victim” acted voluntarily. No-one held a gun to Waites’s head; he voluntarily made the deal. I’m not one of those people who thinks will power is the great equalizer, that we each should get full credit, or full blame, for our actions because we each have an unfettered ability to choose. Your power of choice is only as powerful as the options from which you have to choose. This guy, I’m sure, did not have many options: The banks were not beating a path to his door. Even so, the lender did not coerce him, his circumstances did. The worst that can be said of the lender is that they took advantage of his circumstances.

If there is a problem with title loans, I think it has to do with inequalities of information. As a lawyer, I can hear someone like Waites coming into my office and telling me how the lender is stealing his money, how he’s done paid almost a thousand dollars on a four hundred dollar loan, how they keep telling him he still owes the money, how he can’t keep paying out that money every month, that he’s paid them more than four hundred dollars, that he wants me to help. Then I would look at the agreement and see that what is happening is exactly what the agreement said would happen. This potential client, though, did not understand the loan agreement.  

So maybe instead of capping the rates, the legislature ought to pass some type of mandatory disclosure law. Something that would require the agreements to be written in plain english and in normal sized type. They should include examples of how the payments will be applied to interest and principle, and what happens when the payments do not cover the interest.

That way everyone knows exactly what they are doing when they sign on the dotted line. Loans will still be available for everyone, and no-one can claim to have been cheated.

Advertisements
Explore posts in the same categories: Alabama Court Decisions, Alabama Legislature

9 Comments on “Title Loans: The Problem? The Solution?”

  1. Danny Says:

    Why should these kinds of loans be specifically exempt from the kinds of regulations that protect consumers on other kinds of loans?

    It’s a common talking point that these loans represent higher risk for the lender, but the only data I have seen show that this is not particularly true. Industry data from Colorado show that payday lenders charge off only 3% of loans compared to 2.7% of credit card loans being charged off. And lenders make a lot more money off the former.

    “The worst that can be said of the lender is that they took advantage of his circumstances.”

    That doesn’t really sound like a good thing to me.

    Keep up the good work…

  2. wheeler Says:

    oh i’m not saying that it was a good thing, just that words like “predator” and “unconscionable” are probably not the best descriptions. more like opportunist, or – to apply an old term to a new context – carpetbaggers.

    as for the data about the risk, i’m ready to be corrected by any empirical facts. i was just generalizing. and it does make intuitive sense that if – all other things being equal – borrower A makes 100K a year, and borrower B makes 15K a year, the risk of non-payment is greater for B. Hence, B will pay higher interest. but like you said, in practice income may not be such a good predictor of payment.

    in answer to the first question, i explained in my initial post on this subject that i really could not think of a reason to exempt payday loans from the normal regulations. so if we are going to regulate loans, these ought to be subject to the same regulations. but should we regulate any of them?

    i really don’t know, and i hesitated to even write this post because i don’t have the economic knowledge to even make a guess.

  3. quaoar Says:

    Of course it’s predatory.

    Taking advantage of someone’s desperation so you can make a buck is hardly providing the poor with a needed service. Just like lenders who make equity loans to low-income homeowners so they can foreclose when they fall behind.

  4. Danny Says:

    Sounds like you and I are in agreement that if any loans are regulated then these should be regulated at least as strictly.

    As for calling them predatory… I am not sure that is unreasonble when someone who borrows $325 pays an average of $800 in charges.

  5. demopolite Says:

    Don’t these companies fall under Truth in Lending? If so, and they ARE providing the disclosures provided by law, then I don’t see a problem. If not, then the people affected have a TIL suit.

    I agree with you, wheeler, that the use of “predatory” and “unconscionable” in these situations is hyperbole. The true predatory lending cases involve a lender affirmatively contacting the debtor and dealing with them evasively. Charging high rates on high risk loans is not predatory. It may “wrong,” “immoral,” “unfair,” “shylockian” or a host of other adjectives, but not “predatory.”

  6. demopolite Says:

    wheeler, do you happen to know of any relatively easy way to get a copy of this order? I’m rather interested in reading how exactly this situation is a violation of equal protection. I’m also interested in seeing exactly WHICH equal protection clause has been violated. Remember that Gorman Houston and Roy Moore, in their infinite wisdom, said that the Alabama constitution does not have an equal protection clause (in the ACE litigation).

  7. wheeler Says:

    danny,

    we agree on applying existing regulations. i’m no economist, but i think every reason given for regulating normal loans applies with equal or greater force to regulating title loans. so if the former are capped at x%, then the latter ought to be capped at x%.

    demopolite,

    as for TIL, i’ll guess they are not covered. the reason title loans aren’t covered by the normal interest caps is because the alabama supreme court said a title loan is really just a pawn transaction. so if it’s a pawn transaction, that would mean it isn’t covered by TIL either. yes? no?

    other than driving over to the courthouse (was it in talladega?), or maybe calling one of the lawyers involved, i don’t know how to get it. though i would love to read it. i think it might be pretty, uhh, creative.

    as for the epc, i suppose i ought to be shocked that anything is NOT in that cause for clearcutting otherwise known as the alabama constitution. but if i was to guess, based on its text and history, what one thing is not in alabama’s constitution, a guarantee of equal protection would probably have been my guess.

  8. Don Says:

    Does anyone know if Senate pro tem Lowell Barron was connected with Express Enterprise Inc. before he claims to have had a “road to Damascus” experience?

  9. marlaina Says:

    CAn you be jailed for non payment of a title loan? I have nbeen searching the internet now for two hours. Can someone please tell me? I would greatly appriciate an answer. Thanks please e-mail me back…….
    Marlaina


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: