Wednesday, September 29, 2004
Lenders Levy up to 120% interest -- legally
Loophole lets firms target the poor, military families
-- David Lazarus
Wednesday, September 29, 2004
A handful of money lenders, exploiting a loophole in California law, is making loans with annual interest rates as high as 120 percent and then repossessing customers' vehicles if the money can't be repaid.
Lawmakers and consumer advocates say the firms are making so-called car- title loans even though California's legislators deliberately chose not to approve the practice seven years ago.
Critics say the loans, which are tightly regulated in other states, target poor people, military families and others who might have no choice but to use their vehicles as collateral in a financial pinch.
Even the lenders say default rates run as high as 30 percent.
State Sen. Dean Florez, D-Shafter (Kern County), chairman of the Senate Banking Committee, says he intends to move quickly to address the situation.
"On the scale of predatory business practices, these schemes fit somewhere between grand theft auto and carjacking," he said. "This is one loophole they won't be able to drive a car through next year, once we legislate."
Executives at car-title loan companies say practices are basically uniform throughout their industry:
Recipients hand over their vehicle title and a spare set of keys when they receive their cash, usually in under an hour after submitting an application. The title and keys are returned only after the loan and all interest have been paid off.
A default will result in the vehicle being repossessed and sold at auction so the lender can recover all outstanding costs.
"This kind of thing was supposed to be illegal," said Rosemary Shahan, head of Consumers for Auto Reliability and Safety, a Sacramento advocacy group. "It's just predatory in nature. You can practically hear the theme music from 'Jaws.' "
State regulators were surprised at first to learn that car-title loans were being made.
After looking into the situation, officials at the Department of Corporations, which regulates financial transactions, determined that the loans are governed by the California Finance Lenders Law.
The law, part of the state Financial Code, applies to secured loans of relatively small amounts that are not regulated by other statutes.
The loans apparently do not fall under California's loose definition of predatory lending, which applies primarily to loans that are false or misleading.
Usury laws don't seem to be a factor either. According to the state attorney general's office, these laws aren't applicable to lending institutions such as banks, pawnbrokers and other finance companies.
Yet nearly a third of all Californians obtaining high-interest car-title loans -- typically without credit checks or other financial safeguards -- end up defaulting, lenders say.
Other loan recipients may make years of interest payments before ever reducing their principal.
"Yes, it's a profitable business, but it's no more profitable than other financial services," insisted Garry Gladstone, president of Growth Resource Group, one of the state's leading car-title lenders.
He added: "People go to Starbucks and pay $5 for a 50 cent cup of coffee. They pay 10 times markup for that cup of coffee. But if they pay more than prime rate for money, they think they're getting gouged. Why?"
Well, for one thing, California lawmakers voted down legislation in 1997 that would have explicitly approved the practice by adding provisions for car- title loans to the Financial Code. The bill was strongly opposed by consumer groups.
Assemblywoman Pat Wiggins, D-Santa Rosa, says it's clear that the Legislature was against the notion of car-title loans when the bill was defeated in the Assembly Banking Committee.
Wiggins, who will leave the Assembly in November because of term limits, is chair of the Banking Committee. "There will be legislation to correct the issue," she predicted.
Tennessee officials met earlier this month to discuss stricter regulations for car-title lenders charging annual interest rates of as much as 264 percent. Florida and Kentucky officials cracked down on the rapidly growing industry several years ago.
No one knows exactly how large the car-title-loan market is nationwide or how many people are affected by its practices. No business groups represent lenders, and few government entities compile statistics.
Recipients of such loans, in turn, are generally desperate for cash and not the sort of people who lodge complaints with the Better Business Bureau.
"It's very alarming," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America. "I don't know anyone who has good numbers on this."
The nationwide market for so-called payday loans, which use people's paychecks as collateral for high-interest loans, is about $40 billion, she noted. The car-title-loan business is believed to be about one-fourth as big.
"I'm surprised to hear that it's happening in California," Fox said. "We fought hard to keep it out. But the industry is always looking for loopholes to allow it to do business."
In this case, car-title lenders focused on sections 22303 and 22304 of the California Finance Lenders Law, the state's grab bag for regulating small- scale lenders.
The first section lays out rules for interest rates charged by licensed lenders. The second stipulates that these rules don't apply to any loan worth more than $2,500.
"We spoke to lawyers about this," said Gladstone at Growth Resource Group, based in San Juan Capistrano. "They determined that this allows us to charge any interest rate the market will bear for loans over $2,500."
He says his firm was the first to offer car-title loans in California in 1995. Competitors soon showed up, Gladstone says, creating a robust market in which interest rates can vary from 60 percent to 120 percent.
He estimates the size of the California car-title-loan market at about $20 million. It's limited, Gladstone says, because lenders in this state must offer larger loans than elsewhere to be profitable, which requires customers in turn to own vehicles of commensurate value.
In other states, where car-title loans are typically for under $1,000, it's common for junkers to be used as collateral.
Gladstone acknowledges that he operates in a gray area of the law. But he believes he's done nothing wrong.
"The proper interpretation of the Financial Code," he said, "is that if they don't prohibit it, it must be legal."
William Wood, who oversees the Financial Code as California's commissioner of corporations, sees things a little differently.
"The law has a lot of things in it that don't get tested or don't get brought up for decades," he said. "That's finally happening now."
More on Friday.
-- David Lazarus
Wednesday, September 29, 2004
A handful of money lenders, exploiting a loophole in California law, is making loans with annual interest rates as high as 120 percent and then repossessing customers' vehicles if the money can't be repaid.
Lawmakers and consumer advocates say the firms are making so-called car- title loans even though California's legislators deliberately chose not to approve the practice seven years ago.
Critics say the loans, which are tightly regulated in other states, target poor people, military families and others who might have no choice but to use their vehicles as collateral in a financial pinch.
Even the lenders say default rates run as high as 30 percent.
State Sen. Dean Florez, D-Shafter (Kern County), chairman of the Senate Banking Committee, says he intends to move quickly to address the situation.
"On the scale of predatory business practices, these schemes fit somewhere between grand theft auto and carjacking," he said. "This is one loophole they won't be able to drive a car through next year, once we legislate."
Executives at car-title loan companies say practices are basically uniform throughout their industry:
Recipients hand over their vehicle title and a spare set of keys when they receive their cash, usually in under an hour after submitting an application. The title and keys are returned only after the loan and all interest have been paid off.
A default will result in the vehicle being repossessed and sold at auction so the lender can recover all outstanding costs.
"This kind of thing was supposed to be illegal," said Rosemary Shahan, head of Consumers for Auto Reliability and Safety, a Sacramento advocacy group. "It's just predatory in nature. You can practically hear the theme music from 'Jaws.' "
State regulators were surprised at first to learn that car-title loans were being made.
After looking into the situation, officials at the Department of Corporations, which regulates financial transactions, determined that the loans are governed by the California Finance Lenders Law.
The law, part of the state Financial Code, applies to secured loans of relatively small amounts that are not regulated by other statutes.
The loans apparently do not fall under California's loose definition of predatory lending, which applies primarily to loans that are false or misleading.
Usury laws don't seem to be a factor either. According to the state attorney general's office, these laws aren't applicable to lending institutions such as banks, pawnbrokers and other finance companies.
Yet nearly a third of all Californians obtaining high-interest car-title loans -- typically without credit checks or other financial safeguards -- end up defaulting, lenders say.
Other loan recipients may make years of interest payments before ever reducing their principal.
"Yes, it's a profitable business, but it's no more profitable than other financial services," insisted Garry Gladstone, president of Growth Resource Group, one of the state's leading car-title lenders.
He added: "People go to Starbucks and pay $5 for a 50 cent cup of coffee. They pay 10 times markup for that cup of coffee. But if they pay more than prime rate for money, they think they're getting gouged. Why?"
Well, for one thing, California lawmakers voted down legislation in 1997 that would have explicitly approved the practice by adding provisions for car- title loans to the Financial Code. The bill was strongly opposed by consumer groups.
Assemblywoman Pat Wiggins, D-Santa Rosa, says it's clear that the Legislature was against the notion of car-title loans when the bill was defeated in the Assembly Banking Committee.
Wiggins, who will leave the Assembly in November because of term limits, is chair of the Banking Committee. "There will be legislation to correct the issue," she predicted.
Tennessee officials met earlier this month to discuss stricter regulations for car-title lenders charging annual interest rates of as much as 264 percent. Florida and Kentucky officials cracked down on the rapidly growing industry several years ago.
No one knows exactly how large the car-title-loan market is nationwide or how many people are affected by its practices. No business groups represent lenders, and few government entities compile statistics.
Recipients of such loans, in turn, are generally desperate for cash and not the sort of people who lodge complaints with the Better Business Bureau.
"It's very alarming," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America. "I don't know anyone who has good numbers on this."
The nationwide market for so-called payday loans, which use people's paychecks as collateral for high-interest loans, is about $40 billion, she noted. The car-title-loan business is believed to be about one-fourth as big.
"I'm surprised to hear that it's happening in California," Fox said. "We fought hard to keep it out. But the industry is always looking for loopholes to allow it to do business."
In this case, car-title lenders focused on sections 22303 and 22304 of the California Finance Lenders Law, the state's grab bag for regulating small- scale lenders.
The first section lays out rules for interest rates charged by licensed lenders. The second stipulates that these rules don't apply to any loan worth more than $2,500.
"We spoke to lawyers about this," said Gladstone at Growth Resource Group, based in San Juan Capistrano. "They determined that this allows us to charge any interest rate the market will bear for loans over $2,500."
He says his firm was the first to offer car-title loans in California in 1995. Competitors soon showed up, Gladstone says, creating a robust market in which interest rates can vary from 60 percent to 120 percent.
He estimates the size of the California car-title-loan market at about $20 million. It's limited, Gladstone says, because lenders in this state must offer larger loans than elsewhere to be profitable, which requires customers in turn to own vehicles of commensurate value.
In other states, where car-title loans are typically for under $1,000, it's common for junkers to be used as collateral.
Gladstone acknowledges that he operates in a gray area of the law. But he believes he's done nothing wrong.
"The proper interpretation of the Financial Code," he said, "is that if they don't prohibit it, it must be legal."
William Wood, who oversees the Financial Code as California's commissioner of corporations, sees things a little differently.
"The law has a lot of things in it that don't get tested or don't get brought up for decades," he said. "That's finally happening now."
More on Friday.
# posted by Senator Dean Florez @ 8:52 AM 
