Vehicle Title Loans Underscores Need For Payday Rules CFPB
On June 2, the Consumer Financial Protection Bureau (CFPB) will hold a hearing in Kansas City, where it is expected to release its proposed regulations for payday and other small-dollar consumer lenders on June 2. Meanwhile, the agency has put out a study of the car-title loan market, adding new weight and urgency to the case for these rules.
Car-title loans, like payday loans, are often marketed as a source of short-term emergency credit; but they’re engineered, the CFPB’s research showed, to suck people into high-cost long-term debt. Only 12 percent of borrowers manage to repay their loans within the typical prescribed term of 30 days, according to the study, while fully 20 percent of borrowers end up losing their vehicles. The average borrower pays more in fees ($1,300) than the amount borrowed ($1,000).
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Since the CFPB released a preliminary outline of its proposal in March 2015, more than $10 billion has been drained from consumers by exorbitant interest rates and fees on payday, car-title, and other debt-trap loans. In short, the Bureau’s proposal will not be coming a moment too soon. Consumer advocates will be rooting – and fighting – for it to be completed as expeditiously, and in as strong and loophole-free a form, as possible.
Vehicle Title Loans Underscores Need For Payday Rules – Introduction
This report examines consumer usage and default patterns for single-payment vehicle title loans. Vehicle title loans are a type of credit product in which the lender takes a security interest in the borrower’s vehicle and the loan approval and amount is primarily based on the vehicle’s value, rather than a credit check and traditonal underwriting. While the vehicle title loans that are the subject of this report are structured so that a single payment of the principal and associated fees are due in about a month, some lenders also offer longer-term vehicle title loans that are repayable in installments. Hereinafter in this report, we use the term “vehicle title loan” to refer to just those loans with a single payment.
Like payday loans, vehicle title loans are made by non-depository lenders. The cost is typically expressed in dollars per $100 borrowed, and annual percentage rates (APRs) are in the triple digits. However, there are several key differences between the two products. While the repayment of a payday loan is timed to coincide with a borrower’s payday or other income receipt, vehicle title loans are due in about a month regardless of the borrower’s pay frequency. In addition, instead of giving the lender a post-dated check or authorizing the lender to withdraw payments from a bank account, a vehicle title borrower provides the lender with the title to her car, which generally must be owned free and clear. The vehicle’s value is the primary consideration for the amount that can be borrowed. Although the borrower retains use of her car while the loan is outstanding, a lender can repossess and sell the vehicle to satisfy the amount owed if loan payments are not made on time. Because account access is not required, vehicle title borrowers may not have an account with a bank or credit union. Finally, while payday loans are offered both through storefronts and online, vehicle title lending is typically conducted in storefronts so that the lender can assess the vehicle’s condition.
The Bureau analyzed nearly 3.5 million de-identified records of vehicle title loans originated by lenders in storefronts over a multi-year period. We examined loan usage patterns, with a particular focus on whether a loan is reborrowed. Reborrowing occurs when a loan is rolled over by paying a fee to extend the loan another 30 days, or when a subsequent loan is taken soon after repayment. We measure the number of times a loan is reborrowed by the length of a “loan sequence,” which consists of an initial loan made to a borrower and any subsequent loans made within a short period of time after a previous loan is repaid. We also examine whether the amount borrowed during a loan sequence changes over time and the extent to which loans default and vehicles are repossessed.
The following key findings from this analysis are included in this report:
- A small share of vehicle title loans are repaid without taking out a subsequent loan.
- Over 80 percent of vehicle title loans in our data are reborrowed on the same day a previous loan is repaid and nearly 90 percent are reborrowed within 60 days. The remaining loans are either repaid without reborrowing, or end in default.
- Only about one-in-eight loan sequences consist of a single loan that is repaid without reborrowing.
- Over half of loan sequences are for more than three loans, and more than a third of loan sequences are for seven or more loans. One-fifth to one-quarter of loan sequences are at least ten loans long, depending on the loan sequence definition used.
- Most loans are part of long borrowing sequences. About half of loans are in sequences of ten loans or more. In contrast, no more than 15% of loans are in sequences of three loans or fewer.
- Borrowers who take out multiple loans within a sequence are more likely to borrow the same or smaller amounts over time rather than larger amounts. Borrowers who take on increasing amounts of debt over time are at greater risk of default. In general, the more loans in a sequence, the more likely the amount borrowed in the last loan of the sequence is greater than that of the first.
- Vehicle title loan sequences have high default rates. About a third of loan sequences experience a default and one-in-five result in the repossession of the borrower’s vehicle.
The next section provides a description of the data used to perform these analyses, and the following sections outline our findings related to usage patterns and default in greater detail.
The Bureau obtained de-identified data from vehicle title lenders consisting of nearly 3.5 million loans made to over 400,000 borrowers in ten states during 2010-2013. Our data contain an anonymous customer ID that we use to link all loans to the same consumer by a given lender.
The single-payment vehicle title loans in our data were originated in storefronts and typically have 30-day terms, at which point the full amount of principal and associated fees is due. As shown in the table below, the median loan size was just under $700. The average loan size is much higher ($959), reflecting the fact that a portion of loans were for significantly greater amounts. The loans in our data carry APRs of around 300%.
Patterns of usage and default
In this section, we present patterns of loan usage and default. We report the share of vehicle title loans that are reborrowed, the distribution of loan sequence lengths, any changes in loan size over the course of a loan sequence, and the incidence of default and repossession for these loans.
To describe usage patterns for vehicle title loans, we measure the length of “loan sequences.” A loan sequence consists of an initial loan and any subsequent loans that are taken within a specified period of time after the prior loan. As described earlier, these subsequent loans are considered a “reborrowing” of the initial loan.
There are multiple ways in which a loan sequence can be defined. One approach is to only consider those loans made within 14 days of a previous loan being repaid to be part of the same loan sequence. While the intention of this measure is to determine whether a borrower can afford to repay a loan without taking another within the same pay period, the 14-day definition is limited in that it does not account for borrowers who are paid on a less frequent basis, such as those paid monthly. In addition, many recurring expenses, such as housing payments, are on a monthly cycle. To understand the extent to which borrowers can afford to repay a vehicle title loan without reborrowing, a 30-day definition provides a useful measure of whether borrowers go a full expense cycle without taking out another loan. Finally, a more expansive 60-day definition is likely to capture a still greater number of instances of reborrowing, as it excludes only subsequent loans that are taken out after two full expense cycles. In this report, we detail findings for single-payment vehicle title loans for each of these possible loan sequence definitions—14, 30, and 60 days. Each approach yields very similar results.
We also report on the extent to which loans and loan sequences experience a “default,” which includes any charge-offs or repossessions that are identified by the lenders in our data. For sequences consisting of more than one loan, we also look at whether loan amounts increase, decrease, or stay the same between the first and last loan.
Vehicle title loan reborrowing
The loans in our dataset have three possible outcomes: (1) they can be repaid without a subsequent reborrowing, (2) they could end in default, or (3) they could be followed by a reborrowing either the same day or within a specified period of time after repayment. In Table 2 below, we report on the share of loans in our dataset that are reborrowed the same day,14 or within 14, 30, or 60 days of repayment. Over 80% of vehicle title loans are reborrowed on the same day a previous loan is repaid, and 87% of loans are reborrowed within 60 days. The remaining loans are either repaid without reborrowing or end in default.
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