Monday, February 9, 2015

Shark bait: car title loan edition

Car title loans are being targeted by the CFPB:
  [a] federal regulator is entering the fray, drafting regulations that could sharply reduce the number of unaffordable loans that lenders can make.
The Consumer Financial Protection Bureau, created after the 2008 financial crisis, will soon release the first draft of federal regulations to govern a wide range of short-term loans.
The rules are expected to address expensive credit backed by car titles and some installment loans that stretch longer than the traditional two-week payday loan, according to industry lawyers, consumer groups and government authorities briefed on the discussions who all spoke on the condition of anonymity because the deliberations are private. Certain installment loans, for example, with interest rates that exceed 36 percent, the people said, will most likely be covered by the rules.
Behind that decision, the people said, is a stark acknowledgment of just how successfully lenders have adapted to keep offering high-cost products despite state laws meant to rein in the loans.
The federal regulations taking shape will most likely set off a new round of lobbying from payday lenders.
Lobbyists for the loan sharks are circling around legislators in Kentycky, Washington and New Mexico to protect their scam. And it is lucrative:
The median income of payday loan borrowers was just over $22,400 a year, according to an analysis of roughly 15 million payday loans by the consumer bureau, leaving many struggling. Nearly 70 percent of borrowers use the loans to cover basic expenses, with only 16 percent tapping the loans for emergencies, the Pew Charitable Trust found.
That precarious financial footing helps explain how a single loan — say, $350 — can spiral, with a snarl of fees that exceed the amount first borrowed.
At the center of the regulations being considered, the people familiar with the matter said, is a requirement that lenders assess whether borrowers can repay loans — interest and principal — at the end of a two-week period by examining their income, other debts and their payment history.
Few people can, the data suggest, leaving borrowers to either roll over their loans, heaping on more fees, or take out new ones altogether. The bureau found that during a 12-month period, borrowers took out a median of 10 loans. Borrowers paid median fees of $458. The median amount borrowed was $350. And more than 80 percent of loans were rolled over or renewed within two weeks.
That churn is central to many lenders’ business, according to data from the bureau. Borrowers who take out 11 or more loans each year account for roughly 75 percent of the fees generated.
The loan sharks are fighting to keep their feeding grounds open.
 They are people like Eboni Maze, 32, who works for a cruise line in Wichita, Kan., and says that a single loan — money borrowed against her car, a 2012 Kia, so she could pay her rent — still haunts her more than three years later. Her car was repossessed after she could not keep up with the payments on the loan, which had an interest rate of more than 150 percent. To afford the down payment on another car, she took out a payday loan. When she could not pay that one off, she took out another.

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