Division of Legislative Services > Legislative Record > 2009
Joint Meeting of the Special Subcommittees of the House and Senate Committees on Commerce and Labor Studying Title Lending
June 29, 2009
The initial joint meeting of the special subcommittees was held in Richmond on June 29, 2009, and was chaired by Delegate Terry Kilgore.
The authorization to charge interest at any rate the parties agree, subject to requirements that the credit be extended under an open-end plan and that the borrower have a 25-day grace period, exists as an exemption to the general limitation, established by Virginia Code § 6.1-330.55, that limits the rate of interest that may be charged on a loan contract to no more than 12% per year.
Other exemptions from the 12% annual limit on the contract rate of interest on consumer loans exist for sellers extending credit under a closed-end installment credit plan, payday loans, and loans by consumer finance companies, which may charge interest at any agreed-upon rate if the loan is for more than $2,500 or at a rate of not more than 36% per year if the loan amount does not exceed $2,500. Moreover, interest may be charged on pawn loans at rates not exceeding 10% per month on a loan of $25 or less, 7% per month on a loan between $25 and $100, or 5% per month on a loan of $100 or more.
In general, the Consumer Finance Act prohibits any person from lending any amount to individuals for personal, family, household, or other nonbusiness purposes, and charging more than 12% per year, unless authorized by the Consumer Finance Act or the Payday Loan Act. However, this prohibition does not apply to extensions of credit under Virginia Code § 6.1-330.78, which allows open-end extensions of credit to carry whatever interest rate the parties agree to, if interest does not accrue if the balance is paid within a 25-day billing cycle.
While § 6.1-330.78 currently allows title lenders to charge interest at unlimited rates, that section, as initially enacted in 1968, permitted certain creditors in consumer credit sales to charge 1.5% per month in interest. The section has since been amended multiple times. The most recent amendments occurred in the 2009 Session when it was amended to prohibit licensed payday lenders from extending unsecured credit under open-end credit plans. The 2009 amendments to § 6.1-330.78, by allowing payday lenders to make loans under this section if the loans are secured by a lien on a title to a motor vehicle, constitute the first occasion that the Virginia Code has recognized the practice of title lending.
The provisions of other states' laws regarding title lending vary widely.
Morris, Thompson McMullan
While Mr. Morris acknowledged that the industry should be regulated, he expressed concerns that prohibiting title lending will make it more difficult for Virginians to obtain small loans. If the only asset a borrower has is his motor vehicle, he may be better off using it as collateral for a title loan and using his car to travel to his job than selling his car to pay other debts.
Virginia Poverty Law Center
Mr. Speer expressed great concern over the use of a motor vehicle title as security for a loan. Even when title loans are cast as nonrecourse debt, borrowers face a real threat of the vehicle's repossession because they do not have the resources to purchase another car if the collateral is sold. Mr. Speer added that some borrowers have chosen to lose their home to eviction or foreclosure rather than default on a title loan, because they would lose their means of commuting to work if their car was repossessed.
Mr. Speer urged the members to place title lending under the Consumer Finance Act. Reasons for this solution include the 36% annual interest rate cap on loans of less than $2,500, the requirement that prospective licensees be investigated and post a bond, and the fact that loans under the Consumer Finance Act are required to be term loans rather than open-end revolving loans. Moreover, he expressed concern that payday lenders are shifting to making title loans in order to avoid many of the consumer protections addressing payday loans that were enacted in the 2008 Session.
Face, Jr., Commissioner of Financial Institutions
Mr. Face offered several suggestions for consideration in the event that the General Assembly sought to regulate the title lending industry. First, he cited Virginia's Mortgage Lender and Broker Act as containing tools that may serve as a model for regulatory legislation. Second, he observed that some states address motor vehicle repossession procedures. In addition, he noted that some states limit the amount that may be borrowed and address lending to military personnel.
Irvin, Sr. Asst. Attorney General
In a second series of enforcement actions, the Attorney General's office settled disputes with title lenders regarding whether the loan product being offered was open-end credit as required by § 6.1-330.78. In order to qualify as open-end credit, there must be a reasonable contemplation of repeated transactions, an assessment of finance charges on the outstanding balance, and the ability to borrow funds made available as the principal balance is reduced. Title lenders that charged borrowers a cash advance fee and one days' interest at the time the loan was made were charged with violating the requirement of § 6.1-330.78 that borrowers not be charged interest if the loan is repaid within a 25-day billing cycle. Under the terms of the settlements, the lenders were required, among other terms, to refund certain interest to borrowers and to agree not to collect on deficiency judgments.
The third series
of enforcement actions, instituted in 2007, involved five title lenders
who were alleged either to have violated the requirements regarding the
25-day interest-free grace period or to have structured their loans as
installment loans rather than as an open-end loan product. Settlements
were reached with the offending lenders. Mr. Irvin also described actions
brought earlier this year by the District of Columbia against two Virginia-based
title lenders for advertising title loans within that
The subcommittees intend to hold their next joint meeting in September. The meeting will feature a presentation by a representative of the Tennessee Department of Financial Institutions. In addition, the State Corporation Commission and Office of the Attorney General were asked to report on Tennessee's Title Pledge Act.
Division of Legislative Services > Legislative Record > 2009