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.

Presentations

Staff Report
Staff outlined the statutory framework in which title lending occurs in Virginia. The term "title loan," as used in Virginia, refers to a non-purchase-money, revolving consumer loan that is secured by a lien on the title to a motor vehicle, made pursuant to Virginia Code § 6.1-330.78 by unlicensed lenders. A typical title loan may be for $500, have a term of six months, and require the payment of a membership fee. Title lenders typically charge interest at rates of 25% per month or more. Such interest rates are permitted under the existing Virginia law that allows a seller or lender extending credit under an open-end credit or similar plan to impose finance charges and other charges and fees at such rates and in such manner as the parties may agree, if no interest is charged if the balance is repaid in full within a 25-day billing cycle.

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.

• Approximately 17 states have enacted legislation specifically regulating title loans.
• Of these 17 states, 11 states (Arizona, Idaho, Illinois, Mississippi, Missouri, Montana, Nevada, South Carolina, South Dakota, Tennessee, and Utah) have enacted laws that either do not cap interest rates or cap interest rates at levels exceeding 10% per month.
• The other six states with laws specifically addressing title loans (Florida, Iowa, Kentucky, Minnesota, New Hampshire, and Oregon) cap interest at annual rates of 36% or less.
• Of the other states, high-interest title lending is permitted in two (Alabama and Georgia) under general pawn loan laws and is permitted in seven (California, Delaware, Kansas, New Mexico, Texas, Wisconsin, and Virginia) under other exceptions to general interest rate caps.
• Finally, 24 states and the District of Columbia either do not allow title lending or allow lenders to charge interest at rates that do not exceed the rates that generally may be charged on regulated consumer loans.

Dewey B. Morris, Thompson McMullan
Mr. Morris provided the perspective of four title lending firms. He advised that his clients supported the approach, previously adopted with respect to mortgage lenders and brokers, payday lenders, and other nondepository financial institutions, of requiring firms to be licensed by the State Corporation Commission and to comply with consumer protection requirements. Consumer protections that Mr. Morris' clients currently provide include limiting borrowers to having one title loan at a time, complying with truth-in-lending requirements, prohibiting personal recourse against borrowers for deficiencies, limiting on the amount of loans, and prohibiting the assessment of finance charges if a loan is repaid during a 25-day billing period. He noted that a number of the consumer protections are included in the Tennessee Title Pledge Act. He added that his clients would not object to the enactment of similar provisions in Virginia.

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.

Jay Speer, Virginia Poverty Law Center
Mr. Speer presented the perspective of consumer protection groups. He urged members to reject the title lending industry's call for licensure and regulation, arguing that it would result in a proliferation of new title lenders operating under the respectability provided by state licensure. He observed that title loans, per se, are being made by credit unions under terms that he does not characterize as predatory. Title loans were described as a device that attempts to keep borrowers in a cycle of debt.

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.

E. Joseph Face, Jr., Commissioner of Financial Institutions
Mr. Face stated that while the State Corporation Commission is not authorized to regulate title lending (except when done by licensed payday lenders), the agency does receive complaints. Since 2004, the SCC has received 94 written complaints and 169 telephone inquiries. The four issues most often identified are:

• High interest rates,
• Owing a larger loan balance than anticipated,
• Repossessions of motor vehicles, and
• The inability of borrowers to repay a loan.

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.

David B. Irvin, Sr. Asst. Attorney General
Mr. Irvin outlined litigation instituted against title lenders who failed to comply with Virginia law. In the mid-1990s, the Attorney General's office obtained a summary judgment against a lender making loans that purportedly were exempt from Virginia's usury laws under the exemptions for loans by pawnbrokers. The court agreed with the Attorney General's position that a pawn loan requires the lender to retain physical possession of the pawned personal property and that pledging a certificate of title was legally insufficient.

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
jurisdiction.

Next Meeting

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.

Chairman:
The Hon. Terry Kilgore

For information, contact:
Frank Munyan, DLS Staff