Division of Legislative Services > Legislative Record > 2009
Special Subcommittees of the House and Senate Committees on Commerce and Labor Studying Title Lending
September 24, 2009
The second joint meeting of the Special Subcommittees of the House and Senate Committees on Commerce and Labor Studying Title Lending met in Richmond.
Tennessee's Title Pledge Act
Commissioner, Tennessee Department of Financial Institutions
Other features of the 2005 amendments include requirements that the lender return to the borrower any surplus funds generated from the sale of the collateralized motor vehicle, sales be conducted in a commercially reasonable manner, borrowers be provided with disclosures, and loan agreements include the Department's address and telephone number for filing complaints. Two dozen complaints were filed in 2007, and 30 were filed last year. Several members commented on the small number of complaints, given that over 139,000 new loan agreements were executed in 2006.
The 2005 legislation required the Tennessee Department to periodically report on the title lending industry. In its first report, released in February 2006, the Department found that 27 percent of lenders were charging their customers more than the 22 percent per month allowed by law. Regular examinations since that time have eliminated these overcharges by title lenders.
The number of title lending locations in Tennessee decreased from 931 in 2005 to 703 in 2006. Unpublished data shows that as of June 30, 2009, there were 764 licensed locations. The Department's 2008 report indicates that the average title loan amount was $557. Over 18,000 motor vehicles were repossessed following loan defaults. Over $1.2 million of surplus following sale of reposed vehicles was returned to borrowers. Of the 83,570 agreements outstanding as of December 31, 2006, 88 percent had been renewed at least one time, and 14 percent had been renewed 10 or more times.
The Department's 2008 report also addressed the profitability of title lending. It reported that licensees earned net income of $9.3 million on $72.1 million in total revenue, of which $5.1 million was distributed to owners and $4.2 million went to retained earnings. Lenders that charged the maximum of 22 percent per month had a profit margin ratio of 20 percent. The report notes that the average break-even rate for lenders, which is the interest rate a lender would charge on average in order to cover its costs, was 17.6 percent per month. The break-even point is less for lender groups with less bad debt expense. Single-location licensees had bad debt expenses averaging 5.8 percent and had break-even points of 15.8 percent, while lenders with 10 or more locations had bad debt expenses averaging over 20 percent and had break-even points of 20 percent.
The Department's most recent data reveals that approximately 40 percent of title lenders are charging less that the law's cap of 22 percent per month, with the lowest rate charged being 10 percent per month. The 2008 report contains an observation that "[w]ith a wide disparity in bad debt expense among companies, we continue to speculate that the current rate provides enough cushion and perhaps incentive for some companies to operate at a less than optimum efficiency. Whether rates are lowered statutorily or not, there appears to be some competitive market forces in place that might reduce rates where competition exists. However, . . . there appears to be a trend toward consolidation and in those areas of the state where there is little or no competition, rates are not likely to move downward by market pressure."
Mr. Gonzales concluded with a summary of the Department's current efforts to promulgate rules that seek to address issues inadequately addressed in the current Title Pledge Act. Rules are proposed to cover issues involving disclosures, recordkeeping, repossession and sales procedures, and voluntary surrendering of collateral.
Senior Assistant Attorney General, Antitrust and Consumer Litigation Section
Face, Jr., Virginia's Commissioner of Financial Institutions
Center for Responsible Lending
Johnson, Senior Legislative Counsel, Center for Responsible Lending
Ms. Johnson concluded by describing the assumption that the enactment of consumer protections will create a drag on the market and will impair business as a false dichotomy. In her view, businesses have a symbiotic relationship with their customers, and the health of the business community depends on the financial health of households. Consequently, practices that undermine the financial health of households in the long run undermine the health of the businesses that depend on them.
Her comments sparked discussion among some members, who questioned whether the few complaints filed in Tennessee undercut her characterization of title loans as predatory. One issue raised was whether people who seek small loans would turn to loan sharks if legal alternatives were to be prohibited. An industry representative stated that the average income of persons obtaining title loans was between $55,000 and $75,000, and added that of every 100 title loans made, five result in repossession of the collateralized motor vehicle.
The meeting concluded with a public hearing at which a dozen people shared their perspectives. All but one of the speakers criticized title lending. Several speakers suggested that the Consumer Finance Act, which allows licensed lenders to charge a maximum of 36 percent interest annually on loans of up to $2,500, should provide an adequate framework for making small consumer loans. Jeff Smith of the Virginia Financial Services Association spoke only to rebut this suggestion. He provided data that the number of loans of less than $2,500 made by consumer finance companies in Virginia has declined from 219,257 in 1996 to 29,283 in 2008. He attributed the decline to the 36 percent annual interest rate cap, which prevents the companies from operating. Instead of continuing to make loans of less than $2,500, the companies are making larger loans that are not subject to the statutory interest rate cap. In response to questions about the low number of complaints against title lenders, a few speakers cited the industry's use of confidentiality clauses in settlement documents.
The Special Subcommittees plan to hold another joint meeting in November or early December. The next meeting dates will be posted on the General Assembly calendar as soon as possible.
Division of Legislative Services > Legislative Record > 2009