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

Greg Gonzales, Commissioner, Tennessee Department of Financial Institutions
Mr. Gonzales gave information about the implementation of Tennessee's 2005 amendments to its title pledge laws. Prior to the 2005 changes, title lenders were required to register with the county clerk. The 2005 amendments moved away from this decentralized approach and made title lenders subject to licensing and examination by the Department of Financial Institutions. Another major feature of the 2005 legislation was to require principal reduction of loans starting with their third renewal. Under this feature, the lender is required to reduce the outstanding principal balance subject to interest and fees by five percent per month, whether the payment is received or not. It has the practical effect of reducing the payoff time on a title pledge loan to 22 months.

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 Unpublished data shows that as of June 30, 2009, there were 764 licensed locations.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.

David Irvin, Senior Assistant Attorney General, Antitrust and Consumer Litigation Section
At the June meeting of the subcommittees, the Office of the Attorney General and Bureau of Financial Institutions were asked to prepare comments on the Tennessee Title Pledge Act. Mr. Irvin commented on the fee structure and consumer protections in the Tennessee law. Comparisons were made to Virginia's current law, which allows title loans to be offered under Virginia Code § 6.1-330.78, as well as to other forms of small-loan consumer lending available in Virginia under pawn loan laws and the Consumer Finance Act. Mr. Irvin also compared features of Tennessee's law to other forms of legalized title lending in other states. Mr. Irvin concluded that state laws in this area generally include "tradeoffs," with some states providing lower monthly interest rates but fewer consumer protections in other areas, and vice versa.

E. Joseph Face, Jr., Virginia's Commissioner of Financial Institutions
Mr. Face provided comments on the regulatory aspects of Tennessee's title lending laws. Mr. Face concluded that its provisions with respect to issues such as bonding, licensure, and examinations, are comparable to provisions in chapters in Title 6.1 of the Virginia Code that provide for the regulation of financial services providers with one major exception. He observed that the Tennessee law does not include a prohibition on arranging or brokering loans, such as was recently added to Virginia's payday lending law. Such a feature was viewed as necessary to ensure that unlicensed lenders do not partner with other entities to provide the product. Mr. Face acknowledged that there is no data regarding the number of title lenders to title loans in Virginia because the activity is not regulated by his office. In response to a request by Senator Saslaw, Mr. Face agreed to canvass other states to determine how many title lending locations are operating in those states where this type of lending is permitted.

Staff Report
Staff provided an additional perspective on the Tennessee Title Pledge Act. Asked to determine if there were any national or multistate efforts to enact uniform title lending laws, staff observed that the American Legislative Exchange Council (ALEC) adopted a model title pledge act in September 2005. In many details, the ALEC model act is identical to the Tennessee Title Pledge Act. Further inquiry led to the finding that the ALEC model act was based on the 2005 Tennessee law. The ALEC model act varies from the Tennessee law in about half a dozen substantive areas, including the permitted interest rates and fees (Tennessee limits them to 22 percent per month, while the ALEC model allows such charges as the parties agree); principal reductions (which are required starting with the third renewal under the Tennessee law, but not until the sixth renewal under the ALEC model); and the maximum loan amount ($2,500 under the Tennessee law and $10,000 under the ALEC model).

Center for Responsible Lending

Jennifer Johnson, Senior Legislative Counsel, Center for Responsible Lending
Ms. Johnson described title lending as part of the predatory small dollar lending industry. She observed that 32 states and the District of Columbia restrict car title lending, and that Virginia is the only state seriously considering codifying the car-title model. She urged the Special Subcommittees to enact a double-digit interest rate cap on all small dollar lending, require small dollar lenders to determine a consumer's ability to repay a loan, limit the term of consumer indebtedness to 90 days in any year for loans with an annual interest rate exceeding 36 percent, and reject industry proposals to codify the status quo.

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.

Public Hearing

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.

Next Meeting

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.

Chairman:
The Hon. Terry Kilgore

For information, contact:
Frank Munyan, Anne Louise Mason, DLS Staff