Grand theft auto loans: repossession and demographic realities in title lending.

• Author: Martin, Nathalie
• Position: Conclusion of III. Title Loans in New Mexico: The Devil or the Deep Blue Sea? C. State Data from Title Loan Companies 1. The Size of the Industry through V. Conclusion, with footnotes, p. 69-94

This Table illustrates that, assuming customers paid off their first loan without defaulting or rolling over, at the very least, title lenders grossed over $647 million in New Mexico in 2004. They grossed over $437 million in 2005, over $353 million in 2006, over $340 million in 2007, and over $490 million in 2008. These dollar values represent the minimum returns on investment that the lenders could have made under these assumptions, based upon their own self-reporting, without taking into consideration any rollovers, refinances, additional fees, or other charges. It is strictly the yearly amount loaned times the average daily rate times the average term, as reported by the lenders. The maximum numbers on the last line of Table 4.1 above suggest that, when considering rollovers, these numbers could triple. We doubt that these maximums are ever reached, given the inevitable defaults. on the other hand, we believe that the minimum estimates above are too low and that industry claims that profits are low considering risk and default rates (151) are dubious.

2. The Interest Rate on the Loans

   Interest rates on fringe banking products can be steep. Payday loans in New Mexico and their new incarnation, the installment loan, frequently run from 100% to 560%, and some interest rates are over 1000%. (152) Many observers think that an average rate for payday loans is around 500-600% (153) and that title loans typically cost up to 300% per annum. (154) Our data from the phone interviews, as well as through the state data reports, confirm these results.

   Regulation Z of the Truth in Lending Act of 1968 (TILA) (155) requires that lenders disclose all interest rates and fees. (156) "TILA was a prototype consumer-protection statute and became the 'template' for most consumer-credit legislation." (157) It requires that lenders "disclose all of a contract's terms and highlight, in a uniform way, critical terms like [APRs] and fees." (158) TILA governs the title lending industry as well. (159)

   Whether lenders reported the interest rate for all loans made, or whether only their maximum and minimum loans were reported and then averaged by the state, is unclear. Currently, the average title loan interest rate in Albuquerque is 388%, and 300% is the most common interest rate, as reported from the phone survey. (160) The following chart illustrates the FID report data, showing the average APR converted into a daily interest rate, which is then multiplied by the average term from line six of the reports. By taking the estimated principal amount loaned for the year and multiplying it by the functional rate, we get an estimate of the return on the principal loaned for the year. Despite less than half the principal being loaned in 2008, as compared with 2006 and 2007, actual returns were very much the same. (161)

3. The Length of the Loans

   The common lore is that title loans have an initial one-month term. (162) While thirty days was the most common loan period, some loans were for longer or shorter periods. Table 6 reflects the number of days for which each loan was taken. The low end does not make sense, because some lenders report making loans for zero days or one day. The high end is more helpful, though alarming. At the long end, loans range from 1095 days in 2008 to 730 days in 2004, with the range for the other years falling somewhere in between. (163) These longest terms are startling. If these were three-year loans with an APR of 300% or more, the borrowers could have paid $10,000 to borrow $1000. Disturbingly, the initial loan term more than doubled between 2007 and 2008, from thirty-five days to seventy-two days, frequently at an effective interest rate of 300% or more. (164)

4. Lather, Rinse, and Repeat: Are the Loans Frequently Renewed?

   This section discusses whether borrowers use these loans frequently or infrequently. Lenders claim these loans are money sources of last resort and are necessary to help consumers in emergencies. (165) Consumer groups insist that consumers frequently use these loans for regular or even luxury purchases, after which consumers are in a more dire financial situation than before. The data below describe the average number of loans per customer in New Mexico for the years in question, as well as the average times that borrowers roll over or renew their original loans. Together, these two sets of statistics paint a grim picture of almost constant indebtedness for consumers who use these loans.

   1. Average Number of New Title Loans Made to the Same Customer Originated During Calendar Year

   Table 7 reflects the number of loans made to individual customers in one year. This table refutes industry claims that these loans are used infrequently for emergencies (166) by showing that the average customer takes out between 3.15 and 5 loans per year, not taking into account any rollovers. (167) If the average customer is taking out three to five title loans a year, one wonders how many times the frequent users make these loans. Could it be that most of the time a customer has one of these loans out? These data suggest a serious debt cycle on the part of consumers, rather than an occasional use for emergencies only. Consumers caught in such a debt cycle also are least likely to be able to afford these loans.

   These data allow us to estimate the number of loans made per year by dividing the amount of principal from Table 4 by the average loan amount from Table 1. The number of customers who use title loans in a given year can be estimated by dividing the result by the average from Table 7. Apparently, between 22,000 and 38,289 people use these products per year in New Mexico. Note the drastic drop in the number of customers in 2008.

   Table 8 indicates the average number of rollovers on existing loans, which ranges from 2.66 to 3.53. This average suggests a high rate of rollovers, renewals, or refinances, and is further evidence that customers are unable to pay off the loans and thus frequently pay interest only, especially when combined with the data in Table 7.1. These data suggest that on average, title loan users take out 3.9 loans (168) and renew on average 3.3 times. Or, if all loans were one month old, these people have the loans out twelve months out of twelve months. (169) We know not all loans are a full month long. Nevertheless, customers who use these products appear to use them frequently and repetitively. It seems that the product design of title loans makes it more likely that they create a debt cycle than even payday loans at higher interest. This situation occurs because title loans are larger, and the ability to pay back the whole loan is smaller.

5. Profits and Losses, Winners and Losers

   1. Number of Title Loans Charged off During the Calendar Year

      Table 9 records the number of charged-off loans in each year. (170)

   2. Dollar Amount of Title Loans Charged off During the Year

      Table 10 reflects the dollar amount of all loans charged off. This number is not, however, an actual loss of capital. Looking at the renewal rates from Table 8, we see that borrowers often refinance and continue to pay on their loans far past the original term. These payments exceed the principal amount of the loan, generating a profit for the lender without reducing the amount owed. (171)

   3. Dollar Amount of Recoveries on Title Loans During the Calendar Year

      Table 11 reflects the total amount that lenders reported they collected on past due accounts charged off in previous years, further demonstrating that write-offs do not reflect losses.

6. Borrower Demographics

   Table 12 reflects the minimum and maximum gross income for all borrowers, as disclosed by the lenders.

   These income data show an income range of borrowers from zero income to $2,080,000. If we assume that the reported numbers are the average of all reported income, outliers will affect the result, (for instance, $0 and $2 million). Thus, these data seem questionable and raise a number of questions, including why someone with such a large income would use such overpriced credit products, or why a lender would make a loan to someone without income.

   Perhaps these data suggest that if the data does not matter to the lender, recording it accurately is not a priority. The law does not require lenders to get proof of income from borrowers, nor do their own underwriting rules seem to warrant doing so. (172) Also, the yearly averages are not representative of the population, because some data points, such as an income of $2,080.000, skew the entire database for that year. Regardless, this data set is all that is available so we will take it at face value. In Table 12.1 below, we compare the averages for each year to the Federal Health and Human Resources Poverty Guidelines for a family of four.

   While the industry and its proponents claim that a majority of their customers are middle class,178 the data tell a different story in New Mexico. We see that most borrowers are near or below the poverty line. This data applies for all years except for 2007, where one customer reporting an income of over two million dollars skewed the data. (179)

   In Table 12.2 below, we compare the average gross income of borrowers to the median incomes of families of all sizes in New Mexico. (180) As Table 12.2 shows, compared to families of all sizes in New Mexico, the average incomes of all title loan customers is far below the median or average income of the rest of the state.

7. Lawsuits and Repossessions

   Both Professor Todd Zywicki and, to some extent, Professor Jim Hawkins claim that lenders usually do not repossess the vehicles pledged as collateral for title loans.182 Whether this claim is correct or not depends upon the meaning of the word "usually." Data obtained from the self-reported records show that between 20% and 71% of the title loan customers have their vehicles repossessed.183 Once reclamation rates are taken into account, between 13% and 60% of customers permanently...