Consumer watchdog turns its attention to auto loans

According to a report released Tuesday by the Consumer Financial Protection Bureau, payday loans aren’t the only type of expensive consumer credit that starts out as a short-term financial fix but often turns into a financial trap. long-term debts.

Consumers who take out auto-title loans are often unable to pay when due and repeatedly refinance to retain possession of their vehicles, the bureau found after analyzing millions of loans. Even then, about 1 in 5 borrowers lose their wheels, according to the analysis.

The report is the latest in a series of studies released by the federal agency as it pushes for a broad set of new rules governing companies that provide short-term consumer loans, usually at interest rates. high interest. The office is expected to publish the proposed rules in the coming weeks.

Previous reports have focused on payday lenders and the consequences of payday loans, such as bank overdraft fees related to missed payments. The latest report focuses on a different, albeit similar, class of lenders that would also be subject to the bureau’s proposed rules.

“Although these [auto-title] Products are usually marketed for short-term financial emergencies, the long-term costs of these loans often only make a bad situation worse,” CFPB Director Richard Cordray said in a conference call on Tuesday with journalists. “These loans … present similar problems to those we encountered with payday loans.”

The report focused specifically on one-time automatic loans, which are similar to payday loans in that they would have to be repaid in a lump sum, usually after a month.

Compared to payday loans, auto title loans tend to be larger and have slightly lower interest rates, although they come with one big problem: borrowers have to provide collateral for these loans, which gives the lender the right to take their car if they can. don’t pay.

One-time payment auto loans are available in 20 states, including Oregon, Nevada, and Arizona, although they are not offered in California.

The report did not examine so-called automatic installment loans, which are generally larger than one-time payment loans and are structured to be repaid over time. CFPB researcher Jesse Leary said the office is also looking into this type of loan, which is available in California.

The bureau reviewed approximately 3.5 million one-time payment automatic loans issued between 2010 and 2013. These loans, on average, were just under $1,000 and had annual interest rates of one just under 300%. A previous CFPB report found that payday loans averaged less than $400 with interest rates around 340%.

The report found that when auto-title loans came due, borrowers had to take out new loans, often from the same lender, to pay off old ones. Most took at least three consecutive loans, and some took 10 or more in a row, leaving them in debt for months instead of weeks.

This resembles the CFPB’s findings in reports on payday loans, which are structured to be repaid on the borrower’s next payday. Repaying the loan often leaves borrowers in a pickle and they may find themselves borrowing multiple times over several months. The CFPB and consumer advocacy groups have called these loans “debt traps.”

Part of the appeal of auto loans and payday loans is that they offer fast cash. A Pew Charitable Trusts report on automatic securities lending found that customers choose lenders based not on price, but on speed and convenience.

Some auto title lenders advertise that they do not check a borrower’s credit at all, only requiring borrowers to own their cars and vehicles to pass an inspection.

Upcoming CFPB rules would likely require lenders to change this practice.

A draft of the proposed rules released last year calls for requiring lenders to review borrowers’ income and expenses to ensure they have enough income left over to pay loan repayments. The rules would also limit the number of times a loan can be refinanced – a move the industry says would cut off credit for some borrowers.

The rules would apply to all loans that must be repaid within 45 days, as well as longer loans that carry interest rates above 36% and are either backed by auto securities or repaid by bank drafts automatic.

The CFPB report on payday lenders questioned the practice of taking payments directly from borrowers’ bank accounts through electronic debits. The report found that around half of all borrowers have missed at least one payment, resulting in overdraft fees or other charges from their banks. On average, these borrowers paid bank fees totaling $185 over 18 months.

The CFPB proposal would require lenders to notify customers before attempting to collect payment from a bank account.

Dennis Shaul, managing director of consumer financial services assn payday loan business group. of America, told a congressional subcommittee in February that the CFPB rules would drive some lenders out of business and deprive potential borrowers of access to the fast credit they need in an emergency.

“The bureau seems unaware that these products have arisen because customers have pressing needs, and those needs won’t go away even if the lenders offering these products do,” Shaul said.

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