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Payday Lenders Morphing Into Auto Title Lenders

Loophole allows interest rates up to 204 percent

Arizona State News December 2010

Kelly Griffith of the Center for Economic Integrity stands in front of a Tucson auto title loan business. Even as they waged a successful campaign to let the exemption on interest rate caps expire for small loans, consumer advocates have watched payday lenders obtain licenses as auto title lenders, which allows them to charge up to a 204 percent annual interest rate. — Matt Slaby/LUCEO

Consumer advocate Kelly Griffith had hoped payday lending in Arizona was dead. As of July 1, the storefront lenders who had been charging up to 460 percent interest on small loans lost an exemption that allowed them to ignore the 36 percent annual rate cap imposed on banks and most other lenders.

Griffith believed a stake had been driven into the heart of what she considered a predatory monster. But it popped out.

Beginning in 2008, when the clock started winding down on payday lending in Arizona, Griffith's Tucson-based group, the Center for Economic Integrity, watched as more than 200 payday loan businesses obtained licenses as auto title lenders.

Some of the same storefronts that had advertised "Payday Loans" now have prominent signs for "Car Title Loans." Arizona laws allow up to a 204 percent annual interest rate if a vehicle is involved as security.

Lee Miller, a spokesman for the Arizona Community Financial Services Association, a trade group whose members include the former payday lenders, said the auto lending products are the "low-cost payday alternative. They [lenders] are not focusing on the collateral of the loan. They are saying: 'Come see us for a loan — we now offer loans that are 50 percent cheaper than a payday loan,' which is absolutely true." And they're still many times higher than the rates charged by traditional lenders.

Miller contends you can't operate a storefront lending business if interest rates are capped at 36 percent. "Nearly all offer some variation of the auto title loan product, but they are also experimenting with other consumer loans, check cashing and prepaid debit cards." He estimates auto title lending may be 60 percent of some lenders' business.

In traditional auto title loans, which have been around for decades, the lender assumes title of a car for the life of the loan. But some auto loans offered by former payday lenders don't require the borrower to surrender the title as collateral. Even if someone has a bank loan on a car, they may still be able to get a car title loan.

State Sen. Debbie McCune Davis, D-Phoenix, who led the legislative effort to kill payday loans, said she believes that if lenders aren't actually holding a title, it's a signature loan and they should only be allowed to charge up to 36 percent a year.

"We are in new territory," McCune Davis said. "We have asked the Attorney General's Office to take a look at this practice, and we are waiting for some guidance as to where these loans fall. Are they really auto title loans?"

The senator wants consumers to know that if they have a loan that involves their vehicle, but the lender isn't the title holder, the car cannot be taken to satisfy the loan.

Miller expects further efforts to close the auto title loophole to be made in the coming sessions. "The folks who campaigned against payday loans will continue to campaign against auto title loans. They sincerely believe that morally, legally, ethically, the maximum Americans should pay for loans is 36 percent annually," he said.

Ritch Steven, AARP Arizona advocacy network chair, said AARP supports closing the loophole. "You can't have products out there that are designed to ensnare and entrap individuals. No one should be allowed to operate outside that 36 percent usury law."

The Attorney General's Office and the Department of Financial Institutions have vowed to crack down on businesses that violate the state's lending laws and encourage consumers to report questionable behavior by lenders. The Arizona Attorney General's Office has set up a toll-free line for consumers at 1-866-879-5219, or they can e-mail The Financial Institutions Department is scrutinizing applicants for auto title lending licenses to make sure they are what they claim. So far none have been rejected. The Attorney General's Office also recommends reading the repayment terms and checking that the lender is licensed with the Arizona Department of Financial Institutions (602-771-2800).

Maureen West is a freelance writer based in Phoenix.

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