Grand Theft Auto Loans: Repossession and Demographic Realities in Title Lending
Martin, Nathalie, Adams, Ozymandias, Missouri Law Review
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.
a. 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
a. Number of Title Loans Charged off During the Calendar Year
Table 9 records the number of charged-off loans in each year. (170)
b. 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)
c. 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 lose their vehicles. (184)
a. Number of Individual Title Loan Borrowers Against whom Lawsuits were Instituted
Table 13 reports on borrowers sued by their title lenders in connection with their title loans. While these data show that lenders infrequently utilize lawsuits, there is no indication that in New Mexico the loans are nonrecourse. In the dozen or so contracts that we have seen, all allow the lender to sue for deficiencies, and some lenders do so. (185)
b. Total Number of Title Loan Repossessions During the Calendar Year
Table 14 reflects the total number of repossessions reported each year. Despite the fact that the number of loans made has decreased recently, the number of repossessions has increased.
If we divide the number of reported repossessions for a given year by the number of loans made that year, we get the percentage of loans repossessed for the year.
While these rates are higher than we contemplated, they do not paint a complete picture. We must go further and divide the number of repossessions per year by the estimated number of customers we calculated in Table 7.1. This calculation provides an estimate of the yearly repossession rate per customer.
As Table 14.2 shows, once we adjust the numbers to reflect the number of loans per customer, we find that the actual number of customers who get their cars repossessed jumps alarmingly. For example, in 2006, 53% of customers had their autos repossessed. To illustrate the magnitude of this repossession rate, we compare this rate to the current home foreclosure rate. In the fourth quarter of 2008 Nevada led the nation with a foreclosure rate between 2.574% and 4%, described by the New York Times as "dangerously widespread." (186) If that foreclosure rate is a crisis, what is 53%? Not only is a vehicle repossession a loss of a major asset, it is the loss of vital transportation.
To say an auto is repossessed does not mean that it was lost permanently, only that a customer fell behind in the payments and the repossession process was at least started. This is reflected in Table 15, which shows the number of customers who reclaimed their autos after repossession. To find out how many customers actually lost their vehicles after repossession, we subtract the number of customers who reclaimed their autos after repossession, as shown in Table 15, from the number of repossessions. We divided the number of autos lost by the total number of customers, as calculated in Table 14.2. These numbers show actual loss rates of 14.64% for 2004, 13.04% for 2005, 41.02% for 2006, 36.99% for 2007, and 60.06% for 2008. These figures are alarming under any standard.
c. Total Number of Motor Vehicles Disposed of by the Lender During the Calendar Year
Table 16 reflects the total number of motor vehicles sold after repossession by the lender during the calendar year. This number should equal the Number of Autos Lost found in Table 15.1, which is calculated by subtracting the Number of Repossessions Reported from Table 14 from the Number of Reclamations by Borrowers After Repossession from Table 15. For some unknown reasons, it does not. This may be the result of vehicles being repossessed in one year and disposed of in another, but without more detailed data this is impossible to confirm.
Table 17 reflects the difference in the selling price of repossessed vehicles as compared to how much the borrowers owe, or the total amount that all vehicle sales proceeds exceeded all loan amounts. New Mexico law requires lenders to return these overages to the borrower. (187)
Below, we divided the amounts in Table 17 by the number of disposed vehicles to determine an estimate of the amount returned to the average customer. Surely some vehicles sell for more than the average and others sell for amounts insufficient to cover the outstanding loan. The data above indicate that the average amount returned is small and getting smaller every year. Since the lenders have to return any overage, the lenders are not motivated to sell vehicles for any more than they are owed. (188) It is most economical for them to sell the vehicles as quickly as possible, as shown in table 17.1.
8. Reporting Woes
One theme quickly developed while analyzing these data. Lenders do not report and there are no ramifications. They do not lose their licenses or suffer any other consequences in response to their inaccurate reporting. We hope our paper will bring attention to and help remedy these practices. Table 18 shows a 32% decrease in lenders reporting between 2007 and 2008. (189) We carefully searched the New Mexico Regulation and Licensing Database for a count of all licensed small lenders authorized to make title loans from 2004 to 2008, data which is reflected in Table 18.1.
Table 18.1 Percentage comparison of lenders who filed reports to lenders authorized to make title loans.
As the table above shows, in 2004, 94.27% of lenders responded, but in 2009 only about 40% of title lenders completed their FID required questionnaires. FID apparently has all but stopped enforcing its reporting requirements. Given what was reported, pursuant to N.M. Statutes Annotated [section] 5815-10.1D(2), there should have been forty-eight more expired or revoked licenses in 2009. (190) In summary, while the reporting has never been perfect, the situation seems to be getting worse each year except for 2007, with no explanation for the drop. In 2008, the percentage of lenders reporting was abysmal. (191) By 2009, fewer than half the lenders complied with the reporting requirements. (192) This lack of compliance makes the 2009 data all but worthless.
IV. Some Conclusions about Title Loan Customers, Repossession Rates, and the Utility of these Loans
This Part draws various conclusions about title lending from the data discussed in Part III above. in so doing, it challenges many of the myths about title lending. it discusses the demographics of title loan customers, the repossession rates on title loans, the legal implications of the data on surplus returns to customers, and finally, the utility of these loans to borrowers. This utility is discussed in the context of other loan products such as payday loans, as well as in light of industry claims that title loans smooth consumption for low-end borrowers with little access to other credit.
A. Title Loan Demographics: Who Uses Them?
Payday lenders have been claiming for years that they serve a primarily middle class population. (193) some industry scholars have made this claim, ever since a 2001 industry-funded study found that most payday customers make between $25,000 and $50,000. (194) This claim is critical to the payday lending industry's assertion that it does not take …
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Publication information: Article title: Grand Theft Auto Loans: Repossession and Demographic Realities in Title Lending. Contributors: Martin, Nathalie - Author, Adams, Ozymandias - Author. Journal title: Missouri Law Review. Volume: 77. Issue: 1 Publication date: Winter 2012. Page number: 69+. © 2007 University of Missouri-Columbia School of Law. COPYRIGHT 2012 Gale Group.
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