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. …