Easy Money, Impossible Debt: How Predatory Lending Traps Alabama’s Poor

Payday and title lenders prey on low-income and impoverished people at their time of greatest need.

And their business model depends on borrowers who make only interest payments repeatedly without whittling down the principal – often paying far more in interest than they borrowed in the first place.

With title loans especially, many consumers don’t even know, and are shocked to find out, that they’re not paying down the principal when they make regular payments.

John*, who has been in the payday loan business in Montgomery for nearly a decade, said he earns $17.50 in interest for each $100 he lends for a two-week period. With his loans limited to $500 per customer, that’s not enough to make his business worthwhile. But if the customer cannot repay the principal, he continues to earn $17.50 twice each month on the original loan, while the principal remains untouched.

He estimates that 98% of his customers don’t pay back the loan right away, typically because to do so would mean they couldn’t pay their other bills.

“I bank on that,” John said. “It’s put my kids through school. When they come in and they say, ‘I just want to pay my interest,’ yeah, I got them. Once you pay it once, you’re going to be doing it again.”

He typically offers borrowers more money than they ask for, knowing the more they take, the harder it will be to pay off unless they don’t pay their rent or utilities.

“To be honest, it’s an entrapment – it’s to trap you,” he said.

John told of one customer, for example, who paid $52.50 in interest every two weeks for a $300 loan – for two years. That equals $2,730 in interest alone.

National data tells the same story. More than three-quarters of all payday loans are given to borrowers who are renewing a loan or who have had another payday loan within their previous pay period. This means that the vast majority of the industry’s profit is derived from loans where the borrower is obtaining no new principal.

When customers do manage to pay off the loan, they frequently come back for another one. Studies show that borrowers are indebted for an average of five to seven months per year. John and his salespeople encourage that.

“The payday loan system has made my lifestyle quite easy, I guess you could say,” John said. “There’s enough money out there for everybody if you want to do this kind of business.”

Those who work in payday or title loan stores are under heavy, constant pressure to lend money to people they know will soon be trapped in debt they cannot pay off. Tiffany* worked in a store in Mobile that offered both payday and title loans. She said employees were graded on their “check count,” or number of loans they had outstanding. (Borrowers are typically required to leave a check with the lender so that if they default, the lender can attempt to cash the check to recoup the principal, interest and any fees that might apply.) “When a borrower pays in full and doesn’t renew, you lose a check,” she said. “They don’t want you to ever drop checks, and if you do, they want to know why.”

Most of the employees she knew earned between $8 and $10 an hour, plus commissions based on the number of outstanding loans they had. If she had 300 loans outstanding, her bonus would double.

“You get emails all day long: ‘Grow the business or find another job,’” Tiffany said.

Some customers, she said, carried the same payday loan for years, making only interest payments. “They could have bought a car or two with that interest money by now.”

No longer working in the business, Tiffany said she felt horrible seeing what happened to customers mired in debt. She believes that shutting down these lenders would be good for the communities they prey upon.

“These people are really trying,” she said. “They’re just everyday, hardworking people.”

The following are features of the payday and title loan industry that harm consumers:

EXORBITANT INTEREST RATES
Low-income families and individuals pay effective annual interest rates of 456% for payday loans and 300% for title loans. The industry and the law express the interest rate as 17.5% for payday loans and 25% for title loans each loan period. Most borrowers have outstanding loans for many pay periods, and the high interest rates are not tied to the risk associated with these loans. This is especially evident with title loans, because the loan is secured by a car valued at an amount greater than the principal loan amount.

Title loan interest rates can be devastating for borrowers like Cierra Myles in Dothan. Her car, for which she had paid $1,200 a few months earlier, was repossessed when she was late making a $129 monthly payment on a $700 title loan. “I feel embarrassed and upset every time I see my car behind that fence,” she said.

LENDERS ENCOURAGE HIGHER PRINCIPAL
Lenders often offer customers more money in loans than they request.

John, the payday lender cited earlier, said he would put money on the counter and say, “Look, this is what you’re approved [for]. You can take this, or I can put $200 back in my pocket. You can walk out the door with it.” Most people take the money.

Borrowers are limited by law to $500 in outstanding payday loans at any time. However, payday lenders do not have a centralized database to determine whether borrowers have loans with other lenders, so many borrowers’ total debt load exceeds $500. Title loans have no maximum loan amount; instead, they are extended based on the value of the car. The 300% annual interest rate drains thousands of dollars in interest payments from families and individuals every year.

Latara Bethune, a hair stylist in Dothan, was offered almost double what she asked for at a title loan shop in her neighborhood. She hesitated, but the employee persuaded her to take the extra money. The agreement she signed required her to pay back, over 18 months, approximately $1,787 for a $400 loan.

UNLIMITED RENEWALS
When a loan quickly comes due and the borrower cannot repay the full amount, the lender can renew, or roll over, the loan, charging an additional interest payment. Lenders intend for borrowers to be unable to repay and to roll over their loans after their first payment is due.

Often, title loan borrowers do not understand that their payments are covering only the interest.

“People would cry,” said Tiffany, the former payday and title loan employee. “They said, ‘I’ve been doing this for a year, why isn’t this done?’ They really didn’t understand. Once I explained it, they were heartbroken. They thought they were working towards a goal, but they weren’t.”

REPAYMENT PERIOD TOO SHORT FOR MEANINGFUL OPPORTUNITY FOR ON-TIME REPAYMENT
Borrowers are required to pay back payday loans by their next pay period. Title loans are expected to be repaid within 30 days. But for borrowers using these loans to pay for routine expenses, it is frequently impossible to repay the full amount of the loan plus interest in such a short period without needing additional funds to pay their bills. Borrowers are almost never able to get ahead and pay back the principal with such high interest payments every week. Studies show that nationwide, 76% of all payday loans are taken out by borrowers who have paid off a loan within the previous two weeks.

Despite the fact that title loans are often extended with principal values of thousands of dollars, borrowers are given only 30 days to repay the principal and interest of up to 25%. If the borrower does not repay the full amount, the lender may decide whether to extend the loan for another month. The title loan borrower is at the mercy of the lender, as the lender may repossess the car at the end of any 30-day period in which the full amount of the loan is not repaid – even though the vehicle may be worth thousands of dollars more than the borrower owes.

NO VERIFICATION OF ABILITY TO REPAY
Most title lenders do not ask for any proof of income or whether the borrower has other obligations. While payday lenders often ask for some proof of income and a bank account, there is no meaningful assessment of a borrower’s ability to repay the loan. Studies show that 69% of borrowers use payday loans to meet everyday expenses, such as rent, bills, medicine and groceries. Many individuals present lenders with only their Social Security income or disability checks as proof of income. While these checks are sometimes enough to cover basic expenses, seniors on Social Security rarely have an opportunity for extra income, making them among the most vulnerable to being trapped in the payday loan debt cycle.

Tiffany said lender employees were encouraged to make loans to Social Security recipients, because they made their interest payments on time and were unlikely to be able to pay back the principal. Edward*, an 89-year-old retiree in Birmingham, was a prime example. He borrowed $800 against his 1996 Buick Riviera to help out a younger relative, understanding that he would pay back a total of $1,000 with interest. But after paying $1,000 over five months, he was informed that he had only been paying the interest and still owed the original $800. Angry, he refused to pay any more, and the lender repossessed the vehicle.

Lenders do not verify borrowers’ ability to repay, because their goal is to extend loans that borrowers cannot pay back and force them to renew. For payday loans, Tiffany said she was able to lend up to 30% of someone’s paycheck. That meant that if someone were to pay off the entire principal and interest in two weeks, they would need to take almost half of their paycheck back to the lender. “According to the financial records they gave me, they qualified according to [the lender’s] standards,” Tiffany said. “According to my personal standards and morals, no, they don’t qualify, because they can’t pay this back ever.”

NO INSTALLMENT PLANS OFFERED
Title loan lenders offer only one option for borrowers who cannot repay the full amount of their loan: rolling over the loan every 30 days. If the lender does not agree to roll the loan over, the car is repossessed.

The law allows but does not require payday lenders to offer a repayment option of four equal monthly installments, with no new interest, if the lender cannot pay on the day that the loan is due. The option is usually offered only when the borrower specifically asks for it. Industry professionals agree that offering such a plan is a “best practice,” but only if the customer informs the lender that they are unable to repay the loan the day before it is due.

Tiffany noted that she was not allowed to offer this program to borrowers unless they specifically requested it, and very few customers knew enough about the law to ask for such a plan. However, Tiffany noted that the few customers to whom she was able to provide this plan repaid their loan without incident. She believed this payment plan was much fairer and wished she could offer it to more borrowers to help them escape their debt.

COMMISSION PAYMENTS TO EMPLOYEES
In order to ensure that individual employees are following the profit model outlined above, lenders pay employees based on the amount of current loans outstanding, not including any loans in collections or past due. This encourages employees to persuade borrowers to take out loans with high principal values and to continue rolling over their loans when they are due. This also encourages employees to use any tactics necessary, including deception, threats and other abusive techniques, to collect the money owed.

Latara Bethune of Dothan said she was threatened by a title lender employee. The employee told her that if Latara did not hand over the keys to her car, the employee would call the police and accuse Latara of stealing.

Borrowers are sometimes even threatened with criminal charges and jail time for failure to pay their loans.

DECEPTIVE EXPLANATIONS OF CONTRACTS, ESPECIALLY FOR TITLE LOANS
Payday lenders frequently do not explain many of the terms of the contract, including stipulations requiring borrowers to agree to mandatory arbitration and to waive their right to a jury trial in the event of a dispute. The contracts are often long and confusing to borrowers, many of whom say they have the most trouble with title loan contracts.

John, for example, does not allow his customers to take contracts home to read them in depth. He said he knows they will not read the contract, or at least the important part buried in the middle. “The first two paragraphs [are] just not very important,” he said. “That third paragraph is the one that you need to read.”

Title loan contracts state that the loan is for 30 days only. However, employees extending these loans often tell consumers they can have as much time as they want to pay off the loan. Many explain only that the borrowers will have to make a “minimum payment” every month, which is equal to the interest due each month and does not include any partial repayment of the principal. Tiffany, for instance, was instructed by her employer that she should never talk about the principal when explaining the monthly payments to a potential borrower. Lenders also do not explain that they can, at any time, refuse to roll over the loan and can repossess the car if the borrower does not pay the full amount of the loan by the end of any 30-day period. Lenders also impose late fees and repossession fees that are not clearly explained, either orally or in writing.

DIRECT ACCESS TO BANK ACCOUNTS OF PAYDAY LOAN BORROWERS
Because payday loan borrowers are required to provide lenders with a postdated check or a debit authorization, lenders have direct access to their bank accounts and can try to collect at any time after the loan term expires. Cashing these checks may result in additional fees for the borrower, including overdraft or insufficient fund fees from the bank and bad check fees from the lender of up to $30.

Lenders’ direct access to borrowers’ bank accounts also allows them to evade federal protections against garnishment of Social Security benefits. This also ensures that lenders stay out of court, where the fees charged and terms of the loan would need to be approved by the court before a judgment is awarded to the lender.

These factors provide additional coercion for borrowers to roll over their loans multiple times, even if the loan does not comply with the law.

HOLDING CAR AS COLLATERAL IN TITLE LOANS
Title loan borrowers can be forced to pay interest for months or years, as otherwise lenders can take from them one of their most valuable possessions. Borrowers in Alabama – where public transportation is inconvenient, unreliable and, in many places, simply unavailable – need cars to get to work, transport their children to school, and do other daily errands.

BUYOUTS OF OTHER TITLE LOANS
When a title loan borrower falls behind on payments and wants to avoid repossession, some lenders will offer to pay off the borrower’s existing loan and extend a new loan. The principal balance on the new loan thus becomes the total amount due on the old loan, including principal, interest and any late fees or other charges that have accumulated. The new lender may also encourage the borrower to borrow additional money. This causes the interest payments to increase dramatically.

This highly predatory practice shows that lenders are not attempting to lend responsibly but rather are choosing to extend additional funds to consumers who have demonstrated an inability to repay a smaller loan. Lenders, in fact, target consumers who cannot afford to pay off their loans but who will do anything they can and make as many interest payments as possible to avoid losing their cars.

RETAINING SURPLUS FROM VEHICLE SALE IN TITLE LOANS
When lenders repossess and sell a borrower’s car, they never return any surplus that exceeds the amount due on the loan. Some borrowers may have paid thousands of dollars in interest and principal by the time the car is repossessed. They lose this money and their car.

MANDATORY ARBITRATION
Many of the contracts for these loans contain mandatory arbitration clauses that prevent consumers from challenging the terms of these loans in court, either through individual actions or class actions.

* NOT HIS REAL NAME.

“I go by what God said: ‘Thou shalt not steal.’ And that’s stealing. It is.”
— Ruby Frazier

Alabama lacks the regulations and oversight necessary to ensure predatory lenders don’t take advantage of their customers, who are usually already facing financial distress. In fact, the standards – or lack thereof – more often favor the lender.

The following explains the regulatory environment for payday and title loans in Alabama.

PAYDAY LOANS
The Deferred Presentment Services Act, enacted by the Alabama Legislature in 2003, authorizes fees – effectively interest charges – of up to 17.5% of a loan, which can be due in as few as 10 days or as many as 30 days after the loan has been issued. Borrowers may receive as much as $500 with each loan. A typical loan is given for two weeks, as most people receive their paychecks on a bi-weekly schedule. Thus, a $500 loan incurs interest charges of $87.50 every two weeks, resulting in an effective annual interest rate of 456%.

When a loan is extended, the borrower either presents a check or authorizes an electronic debit for the principal value and interest charges, postdated for the day the loan is due. On that day, the lender may deposit the check or request the money from the bank. Borrowers with insufficient funds face a bad check fee of $30 from the lender and overdraft fees from the bank.

The Act also permits the lender to roll over the loan only once, at the same 17.5% interest rate. After that, it prohibits the lender from making an additional transaction with the borrower until the loan is paid and one business day has passed. However, the Act also provides that a lender can engage in another transaction with the borrower immediately if the borrower pays the total amount due on the previous loan with cash or “guaranteed funds.” Lenders use this provision to effectively renew loans by forcing borrowers to present the total outstanding amount in cash before immediately returning the same money – minus interest paid – in the form of a new loan. Thus, in practice, lenders engage in multiple rollovers of the same loan when consumers are unable to pay the full amount, causing consumers to make hundreds, or even thousands, of dollars in interest payments on one loan. Additionally, although the Act authorizes lenders to offer an extended repayment plan of four equal monthly installment payments if the borrower is unable to repay on time, the Act does not require lenders to notify consumers of this option or grant a borrower’s request for such a payment plan.

The Act prohibits a lender from “knowingly” extending a loan to a borrower who has any outstanding loans, from any lenders, that exceed $500 in the aggregate. However, it requires lenders to use a third-party private sector database to verify this information only “where available.” Lenders do not currently use a common database.

TITLE LOANS
No statute expressly addresses title lending in Alabama. However, the Alabama Supreme Court has found that the Pawnshop Act covers title lending, even though, unlike a traditional pawn, the borrower retains physical possession of the car and gives the lender possession of the title documents only. Conversely, all other states with similarly vague definitions of pawned goods have found that their states’ generic pawnshop acts do not authorize title pawns.

The Pawnshop Act authorizes a “pawnshop charge” and fees that amount to 25% of the principal per month. The Act provides for a loan term of no less than 30 days. There is no maximum loan amount, and lenders determine the amount extended based on the value of the car. Thus, borrowers can receive thousands of dollars. They may not be held personally liable for the loan.

Lenders are not required to provide extensive disclosures or explain the terms of the loan. Although the contract is required to include the maturity date of the pawn transaction, usually 30 days from the date of the contract, borrowers are also told they will have many months to pay off the full amount of the loan. Borrowers are often told that the interest rate is the “minimum monthly payment,” but are not told that just paying this amount every month will never reduce their debt. The law does not explicitly require lenders to disclose any other fees that may be added to the borrower’s total amount due, including late fees and repossession costs; these fees are often hidden in the contract through the use of deceptive language, or not included at all.

The law contains no limit on the pawnbroker’s ability to roll over the loans and charge additional interest. In practice, borrowers are virtually never able to pay the high amounts of principal and interest within one month and consequently must roll over the loan many times. The law also does not require the lender to roll over the loan every 30 days, so the lender can demand full payment when the borrower does not expect it.

If a borrower is unable to pay off the loan or extend it by the maturity date, the borrower has 30 days after the maturity date to redeem the title by paying the full amount due plus an additional charge equal to the original pawnshop charge. The Pawnshop Act does not explain when lenders can repossess the cars or what, if any, fees they can charge in doing so. Most lenders repossess during this 30-day period and charge a daily late fee. After 30 days, “absolute right, title and interest in and to the goods” vests in the lender, and thus the lender can sell the car. The Pawnshop Act does not explicitly direct the lender to return any money made on the sale of the car that exceeds the amount due on the loan.

If additional safeguards are enacted into law to protect consumers from predatory payday and title lending, some of the current lenders will likely move out of the state, claiming that new regulations are driving them out of business. This is beneficial to the community and inevitable when additional protections are established. Encouraging responsible lending will necessarily entail getting rid of the lenders that are unwilling to extend loans with terms that are fair to consumers.

If these lenders leave the state or become less available, low-income consumers will still have options at their disposal to deal with financial shortfalls. Many creditors will negotiate payment plans with borrowers. Also, borrowers may turn to friends or family for help instead of taking out a loan, which is something that many already do to escape predatory loan debt. Additionally, if these loans were not available, many borrowers would simply cut back on expenses.

In a July 2012 study based on a survey of payday loan borrowers, Pew Charitable Trusts found that most would choose options that do not connect them to a formal institution if payday loans were unavailable. In the Pew survey, 81% said they would cut back on expenses; 62% said they would delay payment of their bills; 57% said they would borrow from family or friends; and 57% said they would sell or pawn personal items. Only 44% of consumers would get a loan from a bank or credit union; 37% would use a credit card; and 17% of employed borrowers would get a loan from their employer.

North Carolina’s experience confirms these findings. In 2001, state legislators allowed laws that permitted payday lending at high interest rates to expire. Five years later, the attorney general reported that the last of the payday lenders in the state had agreed to stop making illegal loans. In a 2007 report commissioned by the Office of the Commissioner of Banks, survey responses and focus groups showed that the absence of storefront payday lending had no significant impact on the availability of credit for households in North Carolina. The most frequent options used by those facing financial shortfalls were paying the expense late or not paying, using money from a savings account, and obtaining money from friends or family. 

Eliminating predatory lending products also allows responsible lenders to enter the market. From 2002 to 2006, the first four years that loans with annual interest rates above 36% were banned in North Carolina, there was a 37% increase in the number of loans made at or below 36% APR. The North Carolina State Employees Credit Union, the biggest in the state, created an alternative payday loan product with an annual interest rate of 12% and a savings plan. Similarly, after the Military Lending Act of 2007 limited the interest rate for loans extended to active-duty military personnel and their families to 36%, non-profits and military relief societies began offering interest-free loans. Many military credit unions and banks also began extending loans at low interest rates or with zero interest.

A pilot program conducted by the Federal Deposit Insurance Corporation also established a “safe, affordable, and feasible template for small-dollar loans.” Charge-off ratios, which represent the amount of debt the bank believes will never be recovered, were in line with the industry average. Most pilot bankers indicated that small-dollar loans were a useful business strategy for developing or retaining long-term relationships with consumers.

Already, many credit unions in Alabama offer 90-day loans at annual interest rates of 18% or lower. These credit unions will offer loans to borrowers with no credit or bad credit, requiring only that they are members of the credit union and can provide proof of income or direct deposit. If additional protections are enacted into law, other banks, credit unions and community organizations will step in to offer safe products to meet the demand for small-dollar loans.

Policymakers must regulate both payday and title loans to protect consumers from predatory lenders. Otherwise, Alabama lenders, many of which are engaged in both payday and title lending, will simply push their customers to take out whichever loan is more favorable to the lender under the new regulatory structure. Other states have seen this reaction to increased regulation. For example, in Arizona, when the payday loan law expired, more than 200 payday lenders filed licenses to operate as title lenders and encouraged their customers to shift to these loans. In Virginia, the number of title loans increased five-fold between 2010 and 2011 after restrictions on payday lending took effect in 2009. Policymakers must take a strong stand on protecting vulnerable communities by addressing both types of predatory loans.

-Richard Cordray
Director, Consumer Financial Protection Bureau
1700 G Street, NW
Washington, D.C. 20552

March 11, 2013

Dear Director Cordray:

For decades, Alabama’s most vulnerable citizens have been targeted and abused by the payday and car title loan industries in the state.  These poorly regulated industries strip hundreds of millions of dollars each year from hard-working communities. As you recognized when you visited Birmingham for a field hearing in January last year, Alabama has one of the highest concentrations of payday lenders in the United States. We also have more car title lenders, per capita, than any other state.

Recently, the Southern Poverty Law Center released a report, Easy Money, Impossible Debt: How Predatory Lending Traps Alabama’s Poor, to document the incredible harm that these industries inflict on communities throughout the state. The report, a copy of which is enclosed, is the product of numerous listening sessions and interviews across the state, and is one of few that tell the stories of actual borrowers as well as those who work in the industry. Through our focus on how these loans affect the lives of consumers in Alabama, we hope that state lawmakers and regulators at the CFPB will better understand the gravity of the problem in states where lenders are allowed to operate unchecked.

As you have recognized, some loans—those whose “success is based on a substantial percentage of users rolling over their debts on a recurring basis”—are “debt traps." These products “trigger a cycle of debt whose substantial costs over time can disrupt the precarious balance of people’s financial lives.”^[1] Our conversations with consumers across Alabama made it clear to us that both payday and title loans are the very embodiment of the evils you described.

The stories highlighted in the report include those of senior citizens trying to help young family members in need, a recent nursing school graduate trying to make ends meet, a military veteran’s family facing a tough time, and other hard-working families and individuals that were ensnared by these loans.  Many have paid hundreds, or even thousands, of dollars in interest payments for initial loans of just a few hundred dollars.  For example, Alicia, a nurse, repaid $2,945 in total for borrowing $1500 for a period of just a few months. Latara, a hairdresser, is still paying $100 per month to pay off her $400 title loan almost two years after it was issued.  Unfortunately, Alicia and Latara’s experiences are all too typical of those who are induced to take out predatory loans.

The report also includes candid interviews from those who own and run payday and title lending stores.  These interviews confirm that the business model of these industries is to encourage high loan amounts and multiple renewals.  A former employee of a payday and title lender explained that she was paid on commission based on loan amounts outstanding, not including any loans in collections or past due.  Indeed, she explained that employees were discouraged from allowing borrowers to pay off the loan amount: “When a borrower pays in full and doesn’t renew, you lose a check.  They don’t want you to ever drop checks, and if you do, they want to know why.”  As one owner of a local payday loan store acknowledged, “To be honest, it’s an entrapment—it’s to trap you.”

We are heartened that the CFPB has spoken out about these debt traps and instituted a comprehensive examination of small-dollar payday loans.  We urge you to conduct an examination of car title loans as well.  As we, along with other groups, explained at the community roundtable discussion CFPB held in Atlanta in January, and as the report explains in more detail, these loans have had the same disastrous effects as payday loans on the lives and financial stability of Alabama’s most vulnerable communities.

We also call on the CFPB to use its rulemaking authority to declare the most egregiously predatory practices of these industries as unlawful, unfair, deceptive, or abusive.  In particular, the report identifies the following unfair business practices that should be the subject of reform:

-Repayment periods too short to allow for a meaningful opportunity for on time repayment. Borrowers must be allowed at least 90 days to save the money required to pay back the loan, and possibly even longer for more expensive title loans.

-Unlimited renewals.There must be a limit on the number of loans per borrower per year to ensure that lenders cannot collect interest on the same loan for months upon end without extending any new principal. 

-Failure to meaningfully assess borrowers’ ability to repay. Lenders must be required to take income into account and to stop the practice of lending beyond what a consumer can afford to pay.

-Failure to utilize a centralized database and report data to the public.  These industries must be forced to report data about the loans extended and outstanding in order to ensure compliance with current laws.  States also must be required to produce data to the public to show how these loans are utilized.

-Payment of employees on a commission basis.  Lenders must be prohibited from paying employees based on the outstanding principal value on all current loans, which encourages abusive practices such as offering higher loan amounts than consumers can afford, persuading borrowers to renew their loans multiple times, and threatening consumers in order to obtain a payment.

-Deceptive explanations of contracts, especially with title loans. Many title lenders currently explain the loan terms as requiring a “minimum monthly payment,” equal to the interest on the loan, so borrowers do not pay down the principal. Lenders must not be permitted to engage in such deceptive explanations. 

-Direct access to the bank accounts of payday loan borrowers.  The abusive practice of requiring a check or access to a financial account as security must be prohibited, as it is in the Military Lending Act.  It allows lenders to evade protections on social security funds and allows banks to rack up overdraft fees for borrowers who have insufficient funds in their accounts.

-Lender buyouts of unpaid title loans. Many lenders will buy a title loan from another lender at the borrower’s request when he reports being unable to pay his first loan.  The second lender then compounds the previously-owed principal, interest, and any late fees into principal on the new loan.  Lenders should not be able to obtain higher interest payments from consumers in this abusive way.

-Retention of the surplus from the sale of repossessed vehicles.  Lenders must not obtain an unfair windfall by retaining any surplus they obtain in the sale of the car that exceeds the current amount due on the loan.

Again, we hope that your rulemaking will extend to cover both payday and title loans in order to effectively protect vulnerable communities seeking small loans.  The experience of states such as Arizona and Virginia has shown that when the payday loan industry encounters increased restrictions, lenders will simply switch to offering predatory car title loans instead.^[2]  We also hope that you will encourage programs that provide incentives for savings and small loan products and that require financial education and credit counseling options to be made available to the communities targeted by these industries. 

We look forward to seeing your continued progress in this area as you work to ensure that the small loan market is helping, not hurting, consumers. Please do not hesitate to contact us if we can provide any additional information.

Sincerely yours,

J. Richard Cohen

President, Southern Poverty Law Center