The Federal Trade Commission has taken action for the first time against two car-title lenders, reaching settlements that will require them to stop their use of deceptive advertising to market title loans.
A car-title loan is typically a high-cost, short-term loan, secured with the consumer’s car title. In administrative complaints issued against the two Georgia companies, First American Title Lending and Finance Select Inc. (also known as Fast Cash Title Pawn), the FTC charged that the companies advertised, both online and in print, zero percent interest rates for a 30-day car-title loan without disclosing important loan conditions or the increased finance charge imposed after the introductory period ended.
The loans require borrowers to use car titles as collateral, usually a given percentage of the vehicle’s resale value. First American Title and Finance Select didn’t disclose that the interest rates can jump as high as 300 percent. Those who miss one payment may have their cars repossessed.
The Federal Deposit Insurance Corp. reported that more than 1.1 million Americans took out auto-title loans in 2013. Of 561 title loans studied by the Center for Responsible Lending in Durham, N.C., about 17 percent of borrowers had their vehicles repossessed.
These loans are different from subprime loans for the purchase of new or used vehicles. The number of those loans is also rising, but for the most part, they carry interest rates below those charged by auto-title lenders.
The FTC is requiring First American Title Lending and Fast Cash Title Pawn to disclose all qualifying terms associated with obtaining a loan at its advertised rate.
They had been touting loans that start at zero percent without explaining that the rates soar exponentially after a short introductory period.
They also must disclose what the finance charge would be after an introductory period ends. They must also agree not to misrepresent material terms of any loan agreements.
In addition, First American Title Lending is prohibited from stating the amount of any down payment, number of payments or periods of repayment, or the amount of any payment or finance charge without clearly and conspicuously stating all the terms required by the Truth in Lending Act.
Consumer advocates have compared auto-title loans to payday lending. In many cases, borrowers don’t own a home, or don’t have equity in a home. When they are desperate to pay medical bills, utility bills or other routine expenses, auto-title loans may be a tempting way to get cash quickly.
“One of the fundamental problems with these title loans is these are not quick fixes for a temporary emergency,” said Lisa Stifler, policy counsel for the Center for Responsible Lending. “Our research shows a typical borrower renews these 30-day loans about eight times a year. The average loan amount is around $1,000, and usually the fees amount to 2 ½ times the amount of the loan.”
Car-title borrowers have an average gross annual income of less than $25,000, according to Todd Zywicki, a George Mason University law professor.