Popular auto title loans offer fast cash at steep price

History of Payday Lending in Ohio

1995: Cash Cashing Lender Law approved.

Spring 2008: Ohio House and Senate pass House Bill 545 to replace the Cash Cashing Lender Law with the Short Term Lender Law. The new law caps APR interest rates at 28 percent, down from 391 percent APR.

November 2008: Voters overwhelmingly endorse the law: 64 percent in favor, 36 percent opposed.

2009: Payday lending industry begins issuing loans under the Second Mortgage Loan Act and the Credit Service Organization Act, which allows them to add on fees, effectively increasing the APR.

May 2010: Ohio House votes 61-37 in favor a bill to close off these loopholes but the Ohio Senate takes no action so bill dies.

January 2012: Payday lenders and others begin offering auto title loans in Ohio.

Source: Dayton Daily News research

Ohio lending Laws:

1. Borrower brings in ID, pay stub or other proof of income, their paid-off car and their car title, free of any liens. They must start the car and move it a few yards forward and back.

2. The lender offers a loan (often for 30 days), with the loan amount depending on the value of the car. During the 30-day period, the lender holds onto the title, while the borrower keeps the car.

3. On a $500 loan, a customer would have to repay almost $650 after 30 days. On a $1,000 loan, a customer would have to pay back more than $1,300. Those fees and interest charges equate to an annual percentage rate of 300 to 400 percent. If the borrower pays off the loan in full, they get their title back.

4. If the borrower can’t pay back the loan after 30 days, they can often pay a “minimum payment” roughly equal to all the fees and interest due. On the $500 loan, that would mean paying about $150. The $500 principal is largely untouched, meaning the $650 is again due in 30 days. Many lenders will allow the borrower to do that over and over, collecting fees while the borrower gets no closer to paying off the loan.

5. If the borrower cannot make the minimum payment, the lender can repossess the car and keep it or sell it.

Source: Dayton Daily News research, visits to title lenders

Where auto loans are done in Dayton area

Auto title loans have become much more available in the Dayton area in the past year. Some agencies specialize in auto title loans, while some existing payday lenders have added the short-term loans to their offerings. They all offer fast cash using your auto title as collateral.

2601 S. Smithville Road, Dayton

5799 Springboro Pike, West Carrollton

675 E. Second St., Franklin

1451 W. First St., Springfield

3220 Dixie Hwy, Fairfield

3401 Park Center Drive, Dayton

Cash Max

6740 Brandt Pike, Huber Heights

Ace Cash Express

1030 S. Smithville Road, Dayton

4301 N. Main St., Dayton

3516 W. Siebenthaler Ave., Dayton

CheckSmart

4212 Linden Ave., Dayton

5521 Salem Ave., Dayton

2129 Needmore Road, Dayton

4064 Wilmington Pike, Kettering

1947 S. Alex Road, West Carrollton

2930 W. Alex-Bell Road, West Carrollton

7645 Old Troy Pike, Huber Heights

801 Union Blvd, Englewood

397 W. Main St., Xenia

3487 Dixie Hwy, Franklin

800 Stahleheber Road, Hamilton

6600 Dixie Hwy, Fairfield

2000 S. Limestone St., Springfield

Springleaf Financial

127 Springboro Pike, Miamisburg

7702 Hoke Road, Clayton

2628 Colonel Glenn Hwy, Fairborn

987 E. Ash St., Piqua

1390 W. First St., Springfield

4421 Roosevelt Blvd, Middletown

1720 S. Erie Hwy, Hamilton

Source: Dayton Daily News research

Storefront and online lenders are offering a new form of expensive credit — with fees and interest rates totaling more than 300 percent in some cases — by exploiting the same legal loopholes used to sidestep voter-approved rate caps on standard payday loans, a Dayton Daily News investigation found.

“Auto title loans” give borrowers quick and easy access to cash but at a steep price. Not only do the agreements carry high fee and interest costs — far above the 28 percent rate ceiling that Ohio voters endorsed for short-term loans in 2008 — but consumers risk having their vehicles repossessed.

Long popular in states such as Texas and Illinois, auto title lending is spreading across Ohio with more than 20 stores in the Miami Valley alone. Lenders promise 30-day loans of $100 up to $10,000, using the title to the borrower’s vehicle as collateral.

An employee at a newly opened LoanMax store at 2601 S. Smithville Road in Dayton told an undercover Daily News reporter that someone taking out a $400 loan would have to pay back $536 after 30 days. On a $1,000 loan, a borrower would have to repay $1,325, the employee said.

If those fees and interest were calculated as an annual percentage rate, both loans would have an effective APR of around 400 percent.

Consumer advocates call auto title lending a dangerous practice that traps people in debt and sometimes takes away an asset that is worth more than the loan: their car or truck. In Texas, an average of 93 people a day have their cars repossessed by auto title lenders, which works out to be a 6 percent repossession rate, according to 2012 data from the Texas Office of Consumer Credit Commissioner.

“The payback time is extremely short and the interest rates are extremely high,” said David Rothstein of Policy Matters Ohio, a Cleveland-based left-leaning think tank. “And there is this new dimension: you could lose your car.”

Amy Voshall of Fairborn took out a $550 title loan this fall but claims the terms weren’t clear before she signed the paperwork. She signed the papers and now faces almost $1,400 in payments over six months. She has already missed one payment and is afraid she will lose the 1995 Chevy Blazer that gets her to school and takes her disabled son to doctor appointments.

“I was in a bind and I needed the help (to pay rent), and now I’m in a worse situation than I ever was,” she said.

Voshall planned to repay the loan when she received an adjustment to her disabled son’s Supplemental Security Income check. But she said she used that money instead to pay overdue utilities, rent and bills.

“It’s heartbreaking for me to look at my kids and say it’s a choice — either we have a car, or you have a Christmas,” she said. “That’s where I’m at right now. As a mom, that just rips my heart out.”

An employee at the Brandt Pike Cash Max where Voshall got her loan said she couldn’t comment on any customer’s account because of privacy rules. She would not give her name or the name the parent company of Cash Max, saying she would forward a reporter’s contact information to the company.

But the employee said she goes “above and beyond” to avoid repossessing cars, saying there would be “an extensive amount of time” after a missed payment before a borrower’s car was repossessed. She would not be specific about that grace period, but when asked whether it was more or less than two weeks, she said “way more than two weeks.”

The Ohio Consumer Lenders Association, which represents payday lenders, said auto equity loans fill an important gap in the credit market for “worthy borrowers” who own cars but have difficulty getting a credit card, bank loan or home-equity line of credit.

“There will always be critics of new consumer financial products,” the association said in a written statement to the Daily News. “In our mind customer demand is the ultimate determinant for establishing the worth and viability of a product. Without demand, a product would not exist very long in a marketplace. The laws of economics and behavior over time will determine the success and value of this product.”

The state of Ohio does not collect data on how many auto title loans are being made, what the loan terms are, what the default rate is or other relevant information. The state doesn’t have a specific licensing category for these types of loans either.

The Department of Commerce referred questions about auto title loans to the industry itself. The Ohio Consumer Lenders Association referred the same questions back to the Department of Commerce.

Critics say lenders are doing an end-run around the state’s 2008 Short Term Loan Act, which was heavily opposed by the payday lending industry and overwhelmingly approved by voters in a statewide referendum.

Yolanda Walker, spokeswoman for Cash America, said payday lenders eschew that statute because “the interest rate is so low it is not feasible for us to do business.”

Legal loopholes

Payday and auto title lenders sidestep the strict limits imposed by the Short Term Loan Act by licensing their businesses under the Second Mortgage Loan Act or the Credit Services Organization Act. Both laws permit fees on top of whatever interest rate is charged.

The Second Mortgage Loan Act was originally designed for borrowers taking out a cash loan with their house put up as security. The CSO act was aimed at regulating the credit repair businesses that collected fees but did little to help consumers consolidate debt or clear up credit blemishes. Now payday lenders licensed as CSOs offer to help borrowers repair their credit by obtaining a payday or auto title loan.

Currently, Ohio has 1,400 licensees under the Second Mortgage Loan Act, down from 2,300 in 2007. The foreclosure crisis greatly decreased the number of mortgage lenders overall, so sheer numbers alone don’t reflect the trend of payday lenders finding legal ways to make high-interest loans. But CSO licenses increased — from eight in 2007 to 36 today, while the state doesn’t have a single licensee doing business under the Short Term Loan Act.

Some payday lenders went out of business, but many just found a way around the lending ceiling. LoanMax, which is registered as a CSO, advertises “loans up to $10,000” on its website with rates “up to 50% less!” A menu on Frequently Asked Questions covers areas such as “What is a title loan?” and “How much can I borrow?” but doesn’t say what the rates are. To a question about whether borrowers can lose their car, the website says, “Unlike other lenders who might be more interested in repossessing the vehicle, LoanMax is more interested in working out a payment arrangement so you can keep your car.”

Such arrangements can get expensive. When the Daily News undercover reporter visited the LoanMax store on South Smithville, the employee outlined a dizzying array of potential fees. Asked what would happen if a loan wasn’t repaid in 30 days, the employee said as long as a borrower made a “minimum payment” roughly equal to the fees and interest (paying $142 on the $400 loan), they could essentially start over with a new loan of the same amount.

The employee pointed out that the minimum payment would only pay down $6 of the principal on the loan, then added that “you can do that as many times as you need to.”

If a borrower did that three times, the dollar amount on fees and interest would be higher than the original loan amount.

The cost is more steep for those who can’t pay off the loan or make the minimum payment.

“If you don’t pay either one of these, there’s 30 days before we would repo the car,” the employee said.

In an interview last week, a manager at the Dayton LoanMax store confirmed the information the employee provided to the undercover reporter.

Other credit options

Payday and auto title lenders say their products are invaluable to customers who are “neglected and ignored” by other lenders.

But some local banks and credit unions attack that theory on two fronts — they say their loans are cheaper and more available than some people think, and they argue thatsome customers who are turned down for bank loans might be better off not borrowing at all rather than taking on risky loans.

“We believe the relationship between risk and return has to be appropriate,” said PNC Bank spokesman Fred Solomon.

A PNC loan using a car as collateral likely would have a minimum loan amount of $2,000, he said, though he acknowledged that default on the loan could lead to losing the car. But PNC’s website lists rates between 3 percent and 9 percent APR for those loans, and Solomon said there would be at least 12 months of smaller installments to pay it off, making default less likely than a 30-day, one-shot deal from title lenders.

Bill Burke, CEO of Day Air Credit Union, said Day Air offers collateral loans to members, also with rates between 2 and 9 percent APR. Like PNC, Burke said Day Air would run a credit check, something that title lenders do not require.

“We don’t fall into that ‘no credit, no cash, no problem’ guarantee,” he said.

Burke said Day Air also offers a specific short-term alternative to payday lending with its StretchPay loans for Day Air members. A first $500 loan would require a $577.40 payback after 30 days – comparable to the cost at some payday lenders and about half the interest and fees that a title lender would charge.

The difference is that $70 of the payback amount is a once-a-year charge, so if the borrower has to roll the loan over at the end of 30 days, their second 30-day loan (or third, or fourth) would have a payoff of only $507.40. Payday and title lenders typically re-apply the fees for each new loan.

“It’s nuts how much they charge (for title loans),” Burke said.

Possible legal challenge

While payday loans have been around Ohio since the mid-’90s, auto title lending is a new and up-and-coming trend, said Linda Cook, senior attorney with the Ohio Poverty Law Center, which works with consumer groups across the state.

Cook and others even suggested that it may be illegal to make auto title loans under the Credit Services Organization Act. Uriah King, senior policy associate at the Center for Responsible Lending, told state officials that more investigation is necessary into the relationship between the credit service organizations and the lenders to see if they’re violating state law.

“This whole thing is a mess and (the state Department of) Commerce and the AG (attorney general) have to step in and get control,” said Rothstein, of Policy Matters.

Ohio’s 9th District Court of Appeals earlier this month dealt a blow to payday lenders, saying Cash America improperly made payday loans under the Second Mortgage Loan Act. The decision applies only in the 9th District, which covers Lorain, Medina, Summit and Wayne counties. It is unclear whether Cash America will appeal the decision to the Ohio Supreme Court.

The industry’s end-run around the Short Term Loan Act isn’t lost on state lawmakers. In May 2010, state Rep. Matt Lundy, D-Elyria, pushed a bill that would have closed payday lending loopholes. The bill passed the Ohio House on a 61-37 vote but the Ohio Senate declined to take action, letting it die.

The surge in auto title loans may revive the reform effort, however. State Sen. Chris Widener, R-Springfield, who sponsored the 2008 law that voters endorsed, said he wants to know more about auto title lending.

“If there is a new product and it’s not clearly defined in code, I can’t see the legislature not taking a look at that,” he said.

Lundy said he is hesitant to re-open the issue of short-term consumer loans because the GOP-controlled General Assembly hasn’t exactly made consumer protection a priority. Still, he said he sees a need for more regulations.

“This thing with car titles, I mean, jeez the worst thing you can do is lose your auto,” he said. “I’d hate to see this run rampant in Ohio.”

Gov. John Kasich last week said he had not heard anything about auto title loans and did not have a position on the issue.

Earlier this year, the state Department of Commerce developed a one-page consumer tip sheet, warning Ohioans to “think long and hard before putting your motor vehicle — which may provide your transportation to work, important appointments, the grocery store — at risk as security for a loan.”

But Commerce spokesman Dennis Ginty said the tip sheet isn’t posted on any state websites or at auto title lending shops. In fact, it’s only been handed out “a few” times so far upon request, he said.

Cook and other consumer advocates say the state needs to get more aggressive.

“They’re here until we either kick them out or shut the door,” she said of lenders who trap desperate borrowers. “And there has to be the political will to shut the door.”