Homeless in Arizona

But I don't think the government should make them illegal. Consumers should be able to make that decision, and if title loans and payday loans are really stupid and a waste of money the business that make them will quickly go out of business.

But from this article it sounds like consumers disagree with me and don't think title loans or payday loans are stupid and a waste of money.

And of course the governments effort to shut down payday loans backfired and created these so called title loans.

Source

Title loans hurt poor, critics say

By Josh Brodesky and Rob O’Dell The Republic | azcentral.com Mon Apr 1, 2013 5:30 PM

Consumer watchdogs sighed with relief after Arizona voters rejected a permanent extension of payday lending in 2008. Payday loans carried triple-digit interest rates that critics said left low-income borrowers trapped in debt, and those high rates were going away.

But the sunset of payday lending only fueled a surge in another form of quick cash for the financially vulnerable: auto-title lending. Like their payday-lending counterparts, auto-title lenders, which use borrowers’ vehicles as collateral, offer short-term loans at triple-digit interest rates, potentially reaching 204 percent.

More than 430 auto-title-lending branches have been licensed in Arizona since 2009, the year after voters rejected payday lending, state figures show. By comparison, from 2000 to 2008, about 160 title-lending branches were licensed with the state.

The rise of title lenders has rekindled a debate over whether these kinds of high-interest loans ultimately help or take advantage of low-income borrowers.

“Many of the payday-loan people, instead of shutting down — although a lot did shut down — a lot of them just put up signs that said auto-title loans,” said Mike Sullivan, director of education for Take Charge America, a non-profit that provides credit counseling. “It was clear pretty quickly they were just changing the name of what they were doing and doing almost the same thing.”

There are now about 600 licensed title-lending branches in Arizona, according to state Department of Financial Institutions data compiled by The Arizona Republic.

The explosive growth of title lending startled many consumer advocates.

Their assumption had been that because a title loan involves a vehicle, there would be fewer potential borrowers. That may be true, but in Arizona a free-and-clear vehicle title isn’t required to get a loan. Proof of registration is enough.

“A registration loan is an auto-title loan,” said Scott Allen, president of the Arizona Title Loan Association and Cash Time Title Loans. “They might call them a different name, but at the end of the day, it’s still a loan secured by your motor vehicle.”

Other factors behind the rise in title and registration loans include plenty of low-income borrowers, around whom lenders have clustered stores; and lax state regulation. Arizona, which is one of 21 states that allow title loans, does not examine title lenders unless a complaint is filed. Put it all together and Arizona is a target market for title lenders.

TitleMax, which claims to be the largest title lender in the country and recently licensed about 85 branches in the state, has said as much: “Clearly in Texas, Arizona, Virginia, and other states, we do see ample room to continue to grow, not only next year but even in years beyond that,” Kelly Wall, vice president of finance for TitleMax, said in a U.S. Securities and Exchange Commission filing late last year.

One consumer’s story

Why would anyone take out a loan with an annual interest rate of 156 percent?

For borrowers with bad credit, little or no savings and few family resources, traditional forms of credit aren’t an option. Title lenders can fix short-term problems, but at the potential cost of long-term debt.

When Jeffery Simmons’ car broke down last summer, he relied on a title loan to pay to get it fixed.

The 56-year-old Glendale resident is on government disability and can’t work because he needs a kidney transplant. He has bad credit, so banks wouldn’t provide a personal loan or issue him a credit card. And his savings were gone.

A title loan, he said, was the only option to get his car fixed.

Simmons went to a local title lender, Tio Rico Te Ayuda, and borrowed $2,000 against his 2001 Nissan Maxima at an annual interest rate of 156 percent.

The cash allowed him to fix his car and make his dialysis appointments, but it came at a high cost: To repay his loan in six months, he would have to shell out $1,560 in interest.

He knew he couldn’t pay off the loan with his monthly disability check of $1,300. But he also knew he couldn’t miss his dialysis appointments three times a week. Before his kidneys failed, Simmons worked in retail sales. He thought he could get a part-time seasonal job in retail to pay off the loan.

“They are under a good pretense, you know, to help people in a time of need,” he said. “But it’s just repayment, man, it is almost impossible. You end up robbing Peter to pay Paul.”

Simmons made interest-only payments for the first five months, but he never found a part-time job. When his loan came due, he refinanced with TitleMax.

Brian Jackson, owner of Tio Rico Te Ayuda, said he couldn’t discuss Simmons’ loan because he was not familiar with the details.

“They are going for what they think is a quick financial fix, but in reality, it’s a long-term-debt product,” said Diane Standaert, legislative counsel at the North Carolina-based Center for Responsible Lending, a non-profit lending watchdog. “Every time they refinance, they essentially pay the fees again to float that same line of credit.”

Standaert said industry records have shown the typical title-loan borrower will refinance a loan eight times in a year. Defaulting on a title loan also potentially means losing a vehicle.

But Allen, president of the Arizona Title Loan Association, said these loans were never meant to be long term and that borrowers are told this. Most customers, he said, use them as quick bridge loans. Simmons’ experience isn’t reflective of the experiences most borrowers have, he said.

The industry serves people, such as Simmons, who don’t have access to bank loans, and rates have to be high because of the high risk, Allen said. In recent SEC filings, TitleMax has reported that about 13 to 17 percent of its loans go uncollected.

“It’s designed for short-term needs,” Allen said. “What we offer in Arizona is less expensive (compared with other states), and it’s quite a bit less expensive than what the old payday-loan framework was.”

While Arizona caps interest rates at 204 percent, many other states that allow title lending don’t cap interest rates. Others cap rates at 300 percent.

A familiar scenario

While several consumer advocates have said title lending has a narrower base than payday lending, almost anyone who owns a car can get a title loan in 30 minutes. The process is virtually unregulated, although state officials said they hear few complaints.

In many ways, title and payday loans are similar, but there are key differences.

For payday lending, which continues with triple-digit rates in other states, borrowers need to show proof of a checking account. They receive advances on their paychecks and are expected to pay off what they borrowed within two weeks. The typical loan amount is $350, according to the Center for Responsible Lending.

Interest rates in Arizona could go as high as 460 percent before the sunset of payday lending in 2010.

For auto-title loans, borrowers must own a vehicle, but a free-and-clear title isn’t required. Proof of ownership is enough.

If a borrower owns a car outright, he or she could potentially lose their car in a default. If there is a loan on the vehicle, the title lender will take a second position. These products are often called “registration” or “equity” loans, not title loans, but it’s the same. The different products allow lenders to target a broader market.

The typical payoff term is 30 days, and interest rates can be as high as 204 percent.

The amount borrowed is usually more than a payday loan. The Center for Responsible Lending has reported that the typical loan is $951. In SEC filings, TitleMax has said its average loan is $1,300.

Both title and payday lending began in Arizona in 2000, following intense industry lobbying of the Legislature.

“Obviously, there is a market for that type of loan,” said Robert Charlton, assistant superintendent at the state’s Department of Financial Institutions. “There is a lot of people that need, you know ... their transmission breaks, they got to get to work. They need to get the money now. They don’t want to lose their jobs. They don’t really care about the APR (annual percentage rate).”

Charlton said that there weren’t many complaints about payday loans and that there haven’t been many complaints about title loans. “And, I will tell you — I think most states will tell you — they got very few consumer complaints against payday lenders,” he said. “I’m not going to say there weren’t some people that were probably taken advantage of, but you know, again, some of those instances were consumers taking out multiple loans with various payday lenders.”

Regulation of title lenders is also almost non-existent. There are no regular examinations, and the state responds only to complaints. Arizona has 13 staffers to handle examinations and complaints for all financial institutions.

“I mean, we don’t even have a receptionist,” Charlton said.

The state could not provide data on the number of title-lender examinations it has done since 2009.

Charlton said a title-lending store can be in operation for months before it pays its application and licensing fees.

Low-income areas

As title lending has taken off in Arizona, local companies have expanded and out-of-state lenders, such as TitleMax, have moved into the market. They have clustered in low-income areas with high minority populations, especially Hispanics, an Arizona Republic analysis of title lending data shows.

In many ways, the history of Tio Rico Te Ayuda — Spanish for “Rich Uncle Helps You” — traces the title-lending industry in Arizona. Its first branch was licensed in 2008, and the lender has steadily grown since then and now has 14 locations across the Valley.

Although it will lend to anyone, the company aggressively markets to Hispanics. Over last summer and fall, it blanketed the area with billboards of a smiling man holding fanned-out cash and wearing dollar-sign glasses.

“It wasn’t something to the point that we only wanted to gear toward Hispanics, it’s just that was where we started, that’s what we felt comfortable with,” said Jackson, the owner of the business.

Jackson also owns an automobile dealership, and he said he noticed that many of his Hispanic employees used title-loan companies. Since he was already in the business of evaluating vehicles and collecting on accounts, it made sense to get into title lending.

“We were used to serving those customers,” he said. “And we felt we could do a good job with that initially, and that’s why we started where we started.”

Tio Rico Te Ayuda is a medium-size player in the title-lending industry. National chains such as ACE Cash Express or Cash America were quick to transition to title lending after the sunset on payday lending.

“I think, for consumers, it’s a great thing,” Jackson said of the new TitleMax stores. “Why they are opening so many, you would have to talk to them, but they have been on an aggressive path to grow, that’s for sure.”

TitleMax did not agree to an interview request.

Whether he realized it or not, Jackson, who is not Hispanic, tapped the heart of the title-lending market with Tio Rico.

An Arizona Republic analysis of title-lending locations and U.S. Census Bureau data found that areas with more title lenders have, on average, a higher percentage of people on public assistance and a much larger percentage of Hispanic and minority residents.

The Arizona neighborhoods with the largest clusters of title lenders are often heavily Hispanic, approaching a 90 percent concentration in some areas, according to census data. Areas with more title lenders also have a much lower average median income and a lower percentage of White residents.

The average median income drops from $58,375 for census tracts with no title lenders to $47,774 for those with one title lender, to $38,442 for those with two title lenders, and $36,442 for census tracts with three or more title lenders. In many cases, the census tracts with high numbers of title lenders are clustered, as well.

In the Valley, title lenders cluster in low-income neighborhoods in central and west Phoenix, as well as areas of Mesa, Glendale and Avondale. In Tucson, lenders cluster on the low-income and Hispanic south side while also concentrating in low-income and depressed areas in north-central Tucson, where there is a large low-income White population.

Restrictions on lenders

There are no plans to regulate title lending in Arizona, although Phoenix and several Texas cities have placed restrictions on the industry.

Phoenix recently passed an ordinance requiring new title-lending branches to be at least 1,320 feet apart and 500 feet from homes. The goal is to spread out future title shops in low-income neighborhoods. But several owners of title-lending companies said the ordinance initially had the opposite effect, prompting some to rush to open new branches before the ordinance took effect.

“I have heard concerns from neighborhood leaders,” said Phoenix Councilman Daniel Valenzuela, who pushed for the zoning ordinance. “They just don’t want to see auto-title loans everywhere. They want to see diverse businesses throughout the community.”

Cities such as Austin, Dallas and San Antonio have sought to curb title lending by restricting loans to 3 percent of a borrower’s gross household income and requiring a 25 percent principal reduction on loans that are refinanced or renewed.

There are no plans to regulate title loans in Arizona, but a number of consumer advocates said they would like to see title lending treated the same way as payday lending. That means interest rates capped at 36 percent, which also fits federal guidelines.

“We knew auto-title lenders were out there, and their statute, frankly, needs to be rewritten,” said state Sen. Debbie McCune Davis, D-Phoenix, who was a vocal critic of payday lending. “We really don’t need people in our economy who are enriching themselves at the price of financial demise of people.”

Allen, the Arizona Title Loan Association president, called the 36 percent rate cap arbitrary. As competition increases in the Valley, he said, interest rates will fall. Until then, the market is setting the value on the loans as it does in other businesses, he said.

“If you are asking me: What is the lowest rate that the industry can offer the product for and be profitable and offer the service? Eventually, competition will tell us,” he said. “Do I think there are companies who could offer their product and service for less interest and still make money? Yes. But I also believe that, when I go to a baseball game, that they could sell me a beer for less than $10 and still be in business, too.”

To force interest rates down would simply put title lenders out of business, he said. And, in fact, there may be some natural attrition in the industry as competition heats up.

For Simmons, the title loan has not worked out. While he said his new loan with TitleMax was “better” than the one he received from Tio Rico Te Ayuda, he did not know the interest rate.

A recent billing statement showed that out of a payment of $308, about $28 went toward principal. If nothing changes, Simmons will end up paying thousands more for a $2,000 loan. His car also continues to break down. To get to dialysis, he takes the bus, and the clinic gives him a ride home.

Simmons and his wife “are in a place right now where we came to grips with our situation and are just trying to make it better,” he said. “Try to stay away from them. You will never pay that stuff back.”

Loans with cars as collateral replacing payday borrowing

Title lending companies are:

Piranhas. They prey financially on those who can least afford it.Necessary. They provide an option to those needing a finanical lifeline.Fine - as long as they aren't in my neighborhood.

Payday loans vs. auto-title loans

Since payday lending sunset in Arizona in 2010, auto-title lending has largely taken its place. In many ways, the loans are similar, but there are key differences.

Payday loans

What borrowers must show: Proof of a checking account.

Repayment period: Two weeks.

Typical loan amount: $350.

Highest interest rate in Arizona: Rates could go as high as 460 percent before 2010. Consumer-lending rates are now capped at 36 percent.

Title loans

What borrowers must show: Proof of car ownership.

Repayment period: 30 days.

Typical loan amount: $951.

Highest interest rate in Arizona: 204 percent.

Sources: Arizona statute, Center for Responsible Lending