Scott, a Democratic state legislator from Birmingham, said he’s often approached by people who need help because they’ve hocked their cars — turning over the title and perhaps a spare key to a lender in exchange for a one-month loan.
Those who repay the loan do so at what amounts to 300 percent annual interest. Those who don’t, walk.
“They’re people who had an emergency need for cash,” Scott said. “Maybe they got behind on a few bills, and need to catch up.”
Car title loans — in which people borrow money on a short-term basis, using their cars as collateral — are illegal in more than half of U.S. states. In Alabama title-loan offices are a common feature of the small-town landscape.
Debate about those loans may soon move to center stage in Alabama politics. Two bills pending in the Alabama House of Representatives would impose new regulations on the industry for the first time in years. Both bills have bipartisan support, but there are major divisions over which bill should pass.
‘The most tragic thing’
Title loans, also known as title pawns, are governed by the same Alabama law that governs pawnshops. But when a person hocks an item as big as a car, the transaction takes on a new level of meaning.
Borrowers typically take out loans in the hundreds of dollars, with a 30-day note, using their cars as collateral. When the note comes due, they owe up to 25 percent more than they borrowed.
And if they can’t pay that money in full, they can pay just the 25 percent, and roll the loan over into another month, with another 25 percent interest. Roll the loan over for a year, and the interest amounts to 300 percent of the original loan.
Apparently, most loans do roll over.
A study by the Center for Responsible Lending, a North Carolina nonprofit group, found that nationwide, the average title loan customer borrows $951, postpones payment eight times, and spends a total of $2,142 in interest.
Failure to pay can be financially disastrous. Default on a loan means surrendering the collateral — one’s car — which can lead to cascading misfortune.
“That’s the most tragic thing, when you see people who can’t work because they’ve lost their car, or retirees who’ve lost a car,” said Stephen Stetson, a policy analyst for the anti-poverty group Alabama Arise. He said people below the poverty line might take out a car loan to make rent or buy medicine, then lose their most valuable asset. Some resort to subterfuge to keep their cars.
“The lender usually has a key, so he can take the car at any time,” Stetson said. “Sometimes there’s a sort of cat-and-mouse game where the borrower is hiding the car and the lender is trying to find it.”
‘Desperate, dumb, uninformed’
Advocates of the title-loan industry say it provides a service to people who don’t use traditional banks.
“Our customers are not desperate, dumb or uninformed,” said Charles Hunter, senior vice president for Triton Management, a Montgomery-based title loan company.
Hunter said that contrary to popular belief, title loan customers aren’t all poor.
“Our population goes from someone who wants borrow $300 on a car worth $1,000 to a businessman with a nicer car who needs $10,000 to make payroll,” he said.
Still, the businessman is likely to pay a lower rate of interest. Hunter said that due to state lien fees and overhead, companies can’t turn a profit on smaller loans without charging the full 25 percent. For larger loans, the rates are more competitive, he said.
Hunter said he supports HB421, a bill that would give title loan customers a way to pay down the principal on their loans over time. At present, borrowers have to pay either the entire amount owed, or just pay the interest to carry over the loan to another month.
The bill would also change the rules for sale of repossessed cars. At present, a payday lender can sell a car and keep all the proceeds. Under HB421, the lender would keep only the amount owed, and give any additional money back to the borrower.
“This bill gives consumer advocates about a dozen things they’ve been asking for,” Hunter said.
Still, Hunter acknowledges, it’s the industry’s bill. And that worries some anti-poverty advocates, who say HB421 doesn’t go far enough.
“It’s good that they want to change the rules for reselling cars, but it doesn’t address the problem of the interest rate,” Stetson said.
‘Never run a business’
Scott said HB421 is an attempt to distract legislators from his own bill, which would cap payday loan interest at the equivalent of 36 percent per year. There’s already a federal law in place that puts a 36 percent cap on loans to anyone in the military, and some states have followed suit by capping all non-traditional loans at 36 percent.
Scott’s bill would also create a $600 licensing fee for people who want to get into the business.
“With what we have now, a pawnbroker can pay $100 for a license and be in the title loan business,” he said.
At a public hearing Wednesday, speakers from the social conservative group Alabama Citizens’ Action Program, the AARP and the anti-poverty groups Alabama Arise and Alabama Appleseed all spoke against HB421 and in favor of Scott’s version.
HB421 passed a committee vote Wednesday and is on its way to the full House for a vote. Scott said he filed his bill Thursday, but it was not yet available in the Legislature’s online records as of Friday.
Hunter said Scott’s bill would kill the payday lending industry entirely by limiting lenders to 3 percent interest on a 30-day loan.
“All our detractors are people who have never been in this business, and have never run a business and had to make payroll,” he said.
Rep. Steve Hurst, R-Munford, a co-sponsor of HB421, said he thought the industry needs regulation, but does fill an important purpose in society.
“What about people who need a few hundred dollars, days before payday, and no one will give them a loan?” he said. “Who’s going to help them?”
Scott believes the industry will adapt.
“Businesses with very high profits are prone to inefficiency,” he said. “When the more inefficient businesses are no longer able to function, the more efficient businesses will take their place.”
Capitol & statewide correspondent: 256-294-4193. On Twitter @TLockette_Star.