Car-title lending is a heated issue in Virginia

Close up underwater shot of shark with jaws wide open

Predatory lenders attack when a loan is originated; loan sharks attack later, when the loan is being serviced.

Earlier this month, the Virginia House of Representatives voted overwhelmingly (96 to 2) to place new restrictions on car-title lending. Loans secured by vehicles have become very popular. Increasingly, however, they are being attacked by consumer protection advocates and other special interest groups as a particularly virulent form of predatory lending.

Following the lead of a similar law in Tennessee, law-makers in Virginia made a failed attempt to regulate car-title lenders last year. Two years ago, however, they managed to enact legislation regulating payday lenders.

Virginia places limits on car-title loans

According to the Washington Examiner, the Virginia legislation will do away with open-ended car-title loans and limit loan terms to one year. It will also establish minimum standards for borrower eligibility, restrict loan amounts to 50 percent of vehicle values, establish interest caps and prohibit the charging of interest after a vehicle has been repossessed.

What is predatory lending?

Predatory lending generally refers to unfair, deceptive or fraudulent practices by lenders during the loan origination process. There is no precise legal definition of predatory lending, but according to Wikipedia, the FDIC has broadly defined the term to mean the imposition of “unfair and abusive terms on borrowers.”

There are, of course, many state and federal laws prohibiting specific practices that satisfy the FDIC’s definition of predatory lending, but the term is basically used as a catch-all for various illegal activities in the generation of loan agreements. Predatory lending issues frequently concern loans secured by cars or real estate, which can be structured to facilitate a borrower’s default and to create unfair profits for the lender as a result of repossession or foreclosure.

Will the new Virginia law stop predators?

At least one outspoken Virginian thinks the new car-title loan regulations are, to put in inelegantly, “a joke.” Writing for the Daily Press, Carol Capó points out that the enactment of payday lending regulations in Virginia opened the door for unscrupulous lenders to circumvent the intent of the law by shifting their business to car-title loans.

Car-title loans,  Capó says, inflict even more harm on borrowers in precarious financial situations than payday loans do. When borrowers in desperate need of money pledge cars as collateral for high-interest loans, they don’t just risk losing their cars. They risk being unable to get to work where they can make money to pay off the car-title loans as well as the other debts that drove them to desperation in the first place.

What do predators do with all that money, anyway?

Capó says the interest rates allowed by the new legislation are exorbitant, and that they resulted from proverbial lobbying efforts. Car-title and open-ended lenders, she says, bought the interest rates they wanted by contributing more than $1.5 million to Virginia politicians over the last five years.