Thank you for joining us. From day one, the Consumer Financial Protection Bureau has sought to bring a data-driven perspective to the regulation and oversight of consumer financial markets and to an improved understanding of consumer behavior. This includes the market for small-dollar loans, including payday loans.
Today, we are releasing our fourth report on this market, which is a study of single-payment auto title loans. Our study analyzed nearly 3.5 million loans made to more than 400,000 borrowers over a period of several years. We examined loan usage patterns, with a focus on the repeated use of these loans, how long it takes borrowers to repay, how often they fall behind, how many borrowers default, and how many have their vehicle seized by the lender.
A typical single-payment auto title loan is taken out by a borrower to cover a cash-flow shortage between paychecks or other income. Borrowers who own their vehicle outright can put up their auto title for collateral in exchange for a loan. If the loan is repaid, the title is returned to the borrower. This credit is costly, as it is typically set at an annualized interest rate around 300 percent. Single-payment auto title loans are available in 20 states; another five states allow only auto title installment loans.
After analyzing this data, we found real concerns for consumers. Our study shows that one-in-five borrowers cannot pay what they owe and end up with their car or truck seized or repossessed by the lender. When borrowers lose their personal vehicles, they also lose mobility. For those who have to walk away from a loan without their car or truck, the collateral damage can be severe if they experience serious challenges getting to their job or even to the doctor’s office.
Our report also found that few of these so-called single-payment loans are actually resolved with a single payment. These loans typically have a 30-day term, and most borrowers cannot afford to repay what they owe when the time comes. In fact, our report found that more than four out of five auto title loans are reborrowed on their due date, rather than paid off. Only about 12 percent of borrowers manage to be one-and-done – paying back their loan, fees, and interest in a single payment without borrowing again soon afterward.
Most borrowers resort to rolling over loans through repeated reborrowing, paying high fees each and every time. More than half of single-payment title loans lead to reborrowing three or more times after their first payment is due, and fully one-third are reborrowed six or more times.
In fact, auto title lenders typically generate about two-thirds of their business from the borrowers who end up being mired in debt for most of the year. It is evidence of the long-term pitfalls of this form of borrowing and another sign that so-called single-payment loans are often anything but that in reality.
These loans thus present issues that are similar to those we have found with payday loans. High rates of reborrowing drive up costs, with the consumer eventually paying interest and fees that are far more than they expected. Indeed, for a sizable percentage of borrowers, the fees and interest exceed the amount of the initial loan itself. The Bureau has consistently recognized that consumers may need affordable credit to cover emergency expenses. If the product is structured to make repayment realistic, then such loans may help tide consumers over in their time of need. But if the payments are not affordable, those in a financial jam with nowhere else to turn may find themselves on a perpetual treadmill of debt, laden with mounting costs that disrupt the precarious balance of their financial lives. Although these products are usually marketed for short-term financial emergencies, the long-term costs of such loans often just make a bad situation even worse.
At the Consumer Bureau, we are working to ensure consumers have a marketplace for short-term and longer-term credit products that have affordable payments and are free of debt traps. We are weighing the findings in this report on single-payment auto title loans, as well as the results from our previous studies on payday loans and deposit advance products, as we prepare new rules to address issues facing consumers in the marketplace for small dollar loans. Thank you.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.