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Tough Luck for Auto Title Loans

posted by Katie Porter

My home state of Iowa recently enacted a bill to ensure that the state's usury law applied to car-title lenders. The new law will cap auto title loans at either 21 percent or 36 percent, depending on the nature of the lender. LoanMax, which has 12 offices in Iowa, lobbied hard against the bill. The Des Moines Register article on the bill's passage had a great quote from the owner of LoanMax, Rod Aycox, about how "emotional" the issue of usury caps was for him but that quote now seems to be missing from the online version of the article. I am sure that the approximately 3,000 Iowans who have lost their cars in the three years since LoanMax came to Iowa agree on the emotional effects of interest rates. Aycox says in the article that LoanMax will be closing its Iowa offices when the law goes into effect. The helpful woman on the phone that I just spoke to at LoanMax said that it will be "business as usual" until at least June 30th and that she isn't sure what will happen after that. 

Of course, "business as usual" means interest rates of 200-300%. Interestingly, Mr. Aycox and his lobbyist turned up at a Consumer Law CLE that I helped organize for the University of Iowa College of Law this fall. I wonder if they liked my presentation on "Fighting Predatory Lending Using Federal Law"? Regardless, once again, it is the states, not the federal government, that are proving themselves to be on the front-line of responding to the changing market for credit. The Iowa Attorney General estimates that while many states permit auto title lending, 3/4 of the American population now lives in a state that prohibits it. Particularly for rural states like Iowa with few or no public transportation options, consumers that fail to repay their title loans risk having no transportation to jobs, medical care, or other necessary services.


Katie, I'll be interested to see how this take-ball-and-go-home threat pans out. The Europeans got worried that usury regulations would stifle consumer credit and I recall DTI in the UK did some study on the effect of ussury caps (or payday lending regulation) and depth of consumer lending and found lenders were moving out of states with regulation. Leaving aside the normative content of this finding, I now wonder how well it tracks reality as a positive matter -- Iowa will be an interesting case study to follow.

John-- Similar threats of "take-ball-and-go-home" were made by payday lenders (and oddly even mainstream banks) following the enactment of the 36% usury cap for military families. To the best of my knowledge, nobody has done the study of whether military families actually have less credit--are payday lenders pulling out of the areas around military bases or are they lending at less than 36% or are they flaunting the law? Of course, there is a separate question of whether the military families miss the high-cost credit. As far as I have seen, consumers in Iowa aren't complaining about the auto-title law (but then again, they haven't felt its effects, if any, yet).

Now that these lenders are gone, the leave behind a vacuum in the demand for the products they provided. Credit unions are tryin to adjust, but they can only provide finance products that do not meet this demand. As this vacuum continiues, people will have to look to welfare and other means that burden the tax payers. I think this rule is not a victory for those that use these loans. It is a victory for the banks, who now have much less competition, and at our expense as people look to hand outs where loans used to help them.

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