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Car Title and Payday Loans Can Trap Unwary Veterans

Nov. 10, 2014
Loans, Payday Loans
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Tiemeyer White, a 33-year-old Navy veteran in Beaumont, Texas, is still haunted by the auto title loan he took out more than a year ago.

In November 2013, the father and full-time electrical engineering student at Lamar University saw his truck repossessed.

Like payday loan shops, lenders that offer quick cash through short-term, high-rate notes secured by a vehicle title mainly serve borrowers who have few alternatives. Some target veterans in particular.

“It’s the worst experience of my life,” White says. “After six and a half years in the Navy, during wartime and everything, this situation just makes my teeth grit.”

An auto title loan typically carries an annual percentage rate of 300% and has a very short term, such as 30 days, in which it must be repaid. It differs from another type of short-term, high-rate debt called a payday loan because the borrower signs over the title of his or her vehicle to secure the debt. Payday lenders usually get a postdated check or other form of access to the borrower’s bank account, but no other collateral. Car title loans are allowed in 21 states, while 29 states have no substantive restrictions on payday loans, according to the Center for Responsible Lending in Durham, North Carolina.

New rules proposed

President Barack Obama’s administration has proposed new regulations to better protect service members on active duty from costly payday and auto title loans. The new rules would close some of the loopholes in the 2006 Military Lending Act, which was designed to protect soldiers and sailors from predatory lenders and caps annual percentage rates, or APRs, at 36% for a range financial products. But veterans remain vulnerable.

In military communities, where many vets live, this is a big problem. More than four out of five ZIP codes – 82% – that have a veterans’ facility also have one or more payday or auto title lenders as well, according to Texas Appleseed, a nonprofit organization that advocates for social and economic justice for Texans. It says almost half of the areas have five or more of these operations, while about three-quarters of Texas ZIP codes have none.

“That’s definitely a concerning trend,” says Ann Baddour, a senior policy analyst at Texas Appleseed. “It’s also something that indicates we need to do more to ensure our veterans have access to safe, fair financial products that help them build their lives, or rebuild their lives in some cases.”

Vulnerable vets

It’s not uncommon for veterans to find themselves in need of financial help. About 1.4 million veterans are at risk of homelessness because of poverty or a lack of support networks in their communities, according to the National Coalition for Homeless Veterans.

But turning to a payday or auto title lender to bridge an income gap can make things even more complicated. The federal Consumer Financial Protection Bureau says short-term, high-rate loans can become debt traps that can snare the unwary. They carry APRs ranging from 391% to 521%, while car title loans average 300% APR, according to the lending center, which advocates for a nationwide cap of 36%. It says many borrowers using title loans can’t keep up with the costly payments and typically roll them over, or extend them, eight times.

Shutdown shuts off pay

White says his vehicle title loan quickly got out of hand. When the U.S. government shut down because of a budget impasse in October 2013, he didn’t get his Post-9/11 benefits or work-study pay for a Department of Veterans Affairs job for almost two months. He fell behind on bills. The title lender began calling him several times a day both at work and on his cellphone, asking for loan payments.

“I tell them, I understand you’re doing your job, but I also understand that your job – you make your living off of making my life worse,” White says. “That’s how I felt that moment.”

Two weeks later, a tow truck hooked up his 2003 Dodge Ram SLT pickup in his school’s parking lot, and he watched as it was hauled away. Later, he saw the truck for sale online. While the Servicemember Civil Relief Act bars the repossession of an active-duty service member’s property without a court order, that doesn’t extend to veterans. White says the loan payments and loss of his truck drained his bank account and made it difficult to focus on schoolwork.

“I know one thing, I will never ever get another title loan. That will never happen,” he says.

Efforts to change

Some short-term lenders are working to change the status quo. At the Community Financial Services Association of America, a trade association of more than 40 payday lenders, members follow all federal and state regulations as well as a set of best practices, says Amy Cantu, a spokeswoman.

“There is a clear distinction between good actors and bad actors in the payday industry,” she says. Members of her group don’t lend to active-duty military personnel, but it does make loans to veterans.

Association members are required to offer extended payment plans at no extra charge to help borrowers avoid getting into a cycle of debt, Cantu says. They also limit loan rollovers to four, to keep borrowers from letting costs grow out of control. Before seeking a loan, check the lender’s Better Business Bureau rating and see if it’s licensed in your state, she advises.

Car title loans also provide a source of short-term credit for those with few options, according to Todd Zywicki of George Mason University in Fairfax, Virginia. But he says prices and conditions should be clear and advertising shouldn’t be deceptive. The Military Lending Act’s restrictions lead some service members to turn to more costly alternatives because the law doesn’t lessen their financial needs, Zywicki says. In his view, capping short-term loan rates will only reduce consumer choice.

“We should not be assuming the people who use these products are morons,” Zywicki says. Rather than legislating away what few options they have, “we should think about giving people more choices,” he says.

Sources of aid

Retired military personnel who served over 20 years or were medically discharged often can get help from aid organizations tied to their service branch. For instance, the Army Emergency Relief program gives grants and no-interest loans to those who can document a financial need. The group has provided about $600 million to soldiers and veterans since 9/11.

Because organizations like these have limited resources, they can’t provide assistance to veterans who served for a shorter amount of time, like White. They can refer them to other source of aid, though. The nonprofit USA Cares, for example, offers fast financial help to veterans in need, responding within 48 hours of receiving a request.

Before getting a payday or auto title loan, Baddour says, veterans should look for lower-cost options.

“Sometimes, when we have a desperate need, we think about meeting that need today and we don’t think about how that’s going to play out,” she says. “I’ve had so many borrowers tell me, ‘I would never do this again. I wish I’d gone to friends and family. I wish I’d gone another way.’”

If you’re in the service or are a veteran and need a financial hand, here are some of the organizations that could help:

Air Force Aid Society – Provides emergency grants and interest-free loans to both active-duty and retired airmen on a case-by-case basis.

Army Emergency Relief – Gives no-interest loans and grants to soldiers and Army veterans with documented needs.

Coast Guard Mutual Assistance – Delivers interest-free emergency loans to retired service members who present their Coast Guard identification and financial documentation.

National Veterans Association – Provides funding for insurance, housing and burial costs to low-income wartime veterans.

Navy-Marine Corps Relief Society – Offers financial aid to retired service members who can document a financial need.

Tow truck photo via Shutterstock.