The Consumer Financial Protection Bureau is learning just how hard it is to put effective curbs on small-dollar consumer credit.
Inside the agency, one of the stickiest questions to answer is whether the forthcoming regulations should cover auto title loans, pawn loans, and other forms of credit that aren't tied to the borrower's paycheck.
Auto title loans present the CFPB with a dilemma. These loans, which generate an estimated $4.3 billion in annual revenue, rely on the lender's ability to repossess the vehicles of borrowers who default.
On one hand, car title loans raise similar consumer-protection issues that payday loans do, which suggests that they should be regulated similarly. "Do I face losing my car, or simply keep paying the fees, again and again?" says Diane Standaert, legislative counsel at the Center for Responsible Lending. "That's the threat that keeps the debt trap going."
Consumer advocates also fear that if federal regulations apply only to payday loans, lenders will simply migrate to title loans a pattern that has already played out in numerous states.
On the other hand, the CFPB has yet to release any research, or hold any public hearings, about auto title lending. That's in contrast to the payday loan market, which has been the subject of extensive bureau research.
The CFPB often asserts that its actions are driven by data, so attempting to regulate auto title lending without first building a strong paper trail could backfire on the bureau.
"They really want to understand the research before they act substantively," says Jo Ann Barefoot, a former bank regulator and industry consultant who serves on the CFPB's Consumer Advisory Board.
Auto title lenders operate in 21 states, including California, Texas, Georgia and Illinois. The loans commonly have 30-day terms, loan sizes of around $1,000, and 300% annual percentage rates, according to the Center for Responsible Lending.
Often the loans go to people who are broke and don't have bank accounts, but do own a car. The loans are not underwritten based on the borrower's ability to repay; instead the lender relies on the potential value of the vehicle in repossession.
In most states that allow the loans, the borrower must hold title to the vehicle. But a couple of states allow the loans even if the consumer doesn't own the car outright, which opens the market to a larger pool of potential borrowers.
In recent weeks, consumer advocates and some liberal members of Congress have begun to pressure the CFPB to take strong action on auto-title loans.
In a May 14 letter, Democratic Sens. Jeff Merkley, Elizabeth Warren, Richard Durbin, Tom Harkin, Richard Blumenthal and Tom Udall urged CFPB Director Richard Cordray to adopt rules that cover not only payday loans, but also auto title loans and other consumer loans.
The senators argued that narrower rules covering only payday loans could create opportunities for "similarly harmful products disguised in different formats."
In Arizona, auto title lending has spread in the wake of a 2008 referendum in which voters decided to eliminate the payday loan industry. TitleMax, one of the nation's largest auto title lenders, currently has about 80 locations in the state.
"I feel like we're just running around stamping out stuff," says Kelly Griffith, co-director of the Center for Economic Integrity, a group that opposes payday lending in Arizona. She worries that "I'll be doing this until my dying day."
Nationally, some of the largest payday lenders are also making auto title loans in certain states. That list includes Cash America, Advance America and Ace Cash Express.
A spokeswoman for the Community Financial Services Association of America, a trade group that represents payday lenders, declined to comment on the potential for federal regulation of auto title lenders.
CFPB Mostly Quiet
The CFPB has said very little in public about auto title loans. But agency officials have indicated that they see similarities between title loans and payday loans.
In January, under questioning by a Democratic congressman, Cordray drew a comparison between the two products. He said that some users of small-dollar get trapped in a cycle debt, while other borrowers use the loans responsibly.
"And it's not solely payday loans. It's car title loans. It's certain types of installment loans. It's pawnbroking. It's a somewhat complicated, dynamic market," Cordray testified.
"We have indicated that we are going to move ahead with making some policy judgments and regulations in this area, and we will. But our concern is exactly yours. We want people to have access to the credit they need, but the kinds of products that are going to make things better for them, not worse."
During a 2013 Senate hearing, David Silberman, an associate director at the CFPB, said: "A competitive, fair marketplace can't work if not everyone is governed by the same set of rules. So we would attempt to look holistically at all products to make sure we're not squeezing air out of one part of the balloon to another."
A CFPB spokesman declined to comment on the agency's thinking with respect to car title loans. But a source familiar with the bureau's deliberations said that CFPB has decided to take a more holistic approach to payday loan regulation, rather than a narrower approach. That may suggest that auto-title loans are more likely to be covered by the payday loan rules.
No Published Research
But here's the hitch: The CFPB has yet to assemble a public record showing that title loans raise similar consumer-protection concerns as payday loans. A CFPB spokesman declined to comment on whether title lending research is currently under way.
"To date, CFPB has done nothing on auto title loans," says Todd Zywicki, a George Mason University law professor who argues there are important differences between title loans and payday loans.
Zywicki says that many borrowers take out title loans secured by their second vehicle, which means that they will still have a way to get to work even if the car gets repossessed. Other borrowers are owners of independent small businesses who can't get a bank loan, he says.
"The consumer protection issues are a lot more complicated than people think," Zywicki says. "And so it really is important to dig into this research."
Other researchers believe that tight restrictions on title loans are appropriate. Nathalie Martin, a University of New Mexico law professor, says that auto title loans are generally harder for borrowers to pay off than payday loans, despite their lower interest rates. That's because title loans tend to come in substantially larger sums than payday loans.
Martin argues that the CFPB should regulate auto title loans under the same framework as payday loans.
"It's absolutely imperative that they do that, because otherwise you're just inviting lenders to switch their model over to whatever doesn't fit within the regulations," she says.