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December 6, 2005

Miller: Enact "Car-Title Loan" Law

Attorney General warns consumers -- and lawmakers -- about car-title loans: "There is no justification for such astronomical interest rates."

DES MOINES.   Attorney General Tom Miller today cautioned consumers to avoid car-title loans, which charge what he called "astronomical and unjustified interest rates."

"Car-title loans are so expensive they just drive many people deeper into debt," Miller said. "On top of that, they pose the major threat of causing people to lose their vehicles as well."

Miller also had a message for the Iowa Legislature:

"Pass the car-title loan bill," Miller said. "Car-title loans are secured loans, but secured loans should be much cheaper because they are backed by a vehicle as collateral. There is no justification for such astronomical interest rates. The Legislature should prohibit such abusive and unconscionable rates for car-title loans."

The Iowa Senate approved a car-title loan law last year that would have capped car-title loan rates at 21 percent - but the bill died when House leaders refused to debate or vote on it. "It's a simple and fair approach to solve this problem," Miller said.

Miller's appeal was made in a State Capitol news conference with Sen. Joe Bolkcom of Iowa City, who led the effort last year to pass the car-title legislation, and Des Moines Rep. Kevin McCarthy.

"Meanwhile, I hope consumers will resist appeals to get into car-title loans, for the holidays or anytime. We've heard of interest rates up to 360%, and right now there is no limit whatsoever. "It's expensive and it's risky," Miller said.

"For example: If a person borrows $300 for the holidays at 360% interest, he or she will have to pay $44.55 of interest in just fifteen days, and have to pay it again and again each fifteen days, if he or she doesn't pay off the $300 principal," Miller said. "What's worse, if a payment is missed, the lender can start the process of repossessing the borrower's vehicle. Repossession and loss of transportation to work and health care is a very severe threat to these Iowans."

Miller encouraged consumers to try to work to get ahead by saving small amounts steadily, and, if necessary, by going to banks and credit unions that offer loans at far better rates.

Background on "Car-Title Loans"

Car-title loans are secured by the consumer's automobile or truck. Lenders actually keep an extra set of keys to the vehicle - and may start repossessing a vehicle if a lender is delinquent in making one payment. The first payment is typically due in fifteen days. If even one payment is late, the lender after ten days may issue a 'right to cure' notice informing consumers that they are in default, and that if they don't correct the default the vehicle will be repossessed in 20 days. (If the consumer makes the required payment but is delinquent again within a year, the lender is not required to provide the right to cure and may repossess after 10 days of delinquency.)

Miller said car-title lenders have attempted to avoid interest rate limitations by claiming the debt is open-ended credit, much like credit cards. Open-end credit was deregulated in Iowa because federal law let out-of-state card issuers export their home state no-cap laws.

Miller also noted that car-title loan companies charge very high interest, but they do not run a credit check in order to determine if a consumer is able to afford such a costly loan - because the loan is secured by a vehicle. "The one indicator of predatory lending that everybody agrees on is making a loan without regard to ability to pay," he said.

"Indeed, with the first payment due just 15 days after the loan, it is very unlikely that the consumer who needed $300 15 days ago will have $344.55 just 15 days later to pay off the loan," Miller said.

"The result is that most consumers are on the 'down' escalator as soon as they sign car-title loan papers," he said. "It's very risky to consumers, but the car-title loan company - with the vehicle as collateral - is risking little or nothing."

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