A Houston-based title lender — Advantage Finance LLC — today launched a program to refinance short-term title loans that may no longer be legal once the Consumer Financial Protection Bureau’s title lending rule goes into effect.
In October, the CFPB released its final rule on payday and title lending, which requires lenders to assess a consumer’s ability to repay when making loans for 45-day terms and under. However, the rule largely left longer title loans past 45 days untouched.
“[We] recognized a need in the auto title loan industry to offer consumers an alternative to very short-term and interest-only automobile title loans,” according to a company’ press release.
The buyout program restructures existing title loans — some as short as 30 days — into “longer-term title loans with better terms for the consumer,” which includes a payment schedule based on both the principal and interest. Often, the restructured plan includes a lower interest rate, according to the company.
“The consumer is helped in two ways: reducing the monthly payments and giving them a more extended period over which to repay the loan,” according to the release.
Especially when it comes to short-term loans, the bureau found there is an incentive to sign up consumers who can’t repay, thus trapping them in a cycle of debt repayment. Because it is actually more profitable for the lender when a consumer is unable to pay, many financial institutions in the space ran no checks on the consumer’s ability to repay.
As a result, the CFPB found that one out of every five single-payment auto title loan sequences ended up in repossession for failure to repay.
By extending the term, the monthly payment is lowered which gives the consumer more time to pay-off the loan amount. The bureau’s rule also puts limits on interest rate and restricts the number of title loans an institution can make to borrowers.
Although the CFPB’s rule does not go into effect for another 20 months and faces congressional and legal challenges, it appears lenders such as Advantage Finance are not waiting to comply.
The lender could not be reached for comment by press time.