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In February, the CFPB ordered TitleMax to pay $10 million for making unlawful title loans.
Earlier this month, the Consumer Financial Protection Bureau (CFPB) issued a lawsuit against USASF Servicing, an auto loan servicer, for consumer protection violations. The lawsuit is the most recent action from the CFPB addressing auto title lending, an industry whose practices have been a target of the agency for several years. The complaint highlights the misconduct some auto title lenders use to trap borrowers, and the life-altering consequences of that cycle of debt.
An auto title loan is when a borrower surrenders their car title as collateral for a small-dollar loan. In the event of a missed payment, the loan servicer then has the right to take the borrower’s car, since it holds the title. As I have written previously, high-risk, predatory loans are utilized by a wide swath of borrowers, often in desperation to cover some sort of essential, such as rent or other bills.
The CFPB lawsuit alleges that since 2016, USASF has, among other things, illegally disabled cars, failed to provide refunds, and “misapplied” payments so that consumers accrued over $1 million in additional interest. The CFPB also alleges that the loan servicer illegally repossessed vehicles. USASF was servicing a dealer called U.S. Auto Sales, a “buy here, pay here” (BHPH) dealership with 31 locations throughout the Southeast that closed down “most” of its business earlier this year, according to the CFPB.
The CFPB alleges that USASF would cause cars to issue warning sounds anytime the driver turned the car on or off for the first four days after a missed payment. On the fifth day, the company would disable the vehicle, keeping drivers from essential activities like work. This activation of the warning sounds and disabling of the cars continuously violated USASF’s own policy and consumer financial law. The CFPB alleges “at least 7,500 erroneous disable[s] and over 71,000 erroneous warnings,” including when borrowers were not in default or had made a promise to pay.
This action comes as the CFPB has ramped up monitoring of the auto title lending industry. In 2022, the CFPB issued compliance guidance in an attempt to curb illegal practices, including many of the things cited in the complaint. CFPB examiners found several “illegal servicing practices, particularly around the charging of unlawful fees,” including inflated repossession charges.
In February, the CFPB ordered TitleMax, a massive auto loan servicing company, to pay $10 million for making unlawful title loans, as well as violating the Military Lending Act, which requires particular interest rates and protections to service members. TitleMax allegedly concealed military members’ active-duty service status to evade scrutiny. TMX, TitleMax’s parent company, was also fined $9 million in 2016 for other practices.
In addition, in June the CFPB turned its attention to the South, issuing a report that highlights the finances of consumers in rural areas of the region, including the state of mortgage lending. “Banking deserts are prevalent throughout the southern region, reflective of the absence of bank or credit union branches in local communities,” the CFPB wrote. The report highlights the high rate of unbanked households across the region, the low rate of banks per person, and other banking and credit barriers in the rural South.
Rate caps are generally effective at curbing predatory auto title lending, often pushing loan servicers out of the state. But many states have shied away from imposing a rate cap of 36 percent.
Last year, ProPublica released a report on consumer finance in Georgia, a state without a rate cap. “Nearly two decades ago, the state made it a felony to offer high-interest payday loans that state lawmakers described as usurious. Yet state law allows title lenders to charge triple-digit annual interest rates,” ProPublica and The Current wrote. “This has helped the industry grow like kudzu throughout the state, which is home to three of the nation’s top title lenders.” In particular, the report notes that auto title lenders in the state operate through pawn shop statutes, not lending statutes.
North Carolina’s governor Roy Cooper, a Democrat, recently vetoed a bill that would weaken its 30 percent rate cap for small-dollar loans.
Despite the CFPB’s actions, unscrupulous auto title loans continue to proliferate. “Regulating predatory lenders is a game of Whac-A-Mole,” John See, an auto lending industry researcher, told the Prospect in an email. “When regulators or legislators crack down, title lenders and repo companies find a loophole and change tactics.”
The way predatory lenders are able to circumvent consumer financial regulations is precisely why the CFPB is necessary, keeping up with changes in the industry. As Kathleen Engel, professor at Suffolk University Law School, noted, Congress has passed legislation that prevents the CFPB from filing lawsuits against BHPH auto lenders, as well as other new and used auto lenders. But the CFPB is able to take action against the servicers of those loans, such as in the case against USASF.
“Until recently, BHPH dealers and their affiliated entities had been flying under the radar of regulators even as their market share was growing dramatically,” Engel told the Prospect. “CFPB’s lawsuit demonstrates that consumers and regulators can still recover against servicers affiliated with BHPH dealers.”
This story has been updated for clarification.
