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The days of unchecked interest rates on never-ending car title loans are coming to an end in Virginia.
Beginning Friday, a new law takes effect that for the first time will regulate the lenders, limiting how much they can charge and lend, and for how long. Borrowers still could lose their vehicles if they fall behind on payments, but the new law will require lenders to tell them upfront exactly how much it will take to repay the loan.
Advocates who fought for years for much stricter requirements are disappointed that lenders will still be allowed to charge triple-digit annual interest rates, but say they are pleased that the industry will fall under the eye of the State Corporation Commission.
"We want to stress to everybody that no one should get these loans. They're not a good deal for anybody," said Jay Speer, executive director of the Virginia Poverty Law Center, which has worked with attorneys to bring dozens of lawsuits against car title lenders. "At least the ones that don't take my advice and get one anyway are not going to get screwed so badly."
The lenders counter that they provide a much-needed service - lending money to people with bad credit who can't get it elsewhere - and that holding a vehicle as collateral makes sense.
So far, 15 companies have applied for licenses to operate about 260 offices across Virginia, said SCC spokesman Ken Schrad. Approved companies will have their licenses by Friday.
Because they were unregulated, nobody knows how many car title lenders are operating in Virginia. Car title lenders operate in 21 states, according to the Center for Responsible Lending. Other states have either banned the lenders or capped interest rates so low that it doesn't make sense for them to do business there.
Since 2007, the Attorney General's Office has negotiated settlements with nine car title lenders it accused of violating state law. Dozens of other personal lawsuits also have been settled out of court.
For years the industry fended off calls for tougher regulation. Since 2005, six companies and industry groups have donated nearly $1.2 million to Virginia lawmakers as legislation to regulate the industry languished in committees.
Last year, the industry and its opponents worked with legislators on the compromise.
The law's author, Senate Majority Leader Richard Saslaw, acknowledged it wasn't perfect when it passed in March, but said the law "brings some semblance of order and regulation to an industry that right now is simply not being regulated and can do pretty much whatever they please."
The new law protects consumers but isn't too cumbersome for the companies, said Katie Grove, a spokeswoman for TitleMax.
"I think that everybody was happy with the law that was produced," she said.
Scott Johnson, a lobbyist for title lender Community Loans of America, said the law codifies many of the industry's best practices. He said many borrowers are small business owners who rely on their vehicle for capitol in order to run their businesses.
Here's how the loans work: Borrowers hand over the vehicle's title and a copy of the keys in exchange for a loan of up to half the vehicle's value. If the borrower falls behind, the lender can repossess the vehicle and sell it at auction if the borrower does not pay off the loan, plus the cost of repossession.
Until now, lenders could charge whatever interest rate they wanted, and borrowers could pay for months without making a dent in the principle of the loan.
Beginning Friday, lenders can charge 22 percent monthly interest on the portion of the loan under $700, 18 percent on the amount between $700 and $1,400 and 15 percent for sums over $1,400.
The law also requires that the loans be repaid within one year.
For example, a $1,500, one-year loan would require a monthly payment of $420, with the total repayment of $5,040, according to the Virginia Partnership to Encourage Responsible Lending.
As part of the new law, lenders must give borrowers a pamphlet advising them that there are less expensive alternatives, that the interest rate is high and that there is a chance they'll lose their vehicle.