Three days before Christmas, 2003, I started as the Manager of Affordable Equity Finance Co. I had worked just weeks before at Peoples Bank of the Ozarks in Clever, Missouri as a Loan Officer. At Peoples Bank, an interest rate of 20% APR was at the top end of the scale. At Affordable Equity, our rates ranged from 115.58% to 243.35% APR.
Why would anyone sign up for an interest rate this high you ask? After reading my book, I hope to give you a better picture of why the high interest loan industry exists, the different parts of the loan process including what happens if a vehicle is repossessed, and provide insights into what Affordable Equity Finance did as a company to make lending fair and just. I also want to share with you short stories about the customers who borrowed money, and the repossession agents that went after the individuals who borrowed money and decided not to pay.
You may have picked this book up to try to wrap your mind around why someone would subject themselves to a three-digit interest rate. It’s not as bad as it sounds. Boy do I sound like someone who is on the sales side of this industry. Let me show you what I mean.
If you want to borrow $150.00 to cover a bill and your bank balance says $6.57, what are your options? You can pay for the bill with a check, and get dinged with a $30.00 overdraft charge from your bank to cover the check. Lets say you go ahead and go this route. BAM! Now you need gas money really bad to see your mother who has come down with a nasty case of pneumonia and she lives 120 miles away. You write another check for the $32.00 in gas and SMACK, the bank hits you with another $30.00 overdraft charge. Now lets say your car is paid off and you have the title in your safe deposit box at the bank. You could ask the bank for a small loan on your car, say $500.00. The banker may be polite, but, unless you are a VIP (Very Important) customer, the banker must say no to this size of a loan for profitability reasons. You try the car title loan office down the street from your bank. They are offering you a six month loan of $250.00. You know you can cover the loan when you get paid in 10 days, so you agree. What did the loan cost you? Most loan companies would charge you 25% per month in interest, or a 300% APR. On a $250.00 loan this amounts to $2.05/day interest. You payoff the loan in 10 days as you planned, so the loan cost you $20.50 in interest plus the title fee of $13.50 the company charged to process your car title. Given this scenario, you have come out $26.00 better by taking out the car title loan instead of using your overdraft protection at the bank, and you had a little extra money to take your mother a meal from her favorite restaurant.
At this time, I am going to give those of you reading that have taken the first option of overdraft protection over and over again a chance to gain your composure. Why did you think that commercial banks love offering Overdraft Protection products?
Most people would think that only the very poor would ever consider a car title loan. While it is true that most long-time repeat and frequent customers who came into my office made less than $20,000 annually, most one-time and occasional customers made far above the 2014 end of year poverty line of $24,250 for a family of four. I remember a married couple coming into the office to borrow money against their Jaguar. Their combined income for the year previous to needing the title loan was almost $220,000! The company did the loan of course. I remember the kids coming into the office one time while their dad was making a payment and they were dressed impeccably. Both parents were highly educated, and the mother had a professional grade position at a respected employer in Springfield.
The high interest loan industry offers short-term loans. Entrepreneur.com defines a short-term loan as payable in 12 month or less, while businessdictionary.com defines a short-term loan as 1-5 years. Yourdictionary.com defines short-term as something temporary or not meant to last. I bring these definitions to your attention because competitive forces within the industry have led to an increase in the length of term of installment loans.
When I started at Affordable Equity Finance in 2003, the company offered loans with a four to nine month payback, dependent upon the size of the loan. Our biggest competitors, Missouri Title Loans and Mid-American Title Loans, offered loan terms of 12 months. The longer you stretch out an installment loan, naturally the more it will cost. The industry knows this. The industry also knows that customers focus more on a monthly payment amount than the total cost of the loan over time.
Enter Titlemax into the Springfield market. Their TV commercials claim to offer customers a rate that is 50% below the rest of the competition. Sounds good, right? Their term on every loan originated is 24 months. To give you the math on this scenario, take a loan of $500.00. One company charges 25% per month on a loan term of 12 months. Titlemax charges 12.5% per month on a loan term of 24 months. The higher interest rate loan will cost you $1608.00 over the life of the loan. The Titlemax loan will cost you $1614.72.
Finding the lowest rate by comparison shopping is always the best way to go. Just remember that loan structure is just as important. In my scenario above, the payment from Titlemax was only $67.28/month. With a payment this low, some borrowers are coerced into borrowing more money against their vehicle. If this customer agrees to increase the loan an extra $100.00, they would pay back $322.94 more for that decision.
The car title loan industry, per its name, relies on cars as security for the loans that are originated. While cars and light trucks are the foundation of collateral loans for the industry, Boats, RVs, Commercial Vehicles, Semi-Trucks, Personal Watercraft, Motorcycles, and ATVs are increasingly used as collateral across the country. How to value collateral to justify the loan amount a customer is approved for is always a struggle for car title loan office managers and their employees.
Affordable Equity Finance is a subsidiary of Zerr Auto Sales, a used auto dealer, and as such has a much better handle on what vehicles brought in the marketplace than most lenders. The company used the Black Book® average of rough value for a particular year, make, and model of vehicle, and then used a formula to determine what amount we should loan. Many of the national competitors use the Kelley Blue Book® loan value as their basis for valuation. For example, the Kelley Blue Book value of my car, a 2006 Chevrolet Malibu Maxx LT sold to a private party was $5637.00 as of September 11, 2014. My vehicle on nadaguides.com, a service of the National Automobile Dealers Association, has an average trade-in value of only $4425.00. When I completed a search on carsforsale.com to look for vehicle values, I found a comparable mileage vehicle for $5999.00 within 500 miles of Springfield, Missouri.
Condition of the car, truck, or SUV is so important when making a valuation. A good number of customers I met with over the years brought vehicles in that were full of household items or trash. Of these vehicles, some were very dirty, worn and torn inside, or had significant body or paint damage. If that were not enough to worry about, the mechanical condition of the vehicles, especially older vehicles, was just as important to determining value. If a motor was knocking, or a transmission was slipping, I would have to drop the value of a good condition vehicle by $1500-2000. If the vehicle was more than 20 years old, the company may not have been able to loan any amount of money.
While there are many names for the different loan offerings in the high interest loan industry, there are only three main types:
Collateralized Loans (Car Title, Boat, Motorcycle, RV, Electronics, Tools, Jewelry)
Most of my book will discuss traditional Collateralized Loans, so let me summarize the other two types of loans. I will also briefly discuss two other types of loans, Pawn Loans (Collateralized), and Under Collateralized Loans (Collateralized).
I attended a meeting of the UPLM (United Payday Lenders of Missouri) in May 2015. At this meeting, I heard from two different speakers about the current status of the industry, and the future of the industry as it related to CFPB (Consumer Financial Protection Bureau) guidelines. One of the speakers mentioned that if CFPB rules are implemented in 2017, the industry may start offering more unsecured loan products to comply with the rules. Many of Missouri’s lenders have a loan license that allows for unsecured lending. One license allows you to lend money unsecured or secured over $500.00. Another less utilized license allows you to lend money unsecured or secured starting at $150.00. Luckily for us in Missouri, this means that lenders can transition from secured to unsecured lending fairly easily.
The biggest difference I see between the Car Title Loan product and the Unsecured Loan product is the ease of collection and collection percentages. If I loan Customer a $1000.00 secured by his automobile, Customer A has to go to bed every night knowing that if he/she doesn’t pay, the car could make its way onto the back of a tow truck. If I loan Customer a $1000.00 on his/her promise to pay only, my company’s only recourse is through the court system.
Every manager in the industry will find themselves in court at some point or another. I can tell you that the two dozen or so times I went to small claims court in Greene County, Missouri, there was always at least two or three other unsecured lending office managers there with cases to bring before the judge.
Affordable Equity Finance did operate a payday loan business in partnership with BnT Loan for about 2 ½ years. Because of the restrictive rules set forth by our loan partner, we only were able to grow the business to about 15-20 customers at any one time. We did have a few really good paying customers, and some of these customers even became regulars with our title loan company.
One of my observations during our company’s time as a payday lender, and what I think is the biggest risk that most payday lenders face, is the default of maximum loan amounts. BnT had a customer that had been with them for a little while when Affordable Equity Finance became a loan partner. The customer started the relationship with our company by borrowing $300.00. After a couple of renewals and payoffs, he asked for $400.00. After another cycle of renewals and payoffs, he asked for $500.00, which is the maximum payday loan in Missouri. Can you guess what happened next? When his due date came to pass two weeks later, he was no where to be found. We did call the number he put on his application after he the account was a few days late, but we never got a response.
The other risk trend that I encountered was the “one and done” customer. This “one and done” customer is the customer that borrows the maximum amount allowed per the company’s policy or state limits on a first time loan with company, then never comes back to make any payments on the loan. As long as the customer did not take out the loan and pledge to pay with a check that was written on a closed account, the customer has not done anything criminal if they do not pay back the loan.
The concept of a pawn loan has in use for centuries throughout the United States, Europe, and Asia. In the United States, there is estimated to be more than 10,000 pawn shops.
Missouri does not have a state license for pawnbrokers, but each County and large municipality in Missouri does. The State of Missouri does have a Statute Section specifically for pawnbrokers, and the Division of Finance does have the authority to audit a pawn shop if prompted by customer or governmental entity complaints. Wisconsin has a state pawnbroker’s license, but I noticed in my travels with LoanMart that very few of the older pawn shop stores have this license.
Pawn loans have two components, a monthly storage fee and a daily interest charge. When Affordable Pawn and Jewelry was opened for business inside Affordable Equity Finance, the company decided to charge a 20% monthly storage fee and 0% interest. This itemization is important in many states because the maximum amount of interest that can be charged in some states in the United States is 36% APR.
Pawnbrokers have been able to sidestep the controversies surrounding the rest of the stores in the high interest industry by using the monthly storage fee feature and two others, the no recourse feature and the possession of collateral feature. When you borrow money via a pawn loan, you are not required to pay the loan back. If you don’t make payments, you transfer ownership of the collateral to the pawnbroker. For this transfer to occur, the pawnbroker gives up any recourse he/she many have if the item doesn’t sell for at least the amount borrowed. Before the car title loan business came into existence, the only option a borrower had if a bank would not loan money on their car or truck was to leave the vehicle with a pawnbroker.
As you can see, the creation of a high interest loan industry that allowed borrowers to keep their collateral became a threat to pawnbroker profits.
LoanMart unveiled a loan product in 2015 in their California market that allows a borrower to borrow money even if the collateral value is below the minimum loan amount allowed by company policy or State law. This Low Vehicle Value product will allow customers with healthy income and older collateral to qualify for a loan. The minimum car title loan in California is $2500.00, so you can see how this product can reach thousands of customers with collateral values below $3000.00.
What a customer needs to bring in to complete a high interest loan is similar to what they would need at your local bank. Most states require the borrower to show an ability to repay the loan. For most loan stores, this means two to four recent paystubs from the customer’s workplace. Most loan stores also accept a Social Security Administration letter, a VA (Veteran’s Administration) letter, or a recent bank statement. What set apart Affordable Equity Finance was our willingness to take alternative forms of income verification. I would look at a QuickBooks Report, Receipt Book, copies of canceled checks, or anything else that showed an ability to repay the loan.
Each borrower must provide proof of address. For most of us, a utility bill is the easiest bill to bring to show proof of address. You would be shocked how many customers I met that struggled to show proof of address over the years. Some potential customers were living with a roommate or romantic interest, and did not have any bills in their name. Some potential customers lived at home with Mom and Dad and weren’t sure if they had a piece of mail with their name printed on it. Some potential customers were staying in a motel or hotel. I even spoke with customers who had forgotten this important proof of address needed for the title loan and would ask if a title with their mailing address on it was sufficient. This last statement may sound reasonable to most of you reading this. In Missouri, whatever address you tell the Department of Revenue contracted office employee behind the counter you live at is the address they will print on the title. To follow the company’s guidelines, potential customers brought in some interesting proof of their address. The Shut Off notice from City Utilities of Springfield was very popular. So was a Summons to appear in Greene County Circuit Court. Past due medical bills from Mercy Hospital and Cox Health Center were used quite often. Random pieces of junk mail were not uncommon. In one instance over the phone, a man asked me if the address sticker from his men’s magazine would suffice as proof of his address.
Each borrower was to provide an extra key(s) for the vehicle(s) used as collateral for the loan. If you are reading this and ever go to work in the car title loan industry, remember this, always check the KEYS in the door, and in the ignition. I have been handed a 1980’s style Chevrolet door key that was supposedly the duplicate key for a 1990’s style Honda or Acura. The silly thing about this is that most Honda, Acura, Toyota, or Nissan keys have been two-sided for years and years, while American made vehicles in the 1980’s and early 1990’s still had a two key system. Most customers comply easily with this requirement. With the onset of the computer chipped keys, though, this requirement has become harder and more expensive for some customers to comply with. Some Mitsubishi keys can run you $125-140. If you have a Volkswagen, Saab, or Porsche, the cost of an extra key to operate the vehicle can run you $180-200. At Affordable Equity Finance, the company did let some customers bring in what some in the industry call a tow key. A tow key is a key that will open the doors and turn over the ignition cylinder without vehicle starting capabilities. Some customers, especially over the phone, would ask what the company needed an extra key for anyway. The easiest way to explain it was to state that it makes the vehicle easier and cheaper to repossess. One of our competitors, Titlemax, actually would take a PHOTOCOPY of the key if the customer did not have one already made. The managers who implemented this loan step were taught this cute little policy loophole by their counterparts in the St. Louis area. The ironic thing about Titlemax employees’ choice to photocopy keys was that each Titlemax location has a key making machine in each store.
Each borrower is required to bring in proof of identification. While with Affordable Equity Finance, I observed some very interesting and disturbing situations when asking for proof of identification. Some potential customers just did not have a State ID. Excuses ranged from losing it to not carrying it all the time. The company would accept a picture employee ID badge, a Military ID, or a VA ID. Some customers would hand me a State ID instead of their Driver’s License. While you are not required to have a valid Driver’s License to take out a car title loan, the fact that the customer drove into the office without one was always a little disturbing. More often than you would think, the spouse or romantic partner of the potential borrower would reach into their wallet or purse and pull out the other person’s identification. Some of the IDs that were presented were in horrific shape. I have seen identification cards that had been chewed by an animal or small child. I have also seen some identification cards that had been faded almost beyond recognition or were cracked in two, three, or four pieces.
Everyone who has ever sought financing knows you have to fill out an application to receive a loan. The basics include: SSN (Social Security Number), Name, Birth Date, Address, Time at Address, Previous Address, Employer Name and Address, Time at Job, Previous Employer, and Personal References.
The application, and the way it is filled out, gives you a preview of the quality of the loan customer. The application at Affordable Equity Finance was an 8 1/2”x 14” paper front and back. It took approximately 8-10 minutes to fill out for the average customer. On a number of occasions, I had customers take 20-25 minutes to fill out the application. This happens for a number of reasons. The customer may be older, they may not remember some of the information requested, or they weren’t prepared to write down reference information. I would peruse over the application to make sure all the blanks were filled in and all the questions asked were answered. The section of the application that always seemed to be the most incomplete was the references section. Affordable Equity Finance made it a policy not to contact all of the references by phone before approving the application. I heard stories from my customers that at some competitors if their reference wasn’t answering their phone, the competitor would have them write down more references until they spoke with at least three or four in person.
The application can be a very important information and collection tool for those in the high interest loan industry. That is why every company in the industry strives for the most accurate information. The application is the first tool a repossession agent uses to find the vehicle. One time, I had a customer write down an address for one of their four references. When the repossession agent checked the address, it was the street number on a power pole in front of a transformer station in Southwest Springfield. Some customers will try anything to keep from giving truthful information.
How many times have you driven by a loan store and seen a noticeable sign that says “NO CREDIT CHECK”? Most chain stores have made a conscious business decision to forego the task of pulling a credit bureau on customers and justify this by the rates they charge for each individual loan. Other companies, Affordable Equity Finance included, use a company called CoreLogic Teletrack® to help determine a borrower’s financial situation.
Affordable Equity Finance started using Teletrack in 2007. If a customer has inquired at a number of competitors recently, or the customer has defaulted on their loan with a similar company in the industry, the report lets you know. I don’t know how many bad loans were averted using the Teletrack program. Some companies use the report as a black and white type of policy. If the report is clean your loan request is approved, if the report has a defaulted loan your loan request is denied. Mr. Zerr understood that people that are in need of a car title loan may have a rocky financial past, and, therefore, the company policy weighed what was on the report against the rest of the application. The company did use the report as a sort of lie detector test against the submitted application. One of the questions on the company’s application was
In the last five years, have you taken out any of the following loans: CAR TITLE LOAN, PAYDAY LOAN, SIGNATURE LOAN
If the customer answered NO to this question, and the report showed that in fact they had taken out a loan, we would use this information to reduce the amount of the loan we could approve for the customer, or we could deny the loan based upon false answer given on the application.
Most of the large chains in our industry were created in the 1990’s including Mid-American Title Loans (1990), Missouri Title Loans (RPM Lenders) (1992), Check Into Cash (1993), and Titlemax (1998).
Mid-American Title Loans and Missouri Title Loans came to the Springfield market in the Spring of 1998. Affordable Equity Finance opened its doors in the Summer of 1998. Dozens of small payday loan offices sprang up between 1998 and 2001 in Springfield. Quik Cash started buying out some of the smaller payday loan businesses in 2005. Titlemax came to Southwest Missouri in 2008. Titlemax purchased all the Cash Choice stores in Missouri after opening their second Springfield store in 2009. The 2008 nationwide recession forced some of the smaller loan companies in town to close. Titlemax continued its expansion by opening three more stores in Springfield, including a Titlebucks location in 2011. Mid-American Title Loans opened a third location in Springfield in 2012. My position with LoanMart Auto Title Loans gave me extensive knowledge as to the health and trends of lending throughout Missouri. Small payday loan stores that were open earlier in 2014 were closed by the time I visited them in the Fall of 2014. In 2015, I observed multiple chains that evaluated their physical footprint throughout the state and closed multiple locations. The small communities in Missouri were affected the most. Some rural residents will now have to travel 40+ miles one way in to borrow money in person.
The foundation of any high interest loan business is getting the phone to ring. Some competitors in the industry rely heavily on TV or radio to get out the message that you need money and you need it NOW and FAST! CALL NOW! Other competitors continue to use the traditional methods such as phone book advertising or billboard advertising. Phone calls, like anything in sales, are just leads. I have taken calls that lasted less than a minute after I found out what a customer wanted to borrow was no where near what my company could loan on their particular vehicle. The phone calls were also very short if the customer’s income was not sufficient enough relative to the amount they wanted to borrow. Other phone calls would last for a long block of time, especially if the loan request was complicated.
These government programs keep the lights on in many of the storefronts across our great nation. As of September 2015, there are over 14,244,000 receiving payments because of a permanent disability. 8,362,516 of these recipients receive Supplemental Security Income (SSI) because they qualify under low-income rules. The existence of these programs has created incredible opportunities and some challenges for our industry. Since payments are fixed and made like clockwork to recipients, companies feel comfortable loaning money to Social Security recipients. Because Social Security is very difficult to garnish, companies have tailored loan offerings to match the risk taken when a customer’s main source of income is from Social Security. My experience with SSI and SSD came down to debt to income ratio. Many customers on SSI and SSD still have monthly rent payments that range from $350-700 per month. When two adults living together are only receiving $1400.00 per month of SSI, housing takes out a large chunk of their available monthly funds. A number of my customers lived in parts of town where the rent was lower, but the utility costs could be above average. A good number of these customers were also heavy smokers or heavy drinkers, which of course eats into the household budget.
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