Bankruptcy

Auto Title Lending Data

By Adam Levitin

Todd Zywicki has written several articles (here and  in a fuller version here) on auto title pledge lending that cite default rates on auto title loans are 14-17%, while repossessions occur only in 4%-8% of cases and in 20% of those cases the borrower redeems the car. These numbers are cobbled together from several disparate sources, so they might not all fit together, but from this (and borrower characteristics) Todd concludes there's no basis to claims that auto title lending is predatory.

These numbers long seemed too good to be true to me?they would imply either huge profit margins (which Todd disputes) or huge overhead costs (Todd's explanation). They also seemed highly skewed by the fact they were counting loans rather than borrowers. Title loans are 30-day loans that can be rolled over, but a roll-over counts as a new roll, which effectively inflates the denominator for default rates. 

I came across a rather obscure Tennessee Department of Financial Institutions study (actually cited by Todd) that has some numbers from examinations of title lenders, and it seems to tell a somewhat less rosy story about title lending.

Following a change in Tennessee's auto title pledge law, the Tennessee Department of Financial Services put out two reports (here and here) on auto title lending in the state based on its examinations of title lenders. The 2008 report has data from 2006. There were 139,319 new title pledge loans made in Tennessee in 2006 (roll-overs excluded), all for $2,500 or less. The average loan was $557.70.

By my calculation, the duration of the average loan was 4.95 months (it actually might be longer, but the report lumps together all longs with 11 or more rollovers?I treated them as all having exactly 11 rollovers for my calculations), meaning there were on average approximately 4 roll-overs or that the real term of a title loan was 5 months on average. 88% of loans outstanding had rolled over at least once. 

Tennessee title pledge lending resulted in 18,199 vehicles being repossessed in 2006. While there is not perfectly matched data on loans and repossessions (repossessions in 2006 include loans made in both 2005 and 2006), if we assume a steady level of auto title lending (which probably isn't right--the number of outstanding loans was 20% higher in Dec. 2006 than Dec. 2005), this translates into 13% of loans (18k/139k) or approximately one in seven resulting in a repossession (not default) rate. That alone is significantly higher than the rate reported by Zywicki.

I had previously been taking this 13% and multiplying it by the roll-over rate, which resulted in a eye-popping 65% repossession rate.  Jim Hawkins, in a very helpful comment rightly noted that there's no reason to multiply this figure by the roll-over rate as the denominator is only "new" loans, not roll-overs.   The number that I've been interested in is not the percentage of loans that result in repos, but the percentage of borrowers who lose their cars annually.  The 139k figure is still likely an inflated denominator for my purposes, as it double counts individuals who took out multiple title loans in a year, but whatever the resulting increase, it surely doesn't match the roll-over rate. Let's say it means a 15%-18% repossession rate. If so, that's quite different from 4%-8% (but hardly 65%...). Todd also cites a range of LTVs on title loans from 33% to 100%; if these loans are at the lower-end of that range, that implies an awful lot of equity stripping going on, which makes me think that title lending is often predatory.   

A second point of interest--Tennessee has an (extremely high) pricing cap for title loans:  22% per month.  But only about 60% of lenders are pricing at the cap. A substantial minority are pricing beneath it. And the industry has healthy profit margins--13% on average before taxes. And this doesn't include money taken out by owners in the form of salary or other benefits). That doesn't fit with Todd's explanation of low margins due to high overhead costs and stiff competition. To me these sort of margins suggest that the usury cap isn't restricting credit in a major way and that it might be too high.  

Now maybe title lending in Tennessee is just different from everywhere else. For example, if Tennessee permitted much higher rates than other states, then maybe the industry is able to accommodate a riskier borrower base, which would translate into more defaults and repossessions. Tennessee does have a very high bankruptcy filing rate.  It's not clear whether there's any correlation between title borrowers and bankruptcy filers (Skiba and Tobacman find a correlation for payday and bankruptcy, albeit of relatively small magnitude if I recall), so maybe Tennessee title borrowers are an unusually risk group, which would account for the high repo rate. I have no way of knowing if Tennessee is unique or typical, but the Tennessee data certainly makes me hesitate to accept Todd's conclusions about title lending.

A final thought: this Tennessee Department of Financial Services report is really good. It's a shame we don't see more of this sort of study from state bank regulators, and that they don't coordinate studies. I think this sort of data is a real service for policy issues. Hopefully this sort of examination-based study is what we will see the CFPB producing.

So here's a question for Credit Slips readers: am I reading this Tennessee data correctly? Any thoughts on its interpretation? 

[Note:  I've updated this post.  1.4.11 11:50pm.]

Full post as published by Credit Slips on January 04, 2011 (boomark / email).