FTC Takes First Action Against Car Title Lenders

Manatt, Phelps & Phillips, LLP

Why it matters

In the agency’s first action against a title lender, the Federal Trade Commission (FTC) recently reached a deal with a pair of car title lenders accused of deceptive advertising. The Commission alleged that the defendants failed to disclose important loan conditions or that the finance charge would increase after an introductory 30-day offer ended. “This type of loan is risky for consumers because if they fail to pay, they could lose their car – an asset many of them can’t live without,” Jessica Rich, director of the FTC’s Bureau of Consumer Protection, said in a statement about the case. “Without proper disclosures, consumers can’t know what they’re getting, so when we see deceptive marketing of these loans we’re going to take action to stop it.” The Bureau of Consumer Financial Protection (CFPB) reportedly is considering whether to include vehicle title loans within the scope of its coming payday loan rules, and this FTC action signals that the FTC also continues to be active in this space. The action also reminds lenders that advertising and marketing materials alone can trigger regulatory action, and a review of marketing and advertising material to ensure appropriate disclosures for any loan products would be time well spent.

Detailed discussion

First American Title Lending of Georgia and Finance Select both offered car title loans. In print advertising and online, the companies promised a zero percent interest rate for a 30-day car title loan.

The agency characterized car title loans as “a high cost, short-term loan,” secured with the consumer’s car title. A typical APR can reach 300 percent and the loans often have short repayment periods of 30 days. But the Commission noted that title loans can morph into longer-term installment loans if a consumer does not repay the loan within 30 days. According to the FTC, the average length of such loans is about nine months, so a $1,000 loan could yield $2,000 in fees.

The agency did not challenge the fees charged by the car title lenders. Instead, the FTC said the ads failed to include important details about the loans, including that the finance charge would increase after the introductory period ended and that certain conditions needed to be met in order to qualify for the loan.

Specifically, Georgia-based First American neglected to mention in its billboards, newspaper ads, and Internet claims for “zero” interest that borrowers had to be new customers, repay the loan within 30 days, and pay with a money order or certified funds (not a personal check or cash), the FTC said. The company, which operated at more than 30 locations, also failed to disclose that borrowers that failed to meet the conditions were required to pay a finance charge from the beginning of the loan and did not inform consumers of the amount of the finance charge after the introductory period ended.

As for Finance Select, the Commission charged that the company – with five locations in Georgia and two in Alabama – not only did not state the finance charge at the end of the 30-day period but also left out the conditions for qualification for its zero percent offer, such as that loans had to be repaid in full in 30 days (or a finance charge would be added for the initial 30 days of the loan).

In administrative complaints, the FTC charged both companies with violations of Section 5 of the Federal Trade Commission Act. First American also ran afoul of the Truth in Lending Act (TILA) and Regulation Z, the agency alleged.

Pursuant to the proposed settlements, both defendants would be prohibited from failing to disclose all the qualifying terms associated with obtaining a loan at an advertised rate, failing to disclose what the finance charge would be after an introductory period ends, and misrepresenting any material terms of any loan agreements.

First American’s deal features additional requirements, including a ban on stating the amount of any down payment, number of payments or periods of repayment, or the amount of any payment or finance charge unless all the terms required by TILA and Regulation Z are clearly and conspicuously disclosed.

The proposed settlements are open for public comment until March 3.

To read the complaint and proposed consent order in In the Matter of First American Title Lending of Georgia, click here.

To read the complaint and proposed consent order in In the Matter of Finance Select, click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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