Insights

In Virginia, the day of unregulated motor vehicle title loans has ended. On October 1, 2010, a motor vehicle title loan took effect that establishes a comprehensive licensing and regulatory framework for motor vehicle title lenders and motor vehicle title loans. The law defines a “motor vehicle title loan” or “title loan” as any loan secured by a non-purchase money security interest in a motor vehicle.

Prior to this legislation, lenders making title loans typically did so through Virginia’s revolving credit statute. In Virginia, revolving credit loans are largely unregulated with no licensing requirements and no usury rate limitations. The Virginia Attorney General’s Office did bring several actions against motor vehicle title lenders enforcing the statute’s repayment grace period, but there was no state agency that had regulatory oversight of the title lending industry.

Virginia’s Motor Vehicle Title Loan law, located in Title 6.2, Chapter 22 of the Code of Virginia, now requires lenders that make closed-end or revolving title loans obtain a license from the State Corporation Commission’s Bureau of Financial Institutions, even if such loans are made to Virginia borrowers from out-of-state lenders through the Internet. The law does not apply to extensions of credit for the sole purpose of financing the purchase of a motor vehicle, or of refinancing a purchase money loan, secured by a lien on the motor vehicle.

Licensing under the Motor Vehicle Title Loan law will require a surety bond of between $50,000 and $500,000 per location, and liquid assets of at least $75,000 available at the licensed location. Annual reports will be required, and licensees will be subject to examinations at least once every three years. Additionally, a licensee may not conduct the business of making motor vehicle title loans at any office, suite, room, or place of business where any other business is solicited or conducted except a registered check cashing business or such other business as permitted by the State Corporations Commission. Failure to obtain the license is a Class 1 misdemeanor.

With a license, a lender may make title loans having a maturity date between 120 days and 12 months, in amounts up to 50% of the vehicle’s fair market value. The loans must be term loans at a simple interest rate not exceeding: (1) 22% percent per month on the portion of the principal that does not exceed $700; (2) 18% per month on the portion of the principal that exceeds $700 but does not exceed $1,400; and (3) 15% per month on the portion of the principal that exceeds $1,400. Accordingly, the law does not impose significant restrictions on the interest rates charged on title loans.

What the law does do, however, is impose significant disclosure requirements on title lenders. In addition to a number of disclosures that must appear in the loan agreement, a prior notice must be provided to the borrower cautioning the borrower about the high interest rates involved and that the failure to repay could result in loss of the vehicle. The law also requires that, before entering into a motor vehicle title loan, a licensee must provide each borrower with a pamphlet developed by the State Corporation Commission, explaining in plain language the rights and responsibilities of the borrower and providing a toll-free number at the Commission for assistance with complaints. Title loan advertising is also subject to regulation and the law imposes certain disclosure requirements.

The Motor Vehicle Title Loan law restricts additional charges that may be imposed. Other than a 5% late charge, the lender may not directly or indirectly charge or collect any amounts other than: (1) a licensee’s actual cost of perfecting its security interest in the motor vehicle; and (2) reasonable costs of repossessing and selling the motor vehicle, provided the borrower is given 10 days notice and opportunity to cure the default.

Upon default and repossession, at least 15 days prior to the sale of a motor vehicle, a licensee must (1) notify the borrower of the date and time after which the motor vehicle is subject to sale and (2) provide the borrower with a written accounting of the amounts due. At any time prior to such sale, borrowers are permitted to redeem the motor vehicle by tendering cash or other good funds instrument for this amount. Following the sale of the vehicle, the borrower is entitled to receive any excess proceeds within 30 days. If there is a deficiency, the borrower is not liable for this amount unless the borrower: (1) intentionally damaged or destroyed the motor vehicle, (2) intentionally concealed the motor vehicle, (3) the vehicle was subject to an undisclosed prior lien, or (4) the borrower subsequently gave a security interest in, or sold, the motor vehicle without the licensee’s written consent.

The State Corporation Commission may impose a fine or penalty not exceeding $1,000 for each violation of the law or regulations. Additionally, if loans are made by an unlicensed lender, each loan is deemed to be separate violation.

On balance, the Motor Vehicle Title Loan law appears to codify the best practices of the industry while acknowledging that high interest rates on title loans are a business necessity given the associated credit risks involved. The law brings order and regulation to an industry that has not been subject to regulatory oversight in Virginia.

David S. Darland is a partner in the Washington, D.C., office of Hudson Cook, LLP. David can be reached at 202-327-9707 or by email at ddarland@hudco.com.