Alabama lacks the regulations and oversight necessary to ensure predatory lenders don’t take advantage of their customers, who are usually already facing financial distress. In fact, the standards – or lack thereof – more often favor the lender.
The following explains the regulatory environment for payday and title loans in Alabama.
The Deferred Presentment Services Act, enacted by the Alabama Legislature in 2003, authorizes fees – effectively interest charges – of up to 17.5% of a loan,10 which can be due in as few as 10 days or as many as 30 days after the loan has been issued.11 Borrowers may receive as much as $500 with each loan.12 A typical loan is given for two weeks, as most people receive their paychecks on a bi-weekly schedule. Thus, a $500 loan incurs interest charges of $87.50 every two weeks, resulting in an effective annual interest rate of 456%.
When a loan is extended, the borrower either presents a check or authorizes an electronic debit for the principal value and interest charges, postdated for the day the loan is due.13 On that day, the lender may deposit the check or request the money from the bank. Borrowers with insufficient funds face a bad check fee of $30 from the lender14 and overdraft fees from the bank.
The Act also permits the lender to roll over the loan only once, at the same 17.5% interest rate.15 After that, it prohibits the lender from making an additional transaction with the borrower until the loan is paid and one business day has passed.16 However, the Act also provides that a lender can engage in another transaction with the borrower immediately if the borrower pays the total amount due on the previous loan with cash or “guaranteed funds.”17 Lenders use this provision to effectively renew loans by forcing borrowers to present the total outstanding amount in cash before immediately returning the same money – minus interest paid – in the form of a new loan. Thus, in practice, lenders engage in multiple rollovers of the same loan when consumers are unable to pay the full amount, causing consumers to make hundreds, or even thousands, of dollars in interest payments on one loan. Additionally, although the Act authorizes lenders to offer an extended repayment plan of four equal monthly installment payments if the borrower is unable to repay on time, the Act does not require lenders to notify consumers of this option or grant a borrower’s request for such a payment plan.18
The Act prohibits a lender from “knowingly” extending a loan to a borrower who has any outstanding loans, from any lenders, that exceed $500 in the aggregate.19 However, it requires lenders to use a third-party private sector database to verify this information only “where available.”20 Lenders do not currently use a common database.
No statute expressly addresses title lending in Alabama. However, the Alabama Supreme Court has found that the Pawnshop Act covers title lending, even though, unlike a traditional pawn, the borrower retains physical possession of the car and gives the lender possession of the title documents only.21 Conversely, all other states with similarly vague definitions of pawned goods have found that their states’ generic pawnshop acts do not authorize title pawns.22
The Pawnshop Act authorizes a “pawnshop charge” and fees that amount to 25% of the principal per month.23 The Act provides for a loan term of no less than 30 days.24 There is no maximum loan amount, and lenders determine the amount extended based on the value of the car. Thus, borrowers can receive thousands of dollars. They may not be held personally liable for the loan.25
Lenders are not required to provide extensive disclosures or explain the terms of the loan. Although the contract is required to include the maturity date of the pawn transaction,26 usually 30 days from the date of the contract, borrowers are also told they will have many months to pay off the full amount of the loan. Borrowers are often told that the interest rate is the “minimum monthly payment,” but are not told that just paying this amount every month will never reduce their debt. The law does not explicitly require lenders to disclose any other fees that may be added to the borrower’s total amount due, including late fees and repossession costs; these fees are often hidden in the contract through the use of deceptive language, or not included at all.
The law contains no limit on the pawnbroker’s ability to roll over the loans and charge additional interest. In practice, borrowers are virtually never able to pay the high amounts of principal and interest within one month and consequently must roll over the loan many times. The law also does not require the lender to roll over the loan every 30 days, so the lender can demand full payment when the borrower does not expect it.
If a borrower is unable to pay off the loan or extend it by the maturity date, the borrower has 30 days after the maturity date to redeem the title by paying the full amount due plus an additional charge equal to the original pawnshop charge.27 The Pawnshop Act does not explain when lenders can repossess the cars or what, if any, fees they can charge in doing so. Most lenders repossess during this 30-day period and charge a daily late fee. After 30 days, “absolute right, title and interest in and to the goods” vests in the lender, and thus the lender can sell the car.28 The Pawnshop Act does not explicitly direct the lender to return any money made on the sale of the car that exceeds the amount due on the loan.