Machado is the owner of Auto Cash, one of three car-title loan companies in Tucson. Like others in the "fringe banking" business, he thinks of himself as filling a desperate need in the economy. "You've got to walk in their shoes," he says of his customers who, according to him, represent all segments of society: "We have attorneys, firemen, police officers, professional people, real estate brokers and real estate salesmen. They are not people who don't have anything."
They may not be totally bereft, but they are in trouble and are willing to borrow money at interest rates dwarfing those of a conventional bank loan, ranging from 17 percent a month (204 percent APR) on $500 or less to 10 percent a month (120 percent APR) on more than $5,000. Title loan companies usually don't check borrowers' credit history, but do require proof of an income. ("Like I tell people who don't have a job, 'Why are we doing this? Very simply, how would you pay me back?' It seems only common sense.") Finally, the borrower must have a car not encumbered with a mortgage. He or she turns over the car's title to the loan company. And, like a gambler who is realistic about losing money, the borrower must face the fact that he may lose his car.
The car-title loan business deals with bigger loans than the payday-loan business (see feature). Machado's loans can be as much as $10,000 for as long as a year, but most fall into the $1,000-$1,500 range for 90 days. Borrowers make interest payments every month and pay off the principal at the end of the loan period. During the period of the loan, a borrower has the use of his car, but a payment default can result in repossession. Machado claims his default rate is the same as most banks and other lenders, 10 or 11 percent. "Since I started in business, I've done approximately 500 contracts without one complaint."
THE FACT IS MACHADO'S industry has what might be called an unsavory reputation. One Arizona law enforcement officer went so far as to remark that the decline of illegal loan-sharking by organized crime can be attributed to the growth and profitability of legal payday and car-title loans.
Even so, there is evidence that organized crime has moved into the field.
According to Pat Kossan, a writer-editor for the Arizona Republic, "Arizona legislators came perilously close [in 1998] to opening the state to a Georgia-based lending company with alleged ties to organized crime" (Republic, February 14, 1999).
Jim Weiers, now the Speaker of the Arizona House of Representatives, introduced a car-title loan bill in the 1998 legislative session. Weiers, who is referred to as a "subprime auto lender," once boasted he had never made a loan at less than 30 percent interest. But Weiers' insensitivity wasn't what led Kossan to write about the legislation. She was intrigued to discover that the major force behind the bill was an Atlanta company, Title Loans of America, one of whose owners, Alvin Malnik, had been banned from New Jersey casinos earlier because of his alleged ties to organized crime.
To help the bill's passage, Title Loans hired Kevin DeMenna and Steven Betts as lobbyists and spent about $2,000 in campaign contributions: $760 to Tom McGovern, who ran for state attorney general and lost; $500 to Governor Jane Hull's campaign; $200 to Representative Jeff Groscost, a Republican and Speaker of the House in 1998; $150 each to campaigns of Senator John Wettaw, a Flagstaff Republican, Sen. Scott Bundgaard, a Glendale Republican, and Weiers; and $125 to Rep. Linda Gray, a Glendale Republican. Despite such generosity, the bill failed.
But the car-title business thrived anyway. To get around the usury laws, car-title companies acted as pawnbrokers, taking a vehicle and leasing it back to the borrower. The borrower, in effect, bought back his or her vehicle at the end of the loan period by repaying the entire principal plus various fees. But the usurious nature of the business led to a lawsuit by the state attorney general's office against a car-title company.
SAL, Inc., in business between 1993 and 1999, was charging 300-percent interest on its lease-back car loans. At the time, the attorney general's office speculated that the company was using the loan business as a way of obtaining cars it could sell in the used-car market. SAL repossessed one out of every six cars on which it made loans, grossing about $1.3 million from the sale of repossessed vehicles and only about $800,000 in loan-interest revenue. The average SAL loan was for $1,339 for a year.
Despite such apparent profitability, the industry was not satisfied. It wanted respectability, as well. Last year, the trade association for car-title lenders, the Arizona Title Loan Association, lobbied once more for a law that would "clarify" the industry's rights. "The law lacked clarity then," said Scott Allen, association president. "Any time you have muddied legal water it causes problems for everybody." Allen contends that the muddied waters contributed to the industry's unsavory reputation, especially in Florida where Title Loans of America, with its alleged ties to organized crime, operates.
Thus, in 2000, Allen lobbied vigorously for passage of S.B. 1244, the bill covering "secondary motor vehicle finance transactions." The bill's opponents, especially the attorney general's office, believed that car-title loans were worse for borrowers than payday loans. "This is a bigger deal than payday loans because a default on a car-title loan means loss of transportation, whereas a default on a payday loan simply means [a borrower] cannot get another loan from the same company," said an attorney general's spokesman.
However, the best that opponents could do was build an important safeguard into the bill: If a loan company repossesses a car and sells it for more than the amount due on the loan, plus the cost of repossession, the balance must be returned to the borrower. In August 2000, the legislature adopted the bill, along with a payday loan bill. It took effect the following month. Most legislators representing Pima County opposed the bill. Local senators voting in favor: Keith A. Bee, Ruth Solomon and Victor Soltero. Voting against: Ann Day, George Cunningham and Peter Rios. Local representatives voting in favor: Kathleen Dunbar, Steve Huffman, Bill McGibbon, Dan Schottel and Lou-Ann M. Preble. Voting against: Harry R. Clark, Rebecca Rios, Carmine Cardamone, Herschella Horton, Sally Ann Trujillo Gonzales, Andy Nichols, Debora Lynn Norris and Marion Lee Pickens. (It should be noted that not all these legislators are still in office.)
Title Loan Association president Allen makes a powerful defense of the industry he leads. "Our law in Arizona requires a much lower interest rate than any other state," he said. "The next lowest state [allows an interest rate of] over 20 percent. Ours goes as low as 10 percent. Most states average 25 percent a month. That's why we have a much lower default and repossession rate and a much higher customer satisfaction rate. It makes us more discriminating [in our lending practices]. In other states, if you can blow fog on a mirror, they give you the money."
Allen contends that association lenders do not want to repossess vehicles, since there is no real profit in their sale. "Repossession runs in the 10-15 percent range," he said. Machado of Auto Cash said, "We don't want the vehicle. For example, we had loaned a gal some money on a 1990 Dodge Spirit that was in fair shape when the loan started and in five months we had to go get the car. The amount due on the contract was about $1,300 and it was sold at the auction for $180. Another example: a 1991 Ford Explorer 4 x 4. That sold at auction for $1,635; the amount due on that was $2,800."
Those examples may be a reason Machado counsels his borrowers to become thrifty. But much of his advice goes unheeded "A young kid came in and paid me back his loan. I gave him a 20-minute lecture. After the conversation, he said, 'Thanks, Jerry. If I need any more money, I'll be back.' The point is, it went in one ear and out the other."