The Virginia attorney general's office sued Cash-N-A-Flash of Hampton, Va., saying it broke the state's consumer finance law by charging customers interest rates of 300% or more on auto title loans and giving no grace period to pay the loan back without a charge.
Auto title loans offer quick cash for a short time -- usually a month -- and typically at high interest rates. The loan amount is for 30% to 50% of the vehicle's value. If the owner can't repay on time, a fee can be paid to roll the debt over, says the nonprofit Americans for Fairness in Lending. If the loan isn't paid off or rolled over, the lender will take the car, sell it and keep the cash.
Virginia's AG alleges CNC Financial Services Inc., which does business as Cash-N-A-Flash, charged borrowers interest rates above the state's 12% annual interest cap since March 2005. Businesses can be exempt from the rule if they provide a 25-day payment grace period that allows a borrower to pay in full before a finance charge gets tacked on to the loan. But Cash-N-A-Flash doesn't qualify, says the state, because some of its loans were set up as "closed-end credit" -- interest, fees and principal paid in a lump sum at the end of the loan term -- with no grace period.
Cash-N-A-Flash representatives could not be reached for comment.
"Virginia's consumer lending laws must be enforced to ensure that borrowers receive legal protection in the marketplace," Virginia Attorney General Kenneth T. Cuccinelli said in a statement.
The suit asks the court to declare "null and void" all loans the company made that break state law and award judgments to borrowers equal to all principal and interest collected.
The nonprofit Center for Responsible Lending says in a legal brief that while auto title loans are marketed for emergencies, they trap borrowers in a cycle of high-interest debt that makes their money woes even worse. Borrowers end up owing far more in interest than what they borrowed.
Read a related story giving financial advice on auto title loans.
Cash-N-A-Flash charged 300% interest on car title loans, says Va. AG