The New Normal: Short-term loans become second-nature to the struggling poor

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Sherrie Cline sits in the parish office at Holy Family Church, where she got help with title loan debt.

Photo by Gwyneth Doland

Sherrie Cline sits in the parish office at Holy Family Church, where she got help with title loan debt.

On April 14, 2011, Sherrie Cline went into New Mexico Title Loans to make a payment on a car title loan she originally took out the year before. She owed about $500, but she didn’t have the money to pay it off. In fact, she needed more money just to pay the bills that were piling up. So she did what she and millions of other Americans have done before her: she rolled the original loan into a new one. She took $250 cash and refinanced $490.14 into a loan of $740.14 that would be due in full just one month later, on May 14.

But 30 days later, Cline was no closer to having $750 than she had been in recent memory. Her financial situation hadn’t changed. In her 50s and living with several health conditions, including diabetes, Cline was disabled and living on a monthly disability check that couldn’t even cover the loan.

So on May 20, she went through what became a ritual. She drove over to New Mexico Title Loans, made a payment of $66, then borrowed $200 more and rolled the $750 into a new loan.

At an interest rate of 360 percent, that meant come June, Cline would owe more than $275 in interest on top of the new principal of over $900. For the next few months she managed to scrape together enough to pay the interest, between $250 and $275, but never managed to put a dent in the principal, which remained around $1,000.

It might seem that only an emergency could push someone to borrow money this way, but Cline’s situation wasn’t unusual. About 70 percent of storefront lending customers use the money to pay for everyday living expenses like rent, utilities, credit card bills or food, according to a 2012 report by the Pew Charitable Trust.

Lenders spend generously in Santa Fe

Efforts to rein in loans like this failed in the state Legislature earlier this year after lawmakers rejected a proposal to limit interest rates to 36 percent, as the federal government has done for members of the military. More than two dozen industry lobbyists pushed hard against the cap.

Advocates for customers of storefront lenders, including financial literacy organizations and religious groups, were outgunned in Santa Fe, not just in number but in caliber. “Quite frankly, I’ve never seen a showing of so many suits in my two decades at the Roundhouse, except with oil and gas,” said Viki Harrison, the executive director of Common Cause.

In addition to the money they spent on lobbying, storefront lending companies and associations gave nearly $140,000 in political donations in 2013 and 2014.

Some lawmakers who took donations from the industry said they would have supported free market principles anyway. Paul Gessing, executive director of the Rio Grande Foundation, agreed. “I’m not going to defend all [the lenders’] practices—I think sometimes they charge rates that are ridiculous—but as long as they’re being transparent and not committing fraud, I think the government stepping in is certainly contrary, not only to the free market, but to freedom in general.” People need access to money and the Legislature shouldn’t take those options away just because they don’t like them, Gessing said.

But to others, the money clearly had an impact.

“I think this is one of the most egregious examples of money from out of state coming in to influence the Legislature,” said Dede Feldman, a retired Democratic state senator. “The companies must feel that it’s worth the investment because it has been worth it so far.”

There are 684 small loan companies currently registered in New Mexico. But only a few are based here. New Mexico Title Loans, for example, has 21 registered locations in New Mexico, but its parent company, Community Loans of America, is based in Atlanta, Georgia. Fast Bucks is headquartered in Dallas, Texas; Check N Go is based in Cincinnati, Ohio.

If the storefront lending industry is to be regulated in New Mexico it will likely come from the federal government or the courts, Feldman said, because the Legislature is too vulnerable to the industry’s money and influence.

At the Roundhouse, Community Loans of America, New Mexico Title Loans’ parent company, was represented by T.J. Trujillo, a veteran lobbyist who doled out $66,700 in political contributions to state lawmakers in 2014 (although he listed none on behalf of Community Loans of America).

On Feb. 18, the same day the Senate Corporations and Transportation committee voted 6-3 to reject a short-term loan rate cap, the lobbyist for Community Loans of America reported that he sponsored a reception for the committee members and staff. As NMID reported, five of the six senators who voted against the cap had accepted thousands of dollars in campaign contributions from the lenders in 2013 and 2014.

New Mexico’s reporting laws (and weak enforcement) make it difficult to know exactly where all of the money flows. For example, after the end of the 2015 legislative session, Trjuillo reported spending nearly $4,000 on meals and entertainment, but as is the case with many such forms filed with the Secretary of State, the disclosure reveals nearly nothing. Trujillo listed only “various” in the boxes where lobbyists are supposed to detail who they spent the money on and “government relations” as the purpose.

How much did the company spend on lobbying? The company declined to comment for this story and New Mexico law doesn’t require lobbyists to disclose their pay.

Lawmakers deny that lobbying and spending by the companies affects their positions. Rep. Bob Wooley, R-Roswell, said during the session that if a lobbyist donates money it “has no effect on my vote at all.” The chair of the House Regulatory and Public Affairs Committee, Rep. Yvette Herrell, R-Alamogordo, also denied feeling any pressure, saying, “Honestly, I don’t ever think, ‘There’s Mr. So-and-So and his company gave me money.”

Ultimately, both voted to shelve the rate cap proposals.

Things Got Complicated

Sitting in Rev. Gerald Steinmetz’s office on a hot June afternoon, Cline said she had been struggling for a long time before she decided to take out loans.

“When the restaurants closed, that’s when things got harder,” Cline said. She and Ernest Sena, her partner of 29 years, had been in the restaurant business until Ernie retired and they shuttered the last of their restaurants, Ernie’s Café on Fourth Street, downtown.

The pair lived near Five Points in the South Valley, just a couple of dusty blocks from the river, on a piece of land owned by Sena’s family and dotted with a cluster of houses. Their house was paid off, so the overhead was cheap, even if it was a little crowded—Sena’s son Ernie Jr. and his girlfriend lived with them—and things could be tense among the extended family that shared the compound.

Sena, 20 years older than Cline, earned about $1,000 a month in Social Security, while she got a monthly disability check about half that size. Money was always tight but the pair was unable to borrow money from a bank. Sena had tried, but he didn’t have the collateral—they didn’t own the family house they were living in. All they had were their cars—and their Social Security and disability checks to prove their income.

Driving around the neighborhood, the solution seemed clear. Storefront lending companies offering car title loans are littered along the stretch of Central Avenue near Atrisco; today there are at least 10 within a mile and a half of where they lived, out of a total of about 150 in Albuquerque.

They chose New Mexico Title Loans because it was right next door to Gilbert Sanchez Income Tax, the firm that had done their returns back when they had the cafes.

Although she said they both needed the money, Cline was the one who signed the paperwork, handing over the title to her 1996 GMC van in exchange for a few hundred dollars.

360% Interest

In 2012, when Cline complained to the company that she had paid the original amount of her loans over and over again, she said they were unfazed. She was shocked when they told her it was normal.

But it is. Almost half of title loans in New Mexico in 2013 were not paid in full when they were due, according to statistics collected by the Regulation and Licensing Department. Nationwide, the average customer renews the loan eight times, according to the Center for Responsible Lending, a nonprofit group that describes itself as “fighting predatory lending practices.”

Although about 12 million people use storefront loans every year, to most people, paying 360 percent interest is far from normal. Many Americans who need $1,000 might charge the expenses on a credit card. Even paying 36 percent interest (which is one-tenth the interest rate of a car title loan but twice as high as competitive credit card rates today) it would only take a year to pay off that amount at $100 per month. After one year the total amount paid would be about $1,200.

But while a credit card allows the borrower the flexibility to pay the minimum or more for as long as it takes to pay off the balance, car title loans mature in just one month. If you can’t pay off the principal and interest, then you have to take out another loan and start paying interest on the interest. Every month it adds up.

And unlike credit cards, bank loans or mortgages, car title loans aren’t given based on the customer’s credit rating, employment or their ability to pay; they’re based on the value of the car. As long as a car is worth a few thousand dollars, the lenders know they’ll always get their money back. In 2013, more than 1,500 New Mexico customers had their cars repossessed, according to RLD. .

But why would anyone agree to pay such high interest rates, compounded month after month, for just a few hundred dollars?

Cline knew what she was doing. Each time she rolled over the loan she signed a new “loan agreement, promissory note and security agreement” that clearly stated how much interest she would pay and the total amount she would pay including interest.

She just believed she didn’t have much choice.

“Now I know why Tio is so rico.”

After Sena died, in 2012, Sherrie was forced to leave the house on Atrisco. But with only her disability check she had a hard time finding an apartment. For a while she lived in the van, along with her two dogs and cat. But her health problems got worse, partially because in the van she wasn’t able to plug in her CPAP machine, an electric contraption that supplies a steady amount of air while she sleeps.

Steinmetz is the pastor of Holy Family Parish, a brown stucco Catholic church on Atrisco, the one where Ernie Sena’s funeral was held.

Steinmetz has been counseling Cline for several years, helping her navigate personal, financial and health problems. She had meticulously saved all of the paperwork from her loans and Steinmetz pored over it with her.

“I would say to Sherrie, ‘Why don’t you pay $100 on the $1,000 you owe?’ and she would say, ‘I can’t. I wouldn’t have anything to live on,’” Steinmetz recalled. “So if you can’t pay the interest, how can you pay the principal?” He was dismayed by how quickly the unpaid interest became principal on which she owed more interest.

Cline was determined to do whatever it took to keep her van, even if it meant staying in increasing debt. She was terrified of losing her van, which meant losing her freedom.

“If I choose to stay home it’s my choice, but if you can’t move then it’s like being closed up in a prison,” she said. She had doctors’ appointments she had to get to and was worried about how she would shop for food without a car. “If that vehicle got taken away then who could be there to take me?” she said. “Ernie was the one who was there for me.”

“Now I know why Tio is so rico!” the bilingual Steinmetz joked about one of the loan companies whose name refers to a rich uncle.

Cycle of debt

The cycle in which borrowers continue taking out new loans to pay old ones is how the industry is structured, according to Ona Porter, the executive director of Prosperity Works, a financial literacy organization that supports capping interest rates. And poor New Mexicans, like Cline, are particularly vulnerable.

“The thing that we know is that people who are on fixed incomes and working low-income jobs have about a 30 percent gap between their monthly income and their monthly expenses, so they do all kinds of juggling to make that work,” Porter said. They may delay paying some bills or hold off on filling prescriptions.

“But when there’s any kind of bump in the road, everything goes awry. They use these loans as an escape route, but what happens is it begins a cycle of debt,” Porter said.

Steinmetz, in his brown cotton cassock, accompanied Cline to the small block building on Central and pleaded with the employees at New Mexico Title Loans to forgive Cline’s loan. They told him to call the company’s corporate headquarters. He did, and eventually the company wrote off the rest of the principal, less than $1,000.

That was also not uncommon. New Mexico lenders wrote off more than $6 million in principal and interest in 2013. They took in nearly $30 million in interest and fees on about the same amount of principal.

Even after Cline’s debt was forgiven, she wasn’t done with the loan. She found out when she went to buy a more efficient car that they had never released the lien from her van. It took several more trips with Steinmetz to get it sorted out.

By 2014 she had traded the van for an old Infiniti sedan and the debt was gone. But the anxiety and worry weren’t. Even a year later she wasn’t certain New Mexico Title Loans had truly forgiven the loan. Steinmetz assured Cline the company wouldn’t come after her but she seemed to only halfway believe it.

“It’s never really going to be done. They’re always going to be trying to figure out how to get their money,” she said.

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