For the past several years efforts have been made at the State Legislature to cap interest rates imposed by New Mexico’s small-loan industry, alternately called storefront lenders or payday lenders. The lenders make loans of $2,500 or less, with often extremely high interest rates and short pay-back periods. And typically their customers are low-income New Mexicans who need quick cash to help pay bills.
The issue is back in 2017, and two proposals to cap such interest rates are expected to be heard today in a House committee.
The big difference between the two bills is the amount of interest lenders could charge. One imposes a 36 percent cap. The other allows lenders to charge up to 175 percent, which is still a big shift from the status quo today, with lenders often imposing effective interest rates significantly higher.
There are 673 small loan companies licensed in New Mexico that make loans of $2,500 or less, often with multiple fees and high interest rates that low-income people struggle to pay.
Lenders provide “payday loans” or tax refund loans, which are small loans made as an advance on a person’s paycheck or tax refund. Or, there are small loans secured with a car title. New Mexico In Depth told the story in 2015 of one woman who desperately took out loans to cover high interest rates she couldn’t pay because she feared losing her vehicle, the only tangible asset she owned and the key to her mobility. When she complained to the company who made the loan in 2012 that she had paid the original amount of the loan many times over, they told her that was normal.
See New Mexico In Depth’s 2015 comprehensive report, The New Normal: Short-term loans become second-nature to the struggling poor
“Rather than people paying interest fees of 900 percent or 1000 percent we’re bringing them down to 175 percent,” said Rep. Patricia Lundstrom, D-Gallup, about a bipartisan proposal she is co-sponsoring with Rep. Debbie Rodella, D-Espanola, Rep. Yvette Herrell, R- Alamogordo, and Jane E. Powdrell-Culbert, R-Corrales.
Lundstrom represents Gallup, a city notorious for the number of store front lenders, which critics say prey on Native American borrowers. The town has more licensed lenders (with 46) than Las Cruces (with 42), a city four times its size.
“It would help my constituency because they would no longer have those predatory lenders,” Lundstrom said of House Bill 347. “We’d be eliminating a lot of those predatory lenders.”
However, Lundstrom’s bill wouldn’t cap tax refund anticipation loans, a type of loan easily available in Gallup.
Lundstrom acknowledged the rates for those loans can be “very, very high” but said the industry makes an argument that such loans are a different lending model. “So we carved them out, just to keep them out,” she said.
While HB 347 caps interest rates significantly, it doesn’t come near the 36 percent cap desired by some consumer advocates.
“The bill does not go nearly far enough,” said Steve Fischmann, a former state Senator who now volunteers his time as an advocate for the Fair Lending Coalition. But he does say it would be an improvement over the status quo. “Sometimes…if we can help people now let’s do what we can,” he said.
Fischmann supports a much lower interest rate cap of 36 percent, which is proposed in House Bill 26, sponsored by Rep. Patricia Roybal Caballero, D-Albuquerque. In the Senate, Sen. Clemente Sanchez, D-Grants, is sponsoring a similar effort, Senate Bill 388.
Several states have interest rate caps of 36 percent, Fischmann said.
But other lawmakers say 36 percent is too low and would hurt businesses and borrowers.
Lundstrom said small lenders would be driven to provide their services online, from outside the state, if a 36 percent rate cap were imposed. That would result in New Mexico authorities having no regulatory control over the industry, she said.
“My feeling is, you’ll push this industry underground,” Lundstrom said about proposals to cap rates at 36 percent. “There’s no way to control what happens on the internet.”
Other lawmakers favor free market approaches.
“It isn’t the right way to do government and control markets,” said Sen. Mark Moores, R-Albuquerque, who said such loans provide an opportunity for those who wouldn’t be able to get loans from banks.
“Folks need money. Where are they going to get their money?” Moores asked. “When your legislators can arbitrarily pick a number out of the air with no science, no market basis on it, we don’t get it right.”
Many people who borrow from storefront lenders don’t have good credit and need quick cash to pay their bills.
But Fischmann doesn’t see such lenders as a good source for financial help. He said lenders could just as easily have created a business that’s consumer friendly and cost efficient, but they haven’t.
“They’ve (lenders) designed a product that does not serve the consumer’s need,” said Fischmann.
And as far as Lundstrom’s concern about online lenders, Fischmann said that people wouldn’t shop around online for loans. “In states with interest caps, people actually borrowed less money than they used to.”
He said the 36 percent cap would apply to lenders outside the state, including online lenders, who lend to New Mexicans. The idea is that lenders who charge over 36 percent wouldn’t be able to get their money back because their contract would be void.
“Online lenders wouldn’t lend to New Mexicans because it would be too risky,” Fischmann said.
The largesse of the small lending industry in making campaign donations is well-known.
During the 2016 election cycle, small lending companies and their professional associations donated more than $118,000 to candidates and political action committees. And those donations weren’t anything new. In 2014 and prior years, the industry similarly gave big.
But a perennial topic of conversation in state capitals is whether industry campaign donations influence the process of making new laws or regulations. Many advocates don’t doubt that they do.
“This place is largely driven by corporate lobbyists, they write the legislation, they bring it here, they have strong sway over many of the legislators,” Fischmann said. “Seventy percent of the power in this building is with corporate lobbyists. They have a huge impact over these bills.”
In 2016, every sponsor of Senate Bill 347 received industry donations. But the sponsor of House Bill 26 did not.
Melorie Begay, a junior majoring in multimedia journalism at the University of New Mexico, is a People, Power and Democracy 2017 intern working with New Mexico In Depth.
(Photo credit: taberandrew)