Short-term lender in Albuquerque (Photo by Marisa Demarco / Source NM)
A proposal to set a ceiling on interest rates for small, fast loans is getting coordinated opposition from lobbyists for storefront lenders, most of whom say the same thing: Regulating interest rates will make it hard for New Mexicans to “access” lines of credit.
Predatory lenders in New Mexico often leave borrowers in endless cycles of debt, experts say, and many of these companies are documented to be giving out more loans in areas of the state with large Native populations, further entrenching the communities in poverty.
The majority of these lenders are situated near Indigenous lands, according to Leonard Gorman, director of the Navajo Nation Human Rights Commission.
These kinds of high-interest loans target Native people, other communities of color and those with the least financial literacy, said Austin Weahkee, an organizer with NM Native Vote. All one has to do is drive through places like Gallup, Grants, Española, Farmington or the low-income neighborhoods in Albuquerque to know that this is an equity issue, he said.
This is the third time that the Legislature has considered lowering the cap on small loan interest rates, with Democratic lawmakers having voted alongside Republicans in previous years to keep allowing interest rates that top out at 175%.
“Every year, we hear, over and over, that New Mexico is a poor state, and over and over again, the state Legislature allows out-of-state companies to operate in New Mexico, charging hundreds of millions of dollars in interest alone from our people,” Weahkee said.
House Bill 132, making its way through the session right now, would cap interest rates on loans in the state to 36%.
High-interest loans in New Mexico are made to borrowers who are unable to pay them on the lender’s terms at the time the money is lent. That leads to refinancing and re-borrowing when payments are due, according to Karen Meyers, a consumer lawyer in Albuquerque who was the head of the Consumer Protection Division at the New Mexico Attorney General’s Office for eight years.
“This is what leads to what people call the ‘debt trap,’” said Meyers, who also worked at the federal Consumer Financial Protection Bureau (CFPB).
Data show that only 14% of installment loans are paid back in full without refinancing or reborrowing, Meyers said. Installment loans are lump sum loans that are paid back monthly.
In 2020, less than one-quarter of these installment borrowers in New Mexico were able to pay off their loan without refinancing or reborrowing, Meyers said.
Borrowers pay high fees and costs when the annual interest rate is 175%, Meyers said.
The House Consumer and Public Affairs Committee voted 3-2 along party lines Saturday to approve the legislation. The bill is sponsored by Rep. Susan Herrera (D-Embudo), Rep. Joy Garrett (D-Albuquerque) and three other House lawmakers.
Breaking the laws
There are 550 small loan companies operating in New Mexico, Herrera said, with 89% of those being out-of-state corporations. Of those, 78% had regulatory action taken against them by the CFPB, Herrera said. But those same companies continue to operate in the state regardless.
Security Finance is one of three companies operating in the state that had to pay fines after the federal Consumer Financial Protection Bureau found they violated federal law. Herrera discussed these fines in committee.
Security Finance made improper collection efforts on delinquent debts, including physically preventing borrowers from leaving their homes, visiting and calling borrowers at their workplaces while knowing that this contact could threaten their job, Herrera said.
Security Finance also violated the Fair Credit Reporting Act by regularly providing inaccurate and incomplete information about borrowers to credit reporting agencies, thus potentially adversely impacting their credit scores, Herrera said.
CFPB ordered Security Finance to stop illegal collection practices and correct the inaccurate information they had given to consumer reporting agencies, Herrera said. CFPB also ordered Security Finance to pay $5 million in civil penalties.
CFPB ordered TitleMax to pay $9 million in civil penalties, ordered Ace Cash Express to refund $5 million to borrowers and another $5 million in civil penalties, Herrera said.
Lobbyists emphasize ‘access’
Ricky Keys opposed the bill in committee. He did not tell the committee who he represents, but he was listed as being affiliated with Security Finance in a 2011 report by the consumer finance division of North Carolina’s bank regulator.
“The inability to access mainstream forms of credit will make an already bad situation worse,” Keys said.
Deborah Reyes, a representative of CURO Financial Technologies Corporation, which owns the brand Speedy Cash, said HB 132 would result in the company immediately pulling it’s installment loan products from the state, “resulting in the denial of credit to New Mexico consumers.”
David Emery, the New Mexico regional manager for QC Financial Services, Inc. said he understands it’s important that New Mexico rein in “rogue actors.” However, he opposed the bill by giving an anecdote about a customer of his who couldn’t get a loan from a major bank in the Albuquerque area that he did not name.
Joe Ruben, speaking on behalf of Opportunity Financial, said lenders do not follow through on their promises to fill the gap left by interest rate caps in other states.
“They don’t change their underwriting criteria, and they don’t change their lending standards to meet the needs of credit-challenged consumers,” Ruben said.
Danielle Fagre Arlowe, senior vice president of the American Financial Services Association, said, “this bill, if passed, would be the most extreme law in the country.”
“While borrowers in New Mexico’s elite will be able to find other sources of credit or afford larger loans, lower income individuals will likely be left in credit deserts if HB 132 is to pass,” Arlowe said.
Tony Tanner, owner of Tancorde Finance, Inc., opposed the bill in committee.
He said he hopes consumer advocates will compromise with the industry “to fashion a solution for all, ensuring access to a stable, regulated industry within New Mexico to assist residents at difficult times.”
Drew Setter, representing the Online Lenders Alliance, opposed the bill on the grounds that it would leave many New Mexico residents without access to credit “at a time of financial uncertainty.”
“It is unclear how a rate cap will help credit unions provide services to those denied access under the bill, when they do not do so now,” he said. “HB 132 will impede how banks market their loan portfolios.”
Former speaker turned lobbyist
Former House Speaker Raymond Sanchez, now a lobbyist for the Consumer Installment Loan Association of New Mexico, opposed the bill on the grounds that it is not “a reasoned piece of legislation.” He did not offer further details about his opposition but said he has been emailing and texting House lawmakers about it.
Sanchez’s company spent $12,650 on political contributions in 2020 and continues to lobby and make campaign contributions despite it’s business license being revoked, according to New Mexico Ethics Watch.
Alternatives can exist
Meyers cited research from other states’ reforms to counter the notion that capping interest rates in New Mexico will leave residents without any access to credit.
Other states have changed their lending caps to 36%, which makes loans affordable and safer, Meyers said, including Montana, South Dakota, Nebraska and Illinois.
In Illinois, Meyers said, 67 new lenders opened for business after the state’s interest cap went into effect, which counters the argument that if HB 132 passes, lenders would leave New Mexico and there would be no loans available. The Community Development Financial Institution in Illinois saw a 70% increase in loan applications from new borrowers, Meyers said.
After South Dakota capped its interest rates in 2016, a study found that there was still credit available to South Dakotans, and that there was an uptick in the use of credit unions.
“This demonstrates that borrowers will seek alternative lending options, and that alternative lending options can exist in a state which has a 36% annual interest rate,” Meyers said.
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