New Mexico’s Legislators Attack Payday Loans – But Can They Succeed?
For years, New Mexico’s lawmakers have struggled with the problem of payday loans. While some legislators would prefer to decrease regulation, payday lending often traps the state’s borrowers in a cycle of debt. Because of this, a number of New Mexico legislators are attacking payday loans, but can they succeed? Maybe they can if they’re able to bring regulatory action to a vote.
New Mexico Lawmakers Mount an Attack Against Payday Loans, But Can They Win?
The Santa Fe New Mexican reports that two of the state’s democrats, Senator Bill Soules and Representative Patricia Roybal Caballero, introduced identical bills designed to cap the enormous interest rates that payday loans are known for charging. Critics of the industry claim that these loans prey on people who are unable to qualify for traditional bank loans.
This year, the payday loan conundrum hasn’t been a particularly high profile issue in the state, but the online payday loan lenders industry has been making headlines recently. In Utah, a state that typically eschews regulation, the House of Representatives voted unanimously to shut down a big loophole in its laws for payday loans with bad credit.
Getting Around the Payday Loan Lending Laws in Utah
According to The Salt Lake Tribune, the state’s laws feature a 10-week limit when it comes to extending a payday loan. However, Utah Representative Brad Daw said that these lenders discovered a “sleight of hand” technique for getting around the law. To do so, lenders are convincing borrowers to take out a new loan. The publication reports that lenders who are engaging in these methods are advising their customers that a new loan will help them avoid legal action and negative reports on their credit scores.
Daw said, “To the borrower, it looks exactly like a rollover, but to the lender, it restarts the 10-week clock so they could continue to rollover the loan.” Studies show that in the state of Utah, the payday loan interest rates average 458 percent. A Dallas-based payday loan company has been using a similar workaround in New Mexico.
In November, District Judge Francis Mathew from Santa Fe directed the FastBucks payday loan company to compensate borrowers due to illegal business practices. The judge ordered the company to pay back $32 million. However, the legal system is dragging its feet on getting the money back to those affected.
Passing Bills to Establish a Rate Cap
Senate Bill 15 and House Bill 26 are the bills brought to the state’s legislature by Soules and Roybal Caballero. If the bills are enacted, then New Mexico will establish an annual interest rate limit of 36 percent. This will be in place unless or until the country’s prime lending rate grows higher than 10 percent.
Both bills require lenders to include interest, fees and any other charges in the loan’s terms. If the bills pass and if the governor signs them into law, then any loan processed after July 1st that features an interest rate that’s more than 36 percent would become void. As of yet, neither bill is on the schedule for a committee hearing, but the bills do have a completed fiscal impact report, so scheduling the hearings may be on the agenda soon.
Interesting Statistics Revealed by the Fiscal Impact Report
The Federal Deposit Insurance Corporation discovered that almost 30 percent of New Mexico households have turned to one or more unconventional financial service providers for loans. This list of providers includes pawnshop loan lenders, nonbank check cashing companies and refund-anticipation loan businesses.
In New Mexico, households that reported using at least one unconventional financial service provider were generally Hispanic, employed, disabled and from 25 to 34 years old. These households were also usually unbanked. This means that they don’t seek financial services from traditional lending institutions.
Most New Mexico residents who seek money from alternative lenders are not homeowners, and many of them failed to earn their high school degrees. Along with these statistics, the majority of them confirmed that their family income was below $15,000 a year.
When it comes to revealing statistics about payday loan lending in New Mexico, there’s one that’s even more telling. Reports show that payday loan companies and similar organizations have sent about $520,000 to the state’s politicians since 2010.
Few Borrowing Options for New Mexico’s Low-Income Residents
The Republic reports that according to the payday and short-term loan industry, New Mexico’s low-income residents have few borrowing options. Unemployment rates are high in the state as is poverty.
Charles Horton, a native of the state and the founder of FastBucks, said, “People need the money. We’re licensed, we’re regulated, we’re not out breaking kneecaps or doing anything illegal to do the collections.”
Of the state’s more than 23,000 short-term loans, approximately two-thirds of them were renewed, extended or refinanced. Consumer advocates contend that the industry’s current interest rates and other fees make it tough for borrowers to repay them, which sets these borrowers up for a cycle of debt.
Roybal Caballero said, “Predatory lending practices have taken on more urgency as state officials look for comprehensive ways to jumpstart the sluggish economy while helping working families.” The bill that she’s sponsoring is one cog in New Mexico’s battle against poverty. She also said, “They just target the state of New Mexico because we have a vulnerable population, and that’s what we want to stop. The bottom line is it’s exploitation.”
A Desperate Attempt to Fill in a Gap Between Income and Monthly Expenses
Those who borrow payday loans often fail to earn enough to cover their monthly expenses. Ona Porter, the head of Prosperity Works, said, “They have all kinds of very creative ways of making that work, but one bump in the road – a hospital bill, a copay they can’t come up with, a blowout – and the whole house of cards comes down. That’s the point at which they try to fill that gap with one of these loans.”
When it comes to payday loans with bad credit, there are few consumer protections in place. The Consumer Financial Protection Bureau is attempting to change this, but much of the regulation for payday loans is left to the states. New Mexico’s legislators are considering proposals that would help those who borrow payday loans.
Can Regulatory Action Against the Lenders of Payday Loans Succeed?
With the country’s leaders searching for ways to decrease regulation on financial institutions, can legislative action against the lenders of payday loans succeed? Some of New Mexico’s leadership certainly seems interested in reining in the industry, but if the country sinks into a period of limited regulation, it’s possible that the state will follow suit.