How can we stop hurting the poor in New Mexico and strengthen the state’s economy at the same time?
By doing exactly what many legislators and advocates have been working on for several years and what the Albuquerque Journal has called for — enacting a 36 percent interest rate cap on consumer loans.
House Bill 36, endorsed by the Courts Corrections and Justice Interim Committee, with strong bi-partisan support of senators and representatives (only one dissenting vote), would end usury in New Mexico and actually stimulate local businesses.
The focus of the discussion has been correctly on the poor, and how their only access to small loans has been through a high-cost lending market, nearly always entangling them in a spiraling cycle of debt, paying between 125 to 1,500 percent APR (annual percentage rate). But, what I also learned when I first began working on this problem, is that the damage to the New Mexico economy is far more than collateral.
More than 75 percent of the companies who profit from these loans and fees are out-of-state corporations that target single parents, the working poor, those on fixed incomes, veterans and Native Americans. Most loans are taken out to pay monthly expenses because a family’s income is inadequate to meet basic needs. Information disclosed by lenders reveals that their profits depend on keeping borrowers in debt by persuading them to refinance, extend or renew their loans over a period of years.
The result is devastating for families and the New Mexico economy. Our Financial Institution Division’s 2013 figures reveal that residents paid in excess of $100 million in interest and fees on these loans — money that would have been spent here on food, housing, and transportation.
New Mexico law has recognized the need to prevent “abuse of borrowers” and predatory lending. Recently, in one case, the NM Supreme Court declared the lenders’ loan practices that resulted in long term indebtedness and the loans themselves, with excessive rates, unconscionable and illegal under New Mexico law. The Court found that these loans were grossly disproportionate to their price, that the companies took advantage of the borrowers and that the companies tried to make an end run around legal protections. The Court ordered that restitution be paid to all borrowers. This landmark case is the first step in stopping the abusive lending practices that are now common.
Many are surprised to learn that New Mexico laws have no usury cap. Until 1981, New Mexico capped interest rates for small consumer loans at 12 percent per year, but repealed it under pressure from lenders. In 2007, the Legislature limited payday loan renewals, but lenders promptly switched to other products, expanding the industry.
In the 2014 legislative session, I introduced a constitutional amendment to allow the voters to decide if usury should be prohibited by capping consumer loans at 36 percent. Similar ballot initiatives in Arizona and Montana had passed handily. States as diverse as Arkansas and New York enacted across-the-board interest rates caps of 17 percent and 25 percent, without overall reductions in credit availability. The U.S. Department of Defense adopted a 36 percent interest rate to protect the military and their families from abusive predatory lenders.
Although my proposed constitutional amendment did not make it onto the ballot, many legislators expressed support for a statute instead. A 2014 poll indicated that voters in New Mexico overwhelmingly favor a 36 percent cap. Many NM cities and counties have adopted formal resolutions supporting a 36 percent cap — Alamogordo, Albuquerque, Farmington, Las Cruces, Santa Fe, Silver City, Bernalillo County and Dona Ana County. The Municipal League and Association of Counties are also in support.
In 2015, the New Mexico Legislature will have the opportunity to end usury in this state by passing House Bill 36 — to help the poor and to stimulate our economy.