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Getting a small loan license in New Mexico is a cinch. Just pay a $1,500 fee to the Department of Regulation and Licensing, show you have $30,000 in capital and a reasonably clean criminal record and you are in. There were 656 small loan operators in the state at the close of 2013.
The powers that come with a license are astonishing. Outside of a very narrow product area technically defined as Payday Loans, licensees can charge any interest rate over any period of time with almost any loan terms they choose on amounts of $2,500 or less. Small lenders routinely burden unsophisticated borrowers with interest rates of anywhere between 200-600 percent and sometimes more than 1,000 percent. In the process, they often point to the license on their wall claiming their products are “state approved.” That license is, in fact, their license to steal.
While legislators and regulators and the courts have routinely turned a blind eye to this issue, the New Mexico Supreme Court finally injected a note of sanity into lending regulation with last month’s King Vs. B & B Investment Group decision. The court determined that 1175-1500 percent interest loans by two Northern New Mexico lenders were legally “unconscionable” under New Mexico’s Unfair Trade Practices Act. In other words, they ruled that it is illegal to collect $1,000 of interest on a one year $100 loan. The court ordered the lenders to refund all interest and loan fees in excess of 15 percent APR to affected borrowers.
Unfortunately, the court decision does not impact other lenders, broad categories of existing loan products such as title and payday loans, or loans under 1,000 percent APR.
Meanwhile, New Mexico’s small loan licensees are looting the working poor of about $100 million in interest and fees annually. Money that could have been spent with local stores and businesses is siphoned away to the out of state corporate interests that dominate this industry. Independent studies show that the economy loses a net 24 cents per dollar of interest and fees charged by small lenders after accounting for lending jobs created.
Though lenders come up with elaborate justifications for their practices, the bottom line is this: poorly informed small loan borrowers come back to the same stores repeatedly. Repeat customers are 80 percent of the business. They use these lenders as a source of revolving credit, similar to a credit card. While most of us may pay 12-15 percent on credit card debt, they are paying triple and quadruple digit interest on consumer loan payments that often soak up 25-40 percent of their income. For many, this results in a cascade of financial emergencies, from unpaid rent and eviction to unpaid medical bills. The industry destroys lives.
The solution is simple, time tested and frankly old fashioned. Reinstate usury laws. At least 16 states have enacted interest rate caps ranging from 17-36 percent, or placed outright bans on payday and title lending. The U.S. military is currently in the process of broadening its ban on loans over 36 percent interest to active service people to cover all short and long term loan products. They believe abusive lending practices put such demanding stresses on military personnel and their families that combat readiness and national security are compromised.
Two out of three borrowers polled in states that have enacted interest caps say they are better off than they used to be. Almost 90 percent of New Mexicans polled favor interest caps of 36 percent or less. We have speed limits to protect drivers and catch limits to protect fisheries. It’s time to enact interest rate limits to protect borrowers.