Rules for predatory lenders must reflect letter, spirit of law

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By Sherry Robinson

An elderly woman got a small loan from a storefront lender and couldn’t understand why she could never manage to pay off the loan even though she made payments.

Leonard Gorman, executive director of the Navajo Nation Human Rights Commission, explained the basics of principal and interest and renewal language in the loan agreement. Once she understood, she cried inconsolably.

Last year, when the Legislature finally reformed laws governing storefront lenders – also called predatory lenders or payday lenders – there was a sense of accomplishment that they had dispatched a nagging problem after years of complaints.

A recent hearing in Gallup made it clear there’s still work to do. Gorman blamed the lenders’ deliberately confusing communications for financial burdens on Navajos, but the small lenders trap Indian and non-Indian people alike.

This is one reason New Mexico is poor. Thousands of people can’t get out from under these debts with their spiraling interest rates, so they don’t participate fully in the economy.

During the 2017 legislative session, HB 347 passed. It made loans of $5,000 or less subject to the Small Loan Act, eliminated processing and handling fees, and capped APR at 175 percent. It banned payday loans, loans for less than four months, single payment loans, and balloon payments. However, it exempted tax refund anticipation loans and raised delinquent fees from 5 cents to 10 cents per dollar loaned. The law also mandated clear information for borrowers.

In February, the state Financial Institutions Division released its regulations for the law. Last week the agency held a hearing in Gallup, which has the state’s highest concentration of storefront lenders (50 serving a population of fewer than 23,000) in the state’s poorest county.

Consumer advocates, like the New Mexico Center on Law and Poverty and Prosperity Works, said HB 347 was progress.

Eliminating payday loans was a big step, and interest of 175 percent beats 1,500 percent. But the cap is still too high, the terms of the loans are still unclear, and lenders need to do a better job of informing borrowers.

One of the nastier snares of the small loan business is the rollover. Can’t make a payment? No problem! Just roll it over and pay a higher interest rate and fees. Because borrowers often can’t repay the loan within the short term limit, after a rollover or two they’re in hock indefinitely with no end in sight.

Incredibly, the state’s new regulations don’t cover loan renewals. And they don’t require lenders to be clear about terms and costs.

“It is all too common in the industry for storefront lenders to mislead borrowers about the true cost of small loans through confusing contract terms, expensive and often useless add-on products, and by marketing loans that conceal long term costs,” says the Center on Law and Poverty. “Because of this intentional subterfuge, it is often difficult or impossible for consumers to calculate the true costs of their loans.”

Those of us with credit can borrow from a bank or credit union and come away with a clear understanding of the interest rate we will pay and the amount of time we have to repay. The law assures us the interest rate will be reasonable. The poorest among us don’t have the same understanding or assurance.

Gorman said, “We have the right to understand what we’re committing to when it comes to loan documents and legal documents.”

One bright spot in this dark picture is the rise of alternative lenders. A number of local governments now offer their employees small loans with moderate interest rates. They repay through payroll deductions.

The Financial Institutions Division needs to step up and make sure its regulations match the letter of the law. From the lenders and the government, words matter.