Copyright © 2020 Albuquerque Journal
SANTA FE – The debate over capping New Mexico interest rates on storefront loans might not be over yet.
Three years after state lawmakers approved a bill that capped small-loan interest rates at 175%, a prominent Santa Fe-based think tank is proposing that the cap be lowered significantly – to 36% – and financial literacy classes be made a graduation requirement for high school students statewide.
Fred Nathan, executive director of Think New Mexico, said the proposed changes would enable state residents to better protect their personal finances.
“With the economic crisis caused by the COVID-19 pandemic, New Mexicans are more vulnerable than ever to predatory lenders, increasing the urgency of these reforms,” Nathan said in a statement.
However, the proposal might face tough sledding during the 2021 legislative session, as recent proposals to lower the interest rate cap have failed to gain traction at the Roundhouse.
Critics of such legislation have argued that such a policy change would put some small-loan stores out of business, decrease state licensing revenue and leave fewer options for cash-strapped New Mexicans.
Rep. Patricia Lundstrom, D-Gallup, one of the sponsors of the 2017 legislation, said lowering the maximum interest rate for small loans could push borrowers to use internet lenders, many of which are based in other countries and cannot be regulated.
“If they’re talking about a 36% APR, I don’t think that works for storefront businesses,” said Lundstrom, who is chairwoman of the House Appropriations and Finance Committee.
However, consumer advocates and other backers of lowering the state’s cap say storefront loan companies prey on the poor and trap people in a cycle of debt.
Roughly 60% of the state’s small-loan stores are within 10 miles of tribal land, where many residents live below the federal poverty line, according to the New Mexico Center on Law and Poverty.
And the Think New Mexico report argues that other options for loans would still be available – such as credit unions – and small-loan stores have not disappeared in other states that have lowered their caps on loan interest rates.
In addition, the report found that New Mexico’s current 175% cap is the third-highest in the nation – lower than only Oklahoma and Mississippi – among the 45 states that have an established limit.
New Mexicans’ use of services such as check cashing and payday loans is also higher than the national average, according to a 2016 survey by federal regulators.
Meanwhile, the Think New Mexico report also details the state’s long history with lending laws.
New Mexico had a 36% annual limit on small-loan interest rates for decades but eliminated the cap in the 1980s amid rising inflation, according to the report.
The 2017 legislation was intended as compromise after years of subsequent debate at the Capitol over payday loans. The bill, which was signed into law by former Gov. Susana Martinez, also banned so-called payday loans with terms of less than 120 days.
While debate simmered on the issue, storefront lending companies hired dozens of lobbyists and gave big campaign contributions to New Mexico legislators and elected officials.
One Florida-based company, Consumer Lending Alliance, gave $24,950 to nearly 30 legislative candidates – both Democrats and Republicans – and political committees in 2016, according to a state campaign finance database.
The other component of the Think New Mexico report deals with making financial literacy classes a requirement for high school graduates.
More than 20 states nationwide have adopted such a requirement, according to the report, and many New Mexico school districts already offer such classes as electives.
However, only about 11% of the state’s high school students took one of the classes, which teach topics such as budgeting, saving and investing money, during the 2019-20 school year, according to Think New Mexico.
New Mexico’s 60-day legislative session starts in January.