ALBUQUERQUE, N.M. — One of the worst things a person without the financial wherewithal to repay a loan can do is take out a so-called “payday” or “storefront” loan to buy Christmas gifts.
But, with the holidays here, and because it is so easy to get such loans, that’s exactly what many low-income people are likely to do. Predatory lenders encourage the practice.
That’s the message University of New Mexico law professor Nathalie Martin hopes to get out to would-be borrowers. She would also like to see interest rates capped statewide at 36 percent.
“I think it’s getting a little more likely that the state Legislature will act,” she said.
Martin – and others – are encouraged by a number of developments:
- In 2007, with broad bipartisan support, President Bush signed the Military Lending Act, placing a 36 percent limit on interest rates on loans to armed forces personnel. In September, with lenders seeking to circumvent the MLA, the Defense Department proposed new and stronger regulations to shore up the law.
- The cities of Albuquerque, Santa Fe, Alamogordo and Las Cruces, and Doña Ana County – and the New Mexico Municipal League and Association of Counties – have adopted resolutions supporting a 36 percent annual percentage rate cap.
- Eighteen states have imposed interest rate limits of 36 percent or lower, most of them in recent years.
- In Georgia, it is now a crime to charge exorbitant interest on loans to people without the means to pay them back.
- In 2007, New Mexico enacted a law capping interest rates on “payday” loans at 400 percent. Many of the lenders quickly changed the loan descriptions from “payday” to “installment,” “title” or “signature” to get around the law.
But this past summer, the New Mexico Supreme Court, citing studies by Martin, held that “signature” loans issued by B&B Investment Group were “unconscionable.” B&B’s interest rates were 1,000 percent or higher.
High-interest lenders argue that they provide a much-needed source of funds for people who would not ordinarily qualify for loans, even those who are truly in need. One lender, Cash Store, in an ad typical for the industry promises borrowers that they can get “cash in hand in as little as 20 minutes during our regular business hours – no waiting overnight for the money you need” and boasts a loan approval rate of over 90 percent. It also offers “competitive terms and NO credit required. Be treated with respect by friendly store associates. Installment loans are a fast, easy way to get up to $2,500.”
Pushing a cap
Martin teaches commercial and consumer law. She also works in the law school’s “live clinic,” where she first came into contact with those she calls “real-life clients,” people who had fallen into the trap of payday loans.
“I would never have thought in my wildest dreams that this was legal, interest rates of 500 percent, 1,000 percent or even higher,” she said.
Martin is not alone in fighting sky-high interest rates and supporting a 36 percent cap.
Assistant Attorney General Karen Meyers of the Consumer Protection Division noted that it wasn’t simply interest rates that the Supreme Court unanimously objected to as procedurally unconscionable in New Mexico v. B&B Investment Group.
The court also addressed the way the loans were marketed and the fact that B&B “aggressively pursued borrowers to get them to increase the principal of their loans,” all of which constitutes a violation of law.
In another lawsuit from 2012, New Mexico v. FastBucks, the judge found the loans to be “Unfair or deceptive trade practices and unconscionable trade practices (which) are unlawful.”
Long legal road
Both the B&B and Fastbucks cases were filed in 2009 and ultimately went to trial. The time period indicates the commitment of the Attorney General’s Office and how long it takes a case to wend its way through the legal system.
Each of the cases dealt with one business entity, although they often do business under several names. B&B, for example, an Illinois company, operated as Cash Loans Now and American Cash Loans.
According to the president of B&B, James Bartlett, the company came to New Mexico to do business because “there was no usury cap” here.
Early this year, a survey by Public Policy Polling found that 86 percent of New Mexicans support capping interest at an annual rate of 36 percent. Many people think that is too high.
Meyers said predatory lending profits depend on repeat loans. Analysts estimate that the business only becomes profitable when customers have rolled over their loans four or five times.
“We have interviewed a lot of consumers,” she said. “It’s really heartbreaking.”
Steve Fischman, a former state senator and chairman of the New Mexico Fair Lending Coalition, said three-fourths of short-term borrowers in the state roll over loans into new loans, which is precisely what predatory lenders want.
“New Mexico is one of the worst states when it comes to such loans, because we have the weakest law,” he said.
The coalition is working with lawmakers to draft a bill that would impose the 36 percent cap. It is likely to come up in the next session. But the chances of passage, despite popular sentiment, are unknown.
The Legislature has failed to act in the past, Fischman said, largely because of the many paid lobbyists – including former lawmakers – working for the lenders. He described the Roundhouse back-slapping as “bipartisan corruption.”
The National Institute on Money in State Politics, a nonpartisan national archive of such donations, reports that, thus far this year, payday lenders have made 122 contributions totalling $97,630 to state lawmakers.
Opponents of storefront loans say one way some lenders entice the poor into taking out loans is to cajole them with smiles and misinformation. Loan offices – often in lower-income neighborhoods – often become places for people to hang out and socialize. Agents behind the loan office desks pass themselves off as friends.
But, Fischman said, “A lot of people thought Bernie Madoff was their friend.”
The Pew Charitable Trust and the Center for Responsible Lending, acting independently, reported last year that the cost of the loans turn temporary financial shortfalls into long-term crises. After rolling their initial loans over, perhaps more than once, borrowers find that they’re paying up to 40 percent of their paychecks to repay the loans.
Prosperity Works, an Albuquerque-based nonprofit striving to improve financial circumstances for lower-income New Mexicans, is a strong supporter of the effort to cap loans.
President and CEO Ona Porter said one drawback of the short-term, high-interest loans is the effect they often have on individuals’ credit ratings. “And credit scores are now used as a primary screen for employment,” she said.
The loans do little, if anything, to boost the state’s economy. A 2013 study by the Center for Community Economic Development found that, for every dollar spent on storefront loan fees, 24 cents is subtracted from economic activity.
UNM’s Martin has conducted five studies related to high-cost lending practices. She firmly believes that low-income people are better off if they don’t take out unlimited numbers of high-cost loans and that such forms of credit cause more harm than good.
“They are neither safe nor affordable,” she said.