“Man was lost if he went to a usurer, for the interest ran faster than a tiger upon him.”
– Pearl Buck ( 1892-1973 )
At noon on Saturday, New Mexico’s 52nd Legislature will adjourn. Sadly, it appears one of its biggest accomplishments will be the repeal of daylight saving time.
Those to the right of me will blame those to the left, and vice versa, for failing to address many of the substantive and substantial issues facing the Land of Enchantment.
Though numerous bills were introduced, our legislators failed to take any action on signature loans, sometimes called payday loans, and they should all be ashamed.
Whether your politics are left, right or middle of the road, there’s no justification for 1,500 percent interest, especially when such loans are marketed to the poorest amongst us.
The Legislature’s inaction leaves a June 2014 decision from the Supreme Court of New Mexico as the “law of the land” on this subject. State vs. B&B Investment Group presented the Attorney General’s complaint that some lenders were violating the Unfair Practices Act by charging interest rates between 1,147 percent and 1,500 percent on small unsecured loans made to the less credit worthy amongst us.
Utilizing mass marketing and operating from retail storefronts, these lenders made loans of under $500 solely upon verification of employment, an address and a signature. These loans were developed after many states, including New Mexico, acted to regulate short term, or pay day loans, several years ago.
But, as the lenders admitted, these signature loans “definitely could be a substitute product” for the former payday model.
After trial, a District Court judge ruled that these signature loans were “unconscionable” under the circumstances and violated New Mexico’s primary consumer protection statute, the Unfair Practices Act, as well as the general public policy of our state.
In considering the lenders’ appeal of that decision, the Supreme Court cited the case of a man who earned about $9 hourly and turned to signature loans to make ends meet. Trying to do “whatever we need to survive from one payday to another payday” he borrowed $100 payable at $40.16 twice monthly for a year.
His $100 loan brought the lender about $1,000 in interest, about 1,150 percent.
The Unfair Practices Act defines as “unconscionable” actions that “take advantage of the lack of knowledge, ability, experience or capacity of a person to a grossly unfair degree.”
The Supreme Court noted trial evidence, including testimony by a University of New Mexico economics professor, had adequately established the target clientele lived at or near the poverty line, often with $15,000 or less annual income, were generally not well educated, and often had trouble understanding credit transactions and consequences.
Further, evidence had shown that the lenders specifically represented the repayment obligations in a misleading manner.
Rejecting the lenders’ argument – the Legislature’s 1981 repeal of our usury law means there is no limit on permissible interest charges in New Mexico – the Supreme Court upheld the trial court’s ruling the loans were unenforceable and its injunction requiring lenders to show the actual costs of each loan instead of only the periodic payments, requiring them to stop marketing the loans as “easy to repay” and requiring borrowers be given contact information for the Attorney General’s Office.
Further, having determined the loan rates up to 1,500 percent were unconscionable and unenforceable, the court required the lenders involved to refund all but principal plus 15 percent interest to the borrowers.
I caution that the B&B Investments ruling likely does not simply establish an interest cap of 15 percent. The court indicates unconscionability is determined by the specific facts of the situation. Several bills before the Legislature proposed interest caps of 36 percent, but they went nowhere.
About 20 percent of New Mexicans live below the poverty line; that’s means about $23,000 a year for a family of four. You can “Judge For Yourself” how credit transactions involving our poorest and least educated citizens should be regulated; is 1,500 percent too much and 15 percent too low?
Politicians often complain that the courts make law instead of interpreting it. Our legislators had their chance to make law on this issue. Too bad they did nothing.
Alan M. Malott is a judge of the 2nd Judicial District Court. Before joining the Court, he practiced law throughout New Mexico for 30 years and was a nationally certified civil trial specialist. If you have questions, contact Judge Malott at PO Box 8305 Albuquerque, NM 87198 or e-mail to: firstname.lastname@example.org. Opinions expressed here are solely those of Judge Alan M. Malott individually and not those of the court.