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Thursday, November 1, 2007
A New Era In Payday Loans
By Leslie Linthicum
Copyright © 2007 Albuquerque Journal; Journal Staff Writer
If you signed up for a payday loan in New Mexico on Wednesday, the sky was the limit on the length of the loan and the interest you might pay.
If you sign up for a payday loan today, you will benefit from a new state law that throws out interest charges and replaces them with lower, capped fees.
The new law also stops lenders from rolling your loan over month after month, racking up the eye-popping interest rates that sparked the statewide reform.
"Payday loans have been easy to obtain and difficult to get out of," state Regulation and Licensing Superintendent Edward Lopez Jr. said. "That all changes now."
The law, effective today, caps the fee a lender may charge at $15.50 for every $100 borrowed on a two-week or month-long loan, plus a 50 cent "verification fee" for each loan.
The new fee rate is still a much higher cost for borrowing than banks or credit unions charge, but the new law's biggest effect on borrowers will be the elimination of the practice of rolling over or renewing the loan.
Payday loans are meant to be short-term loans to get a person caught in a cash crunch to the next payday. But payday loan companies have made their biggest money by extending those loans to payday after payday, Lopez said, piling up interest that far outstrips the amount of the original loan.
Rollovers allowed lenders to continue to add on unlimited interest— which some companies set as high as 600 percent— and could turn $100 borrowed into a debt of more than $1,000 after two years.
"They intend to roll them over and over and over each time, charging the borrower exorbitant fees and interest," Lopez said. "That's pure profit."
Fighting the law
Starting today, lenders must offer borrowers who fail to pay off the loan immediately a fee-free, interest-free payment schedule that can extend 130 days to replace the old rollover practice.
The law also requires lenders to tie into a statewide database and deny credit to anyone whose outstanding payday loan debt equals 25 percent of their gross monthly income.
The law was meant to protect payday loan borrowers— people who often have low incomes, often do not speak English and easily find themselves mired deeply in debt.
It was bitterly fought by the industry, and the fight apparently isn't over.
Lopez said that many payday lenders have registered with the database, but FastBucks, a lender with 27 stores in New Mexico that fought against the new law, has not.
Lopez said he expects some companies will not register and will issue installment loans under a different name, like "fast loans."
"We are just waiting for them to try that," Lopez said.
Lopez said he has conferred with New Mexico Attorney General Gary King and they are ready to prosecute any high-interest, short-term lending businesses that continue to do business while claiming the payday law does not apply to them. The penalty would be the loss of the company's license to do any lending business in New Mexico.
Stephen Solomon, vice president and general counsel of FastBucks, would not talk about the company's plans.
"We are still evaluating the impact of the regulations and statute," he said.
Mickey Barnett, an Albuquerque lawyer who represented payday lenders in earlier attempts at regulation, predicted the new law will hurt people in financial binds by driving lenders away.
"The tighter and tighter the regulations are, the more companies will move away," Barnett said. "At $15.50 for a $100 loan, I guarantee you they can't make money."
New guidelines
Under the law, lenders must orally disclose the fee-free, interest-free payment plan to every borrower and make the disclosure in Spanish to Spanish-speaking customers, Lopez said.
"It was important to me that they say it out loud because I want to make sure that notification doesn't get lost in the stack of paper," he said. "This is about protecting consumers, not about protecting the industry."
Regulation and Licensing requires all payday lenders to register with Veritec Solutions, a company that monitors loans and will give the green or red light to a proposed loan in New Mexico. The technology is similar to credit card terminals that tell merchants nearly instantly whether a purchase is approved.
There are about 650 licensed lenders in New Mexico, although the state does not know how many of them are of the payday loan variety. They will know that— and how many payday loans were given and the dollar amount— by the end of November when Veritec files its first report.
The law also requires the new regulations to be outlined on posters in each payday loan store.
The department will make unannounced visits to some of the hundreds of payday loan stores in New Mexico to monitor whether they are complying with the disclosure law.
The department also is ramping up its financial literacy program to try to teach people better ways to manage their money.
"Even though this payday loan law is tighter and offers more protections than what currently existed," Lopez said, "we still recommend that people borrow money from a bank or a credit union or from family and friends before they take out a payday loan."
