Plentiful credit available without predatory lending

By Fred Nathan

Last Sunday’s Journal (July 23) included an opinion piece by Patrick Brenner, founder and president of the libertarian Southwest Public Policy Institute, expressing regret over New Mexico’s recent law ending predatory lending. The Southwest Public Policy Institute has consistently opposed the law, which reduced the maximum annual interest rate on small loans — under $10,000 — from 175% to 36%.

Earlier this year, in the wake of the reform law taking effect, Brenner wrote about his experiences shopping for small loans. Sunday’s column was his second published piece about that experience, and we were interested to see that his update contained some new information that unintentionally illustrated how well the law is working.

First, Brenner noted that about 22% of New Mexico’s small lenders have ceased operations since the law took effect – in other words, 78% are still in business. As the Journal reported this past March, during the fight to enact the 36% interest rate cap, “opponents of the cap predicted that so-called payday lenders would flee the state, leaving New Mexicans with no opportunity to take out small personal loans for unexpected expenses.” Instead, more than three-quarters of lenders have adapted their business practices to accommodate the 36% interest rate cap, just as they have in other states with similar laws.

Second, Brenner reported that Nusenda Credit Union, which has more than 20 branches across the state, offered a “simple, transparent, and accessible” process for providing a loan at 17% interest. We commend the credit unions like Nusenda that are leading the way in providing access to affordable credit. Credit unions were first established to provide an alternative to loan sharks, and there are now 50 different credit unions with more than 150 branches across New Mexico.

In addition after New Mexico’s 36% interest rate cap was passed, national banks like Bank of America, Wells Fargo, and U.S. Bank began offering small loans to their customers, increasing access to credit for low-income New Mexicans. Brenner did not succeed in getting a loan from these banks because he had not been a customer at the bank for a minimum period of time. The banks limit their small loans to existing customers because they use a person’s history of deposits and withdrawals, rather than a credit score, to evaluate whether someone will be able to pay back a loan, and how much they are eligible to borrow.

The 36% interest rate cap is working not only in New Mexico, but in a growing number of states across the nation. According to the National Consumer Law Center, the median rate cap for a two-year, $2,000 loan is 32%, and 35 states limit loans of that size to rates of 36% or less.

Minnesota recently became the latest state to follow Think New Mexico’s lead and enact a 36% rate cap, which takes effect Jan. 1 of next year. A 36% cap is the gold standard set by the federal Military Lending Act, which has prohibited lenders from charging higher rates to military members and their families since 2006.

The money that New Mexicans are saving because they are no longer paying triple-digit interest rates is being spent on local businesses all across the state, rather than being siphoned off to predatory lending companies, the vast majority of which are located out of state. This is the very definition of local economic development.

New Mexico’s new law ending predatory lending is succeeding at sustaining access to affordable credit without gouging low income borrowers, while injecting millions more dollars a year into the state economy.

Fred Nathan is the executive director of Think New Mexico, the nonpartisan think tank that is a member of the New Mexicans for Fair Lending Coalition, which led the effort to enact New Mexico’s 36% interest rate cap.