The New Mexico House Committee has been making moves to tackle abuses by storefront lenders, more commonly called payday lenders. Payday lenders offer short term loans to individuals who then pay the loan back when they receive their next paycheck, hence the term “payday” loans. Consumer advocate groups have accused unscrupulous lenders of using these loans to prey on the poor by charging unreasonably high interest rates to trap them in a spiral of debt. The annual interest rates on payday loans can have rates that, in parts of New Mexico, average at 350 percent and have been known to rise up to several thousand percent. Residents of areas of New Mexico where unemployment and poverty are endemic often don’t have many options when faced with an unexpected expense other than these small storefront lenders, and they are the most common victims of these loans.
In an move to reign in the excesses of this industry, a bipartisan group of lawmakers in the New Mexico House of Representatives pushed for legislation to cap the interest rates on these loans an increase the length of time that recipients of these loans have to pay them back.
The measure, called House Bill 347, caps interest rates on loans made from entities that are not “federally insured depository institutions”.
The most prominent mandates made by House Bill 347 are:
- Interest rates are capped at 175 percent
- Loan terms provide a minimum of 120 days for repayment.
- Loan terms that allow for a repayment schedule of four installments, to ease the financial pressure on recipients of payday loans.
Though the bill was recommended unanimously by the House Business and Industry Committee, even some in the committee admit that this bill could be better. Consumer advocates, especially, have voiced criticism of the bill’s 175 percent cap, claiming that it doesn’t do enough to protect borrowers. Earlier in the same week that House Bill 347 received its recommendation from the Committee, the Committee voted unanimously to kill discussion on another proposal pushed by advocacy groups, House Bill 26, that capped interest rates at a much lower 36 percent.
This round of legislative wrangling is just the most recent of a long series of legislative battles over regulating interest rates on payday loans. Legislators have considered capping interest rates on payday loans for over a decade. The industry has fought back effectively with lobbyists and campaign contributions. However, exploitation and abuse by the worst offenders in the industry have increased the pressure on lawmakers to provide some protection to their constituents from this kind of predation. The interest rate cap mandated by House Bill 347 is hard to swallow for the concerned parties on both sides of this issue, but it is also seen as a tolerable compromise between the lenders and consumer protection advocates.
However, concerns about the bill’s other provisions have made its prospects of passage through the other House committees, such as the House Judiciary Committee, precarious at times.
One point of contention is a loophole for a certain type of loan whose interest rates are not subject to the 175 percent cap. This type of loan is called a tax refund anticipation loan, and they have been criticized by consumer advocacy groups for being predatory. An attempt to strike this exemption from the Bill by House Speaker Brian Egolf was opposed by the industry’s representatives and some legislatures, and the bill nearly died in the House Judiciary Committee. The exemption continues to remain in the bill. Others on the committee are concerned that the Bill requires the state to needs to report only the aggregate data on small loans. Reporting only the aggregate numbers will make identifying the worst offenders in the industry nearly impossible.
However, the bipartisan sponsors of the bill, and some even some consumer advocates who would rather see a much lower interest rate, make the case that it is a substantial improvement over the current payday loan interest rate.