Hopes to cap the amount storefront lenders in New Mexico can charge in interest and fees faded Monday after a powerful lawmaker’s attempt to fill a loophole in the bill met with cold resistance.
House Bill 347 and a companion Senate bill represent the biggest move in years by lawmakers to regulate an industry that consumer advocates say is preying on the poor with annual rates that could reach 9,000% on certain loans.
By capping most annual percentage rates at 175%, the bills have won support from lobbyists from many front-end lenders and some consumer advocates who see it as an acceptable compromise.
But the proposal was further met with skepticism on Monday by the House Judiciary Committee, which postponed a vote on the bill after House Speaker Brian Egolf asked sponsors to eliminate an exception to the cap by 175%. This casts doubt on the proposal’s prospects as the legislative session enters its final 12 days.
Egolf, D-Santa Fe, wants sponsors to remove the tax refund anticipation loan exemption that consumer advocates have called predatory.
These loans are secured by the expected tax return of the borrower. And while this type of loan represents a relatively small share of the storefront lender market, interest rates would not be capped under Bill 347. Instead, these loans would be regulated by a bill. separate pending consideration by the Legislative Assembly.
House Bill 347’s lead sponsor, Rep. Patricia Lundstrom, D-Gallup, told the committee she should consult with groups working on the legislation before eliminating the 175% interest rate exception. Lundstrom’s position signaled that some lawmakers and the storefront loan industry may withdraw support for the bill.
Consumer advocates have also raised concerns about a provision in the bill that would keep reports that lenders file with state regulators confidential. Regulators would release data on the total number of loans and average interest rates statewide.
Laurie Weahkee of the Native American Voters Alliance said information about lenders should be as accessible as possible to help consumers make informed decisions. Weahkee argued that lenders should also disclose additional information, such as the number of vehicles seized through loans against car titles.
“We really believe that we need reporting to be accountable and transparent,” she told the committee.
Committee members said there was a need for some sort of cap on interest rates, but many at the same time expressed hesitation about setting the limit at 175%.
At this rate, New Mexico’s plan pales in comparison to the steps some other states have taken to curb storefront lenders. The bills also contain language that some consumer rights advocates say would shield the industry from greater public scrutiny.
“One hundred and seventy-five percent seems almost unbelievable,” said Rep. Matthew McQueen, D-Galisteo.
Industry lobbyists and some lawmakers say cutting the cap lower would prevent lenders from giving loans to high-risk people to repay them. They say low-income New Mexicans would suffer from not having access to emergency cash or turn to riskier options such as internet lenders.
“[This bill] will keep alive an industry that provides financing to people who cannot find financing through traditional means,” said Raymond Sanchez, lobbyist for the Consumer Acompte Loan Association. Sanchez is a former House speaker from New Mexico.
But consumer advocates in other states that have imposed much lower caps dispute the suggestion that limiting or ultimately closing storefront lenders would backfire on the poor.
“It’s not a safety net,” said Hank Klein, who campaigned to end payday loans in Arkansas.
This state has a 17% cap written into its constitution for all small loans. Klein rejects the argument that lower ceilings will leave borrowers with little or no credit without access to loans. He says high interest loans just put consumers in debt.
New Mexico consumer advocates pushed for a 36% cap earlier in the session only to have their proposals rejected by legislative committees.
In neighboring Arizona, which has ended payday loans, proponents say a low cap is the only way to stop predatory lenders.
Although Arizona ended a decade of experimentation with payday loans, Kelly Griffiths, executive director of the Center for Economic Integrity in Tucson, says lenders found loopholes or moved on to selling different types loans with three-digit interest rates.
The answer, Griffiths said, is a 36% cap on all small loans rather than trying to regulate specific types of loans or allowing exceptions for certain financial products.
“It’s your solution to predatory lending,” Griffiths said.
Consumer advocates across the country have been pushing for a 36% cap on interest rates on small loans. This number has a long history.
Good government groups first touted the rate in the late 19th and early 20th centuries, when a black market in small loans flourished amid urbanization. They said a 36% interest rate on small loans would be an appropriate exception to lower caps in state usury laws, as it would allow legitimate lenders to make a profit while ensuring that borrowers would not be trapped in debt.
The federal government embraced the idea. Congress has set a 36% cap on loans available to military members and their families. The Federal Deposit Insurance Corporation has also recommended that lenders adopt the rate cap.
Some members of the House Judiciary Committee cited federal government policies Monday in questioning why New Mexico should accept a much higher rate.
But other lawmakers have warned that failure to act this year will expose consumers to interest rates well above 175%.
Lenders argue the law would still represent progress by banning loans less than four months old and changing reporting requirements to include loans not previously accounted for by state regulators. The measure would also create a fund to support financial literacy programs.
“Going another few years with nothing is the wrong thing to do,” Lundstrom said.
Contact Andrew Oxford at 505-986-3093 or [email protected] Follow him on Twitter at @andrewboxford.