COMMENTARY: When I first met Louis, he was too deep in debt to afford a car. He got most of his meals from local food banks. He survived on a net monthly income of $170 after making payments on small loans from six different storefront lenders.
Interest on his loans ranged from 80 percent to 240 percent. Every few months, after he paid down some of the debt, the lenders would contact Louis urging him borrow more. Cash strapped, he would refinance his loans — for an additional fee — and the debt would never go away. He was paying $7,200 annual interest and fees on debt that hovered at around $4,000.
The names of the lenders were familiar. You see them on street corners and in strip malls all over town. Check n Go, Security, World Finance. The state of New Mexico promotes high-cost loan scams by granting loan stores licenses but imposing no restrictions on interest rates or repayment terms for most loan types.
You could feel the bromance when Department of Regulation Finance Division chief Cynthia Richards declared at a legislative interim committee meeting that small lenders provide a “vital service” to low-income borrowers. This in spite of many federal and independent studies showing that high-cost loans routinely lead to financial disaster.
About a quarter of working New Mexicans have been victimized by high cost loans charging up to 3,200 percent annualized interest. Surveys indicate that thousands of these folks are government workers, many of them drowning in debt like Louis. Clerks, maintenance personnel, teacher’s aids, security personnel and many others live one car repair or medical emergency away from financial ruin because they are caught in high-cost debt traps like Louis.
The tragedy is that programs that provide responsible, low-cost loans to workers with low credit scores can be made widely available with little effort. Firms like Employee Loan Solutions and Kashables offer employee-benefit programs that enable organizations to provide loans to credit-challenged workers at interest rates ranging from 6 to 26 percent. Loan applications are online and funds are deposited in the employee’s bank account within a few days. Repayments are made through payroll deductions.
The programs cost nothing for employers to adopt. Vendors provide the service for free; handle all loan financing, administration and collections tasks; and assume all financial risk. One of the most popular uses of employee-benefit small loans is refinancing high-cost debt. Workers repay their 400 percent storefront loan with a 15 percent loan and an amazing thing happens — they pay off the more affordable loan and get out of debt! Default rates are very low.
Employee-benefit loan models are so promising that the New Mexico Senate passed a memorial asking the Martinez Administration to study making them available to state employees. The New Mexico Employee Benefits Bureau could make affordable small loans available to almost 80,000 state and local government and higher education workers by adopting one of these programs.
Awash in loan-industry campaign contributions, the Martinez Administration has apparently declined to follow through. The State Personnel Office has not responded to phone calls or letters inquiring about the status of the affordable-loan benefit study.
Meanwhile, my friend Louis has been more fortunate than many borrowers. He hooked up with One Source Federal Credit Union here in Las Cruces and they put him on a financial plan that has allowed him to pay down his debt and buy a car. After years of suffering, he is finally escaping the storefront loan debt trap.
The State of New Mexico (and local cities, counties and school districts) could offer similar relief to thousands of hardworking government employees at no cost to taxpayers, with minimal risk, and with little effort. If only they could summon up the same love for our public servants that they show for your local corner loan shark.
Steve Fischmann is a former state senator and co-chair of the New Mexico Fair Lending Coalition.