COMMENTARY: New data from the New Mexico department of regulation shows low- and moderate-income borrowers are being swindled out of more money than ever before by high-cost storefront lenders.
Here are the lowlights. The data is for loans charging over 175 percent annual interest and fees during calendar year 2015.
- New Mexicans signed small loan contracts charging $372 million in annual finance fees.
- 131,000 borrowers took out installment loans. The average customer borrowed $1,000 for one year at 350 percent interest with total loan payments of $3,670.
- 60,000 New Mexicans took out one-month, single-payment loans. The average one-month loan was $800 at 253 percent interest. The typical borrower needed to renew their loan twice. These folks wound up repaying $1,320 on what amounted to a three-month, $800 loan.
- 5 percent of borrowers with single-month loans secured by their car had their vehicles repossessed.
It gets worse. The state does not keep data on small loans charging interest of 80 to 174 percent. Many of the highest volume lenders operate in this price range. We have no idea how much more money is being looted by these companies.
High-cost small lending has become one of our state’s premier poverty creation machines.
The governor and the Legislature have stuck their heads in the sand. Previous legislative proposals have been buried by an army of industry lobbyists, loan companies and loan industry associations flush with campaign contribution cash.
Reform opponents claim low-income folks will suffer when interest caps or other remedies restrict credit. Others have fretted that we need products to fill the supposed void created by eliminating abusively high-cost loans.
These arguments confuse abusive lending with legitimate credit. When the average borrower spends $3,700 to repay a one-year, $1,000 loan, they’ve been scammed. These loans are not credit. They are legalized theft. A dozen states and the U.S. Military have enacted comprehensive interest caps of 36 percent or less, and there is no evidence that low-income folks have done anything but benefit.
Affordable loan options are increasingly available. Entrepreneurs and some credit unions have recently developed no-credit-check or low-credit-score small-loan options at interest rates of 10 to 35 percent. Many feature instant online loan approval. The typical $1,000 loan-store borrower can save $2,500 per year by using one of these products.
At these lower interest rates, affordable lenders don’t generate enough revenue to compete with the huge broadcast, direct mail, internet and telephone marketing budgets of the loan sharks. An interest-rate cap would help eliminate the marketing noise and allow affordable loan alternatives to blossom.
Some insist it is up to customers to understand the consequences of loan agreements they sign. The unfortunate reality is they do not. Whether the problem is misrepresentation by lenders, language barriers, or poor math skills, the data tells us borrowers need more protection. If we were all good drivers, we could eliminate guardrails on mountain roads. We don’t see anyone recommending that. Industry advocates who blame the borrower fail to utter a word about businesses responsibility to offer fair and safe products.
The most significant predatory loan bills being introduced this legislative session are SB15 and HB 26. They would enact 36 percent rate caps on all forms of lending in New Mexico, which enjoys overwhelming public support. Voters in Montana and South Dakota recently approved similar laws via initiative by a three-to-one margin when their legislatures refused to act.
HB 100 would require storefront lenders to report loan repayments to credit agencies so borrowers can build their credit scores. A third proposal would require the state to engage a qualified vendor to provide easily accessed affordable loans to state employees. Enacting these proposals would cost the state a pittance. Each would be a boon to low- and middle-income borrowers and to our economy.
Legalized loan-sharking swindles are a monster chain around the ankles of New Mexico’s working class and a monster stain on our state’s reputation. With new leadership in both the Senate and House, this is the year to remove abusive debt shackles and clean up the storefront loan industry.
Steve Fischmann and Ona Porter are co-chairs of the New Mexico Fair Lending Coalition.