New law slashing interest rate cap shakes up state's small-loan industry
Dec. 11—Ahtza Chavez found herself in a vulnerable situation after moving back to New Mexico from California some 20 years ago.
A single parent, Chavez needed money and decided to take out a high-interest installment loan to tide her over. The decision proved costly and ensnared her in a debt trap.
"Every single time I went to make a payment, it was like, 'Oh, just refinance it. It's OK. You don't have to pay it,' " Chavez recalled.
"They're so predatory to people that are in need, that just need to pay their bills, pay for an emergency visit, for all of these things, and it just continues the cycle of poverty for so many New Mexicans," she said, referring to businesses known as storefront lenders. Such companies also offer small loans online, targeting risky customers with few assets and low credit scores and charging interest rates that now reach up to 175 percent in New Mexico. Critics say they take advantage of the poor.
Come January, these small-loan companies are in for a big change when a new law takes effect, significantly lowering the cap on interest rates to 36 percent.
"This ends four decades of reverse economic development in which the state allowed predatory lenders to charge the most vulnerable New Mexicans triple-digit interest rates on small loans and export the profits out of state, since nearly nine of 10 loan companies are headquartered outside New Mexico," said Fred Nathan Jr., founder and executive director of Think New Mexico, a Santa Fe-based think tank that has long advocated for lowering the maximum interest rate on small loans.
'Making a muck'
Although it's not yet in effect, the new law is already changing the face of the state's small-lending industry.
According to the New Mexico Regulation and Licensing Department, the number of active licenses for small-loan companies has dropped 7.5 percent in recent months, from 452 in June to 418 in November, and employees in the industry say numerous lenders have closed up shop.
"It's kind of sucky that it's happening," said an employee of a New Mexico Title Loans store in Albuquerque. "It's closed our competitors' stores, and of course we can no longer lend after Dec. 31st, so eventually my job will be gone once we do our collections and stuff like that," she added. "A lot of my old peers and co-workers have already lost their employment due to this new change."
The employee, like others asked to comment on the coming change in the industry, declined to provide her name and said all media inquiries have to go through a corporate office. None of the corporations responded to requests for interviews.
The Title Loans employee said she wished for an influx of borrowers before the end of the year to keep her working longer.
"I'm hoping and praying something will change here in the future," she said. "Maybe they'll realize, 'Oh, hey, we just closed hundreds of loan companies in New Mexico. People are losing their jobs.' "
She said the loans, despite their high interest costs, help people who can't go to a bank and just say, 'Hey, I need to borrow this.' It's not easy to go to a bank and borrow money."
Curt Cook, who operates Navajo Trading Co. in Farmington, which stopped offering installment loans about a month ago, agreed.
"Any place where it's required that [borrowers] have a certain credit, certain assets and things like that to qualify — well, they don't. That's why they're with me," he said.
Cook said would-be borrowers "don't quite make the connection" when his company informs them he is no longer offering installment loans.
"I'm like, 'Well, it's just the state and the lawmakers that feel that we are taking advantage,' " he said. "... I think they just think they're Casanovas coming in and saving the day, when in reality they're making a muck of this."
Employees at other storefront lending companies said they expect to continue to stay in business, but the new law will restrict who can obtain a loan, leaving people with bad credit scores in the lurch.
Cook said lawmakers are out of touch with the harsh reality less-affluent New Mexicans encounter on a daily basis.
"In reality, they don't care about these people and where they're gonna get their next meal or their next tank of gas or resource of money to pay their electric bill," he said.
Protecting vulnerable New Mexicans
The concerns raised by Cook and other lending company employees echoed arguments by some lawmakers and others who opposed lowering the cap on interest rates during the legislative session earlier this year.
But proponents of the new law said such worries were outweighed by the benefits of reining in businesses they call predatory lenders.
"After many years of effort by advocates and legislators, I am glad to finally sign this legislation into law and deliver common-sense protections to vulnerable New Mexicans in rural and urban communities statewide," Gov. Michelle Lujan Grisham said in a statement after signing House Bill 132 into law in March.
Between 2006 and 2020, lawmakers from both sides of the aisle introduced nearly two dozen bills to significantly lower the cap on interest rates on short-term loans. Almost every proposal died without passing a single committee, according to a policy report Think New Mexico issued in 2020.
The following year, an attempt to forge a compromise — a 99 percent cap on loans of up to $1,100 and
36 percent for loans between $1,100 and $10,000 — stalled in the House of Representatives.
"Part of the explanation [for the repeated failure of bills to pass] is the enormous amount of power and influence that the predatory lending industry has amassed over the past several decades," Think New Mexico's policy report states. "During the last 10 years, predatory lenders and their political action committees have donated nearly $900,000 to New Mexico state candidates and party committees."
The industry also had powerful lobbyists on its side.
"It's a huge profit business ... so anytime you're messing with the amount of money that people can make off of New Mexicans, it's going to obviously face resistance," said Austin Weahkee, former political director of the Native American Voters Alliance Education Project, which lobbied for a lower cap.
Weahkee has firsthand knowledge of the pitfalls of high-interest loans.
"My own dad took out one of these payday loans when we were really young," he said. "He skipped out on lunch [during work] for about two months, did not eat lunch basically for those two months."
The consequences for other borrowers have been even harder, Weahkee said.
"We've heard of people who take out a $3,000 loan and end up owing as much as like $38,000," he said. "They have their car repossessed. They get kicked out of their homes."
Small-loan companies are known to set up shop in minority communities.
In New Mexico, nearly 60 percent of small lenders were located within 10 miles of a tribal community, according to the New Mexico Center on Law and Poverty.
"I will never forget going to Gallup on my way to the Navajo reservation and seeing just store after store after store of predatory lenders lined up tip to tail all the way to the border with Arizona," said Whitney Barkley-Denney, a deputy director of state policy and a senior policy counsel for the Center for Responsible Lending.
"I think they locate in those areas ... for all sorts of reasons, including historical and system racism," she said. "People have less wealth, right? They have less money to fall back on, and they're more likely to be lower paid, and so they go there because those are exactly the people who they think will be desperate enough to use their product."
Alternatives to high-interest loans
Barkley-Denney said people with limited access to credit have options.
"It's something that we've actually talked to people about in places where these lenders have left," she said. "We found a couple of things. One is that they actually do find that they have other credit options. Credit unions in particular can often work with people with low or even no credit scores and help them get into better loans that are better suited for them."
Would-be borrowers also discover they don't need a loan — they need aid.
"What they needed was help, and so that's going to their churches, their local communities, even their family members," Barkley-Denney said. "I think a lot of times people are embarrassed to talk about this kind of thing, so it's not that the hope isn't out there, but maybe they're embarrassed to seek it out."
Ahtza Chavez said her pride prevented her from seeking the help of family members or the advice of her parents when she took out a high-interest loan in the early 2000s.
Now the executive director of the Native American Voters Alliance Education Project, Chavez said the new law will protect vulnerable New Mexicans.
"We heard so many stories about our grandmothers losing heirloom jewelry, losing livestock, losing vehicles to these payday lenders and continuing that cycle of poverty," she said.
Chavez said storefront lenders will still be able to make a profit and operate in New Mexico with interest rates capped at 36 percent.
"One of the good things about this particular bill is that there's the Fair Lending Coalition, and we've had a number of banks and credit unions that were also a part of that coalition working together to figure out how we still have that availability [of credit] for folks that have those emergency situations so that they're not being taken advantage of," she said.
She noted a lending store across the street from her organization's office in Farmington closed last month.
State Rep. Susan Herrera, D-
Embudo, the lead sponsor of HB 132, said it's "great" that such businesses are moving out of New Mexico.
She recalled driving home from a legislative committee hearing one day and seeing workers take down a TitleMax sign: "I just kind of pulled my car over to the side to just enjoy that for a moment."
New Mexicans were getting "gouged" by such companies, Herrera said, adding she has heard "horrendous" stories, including people losing their homes.
"We have more predatory lending companies in this state — we used to — than we have McDonald's," she said. "It was nuts."
She believes the new law, combined with proposed legislation to add financial literacy classes for kids, "will create a healthier New Mexico."
Rep. Daymon Ely, D-Albuquerque, one of the sponsors of HB 132, called the interest rates of up to 175 percent a tax on the poor.
"It was a tax on people that were desperate for money," he said. "... I think 36 percent is enough for [lenders] to make money without ripping people off."
Ely said he was unsympathetic to high-risk lenders who might close their businesses as a result of the new law.
While opponents argued it would reduce the availability of credit, Ely said the Legislature is committed to finding a solution if that becomes a big problem.
"We can figure that out," he said. "But in the meantime, you get people caught in these debt traps that they can't get out of. That's what we want to stop."
Asked what a potential solution might be, Ely noted the state set up a small-business loan program during the coronavirus pandemic.
"There are all kinds of creative ways to do it," he said. "What you don't do is throw up your hands and say, 'Well, some people theoretically might be denied access to credit, so we're going to allow [lenders] to go out and charge outrageous interest rates.' That's what's not acceptable."
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