Summary: HB 132 caps all small loans at 36%, plus includes $150,000 for financial literacy programs with that budget amount ensuring HB132 being deemed ‘germane’ while also addressing one of the root problem driving consumers to storefront lenders, lack of financial awareness.
History: In 2017, legislation capped the interest rate at 175%. Because defenders of the industry argue that high interest rates are at least a way to ensure borrowing options for low-income residents of the state, a 2017 bill to cap the small-loan interest rate at 36% per annum met with opposition from the loan industry and died in the Senate Corporations and Transportation Committee and the House Business and Industry Committee.
In 2019, new legislation (HB 150) passed the House 53:14 and the Senate 33:0, and was signed by the Governor, closing some of the loopholes that have allowed predatory lenders to take advantage of the poor. It also requires all loan agreements to disclose the full cost of the loan including interest and fees, but it did not lower the current 175% cap.
In 2021, SB 66 sailed through the Senate, but the House version, HB 149 was amended by Rep. Alcon in House Judiciary, with the amendment creating a a 99% rate cap and delaying adoption of even that offensive cap for 18 months, giving the industry a free pass with its 175% rate in place for 18 months. HB 149 was amended again on the House floor, creating a 36% rate for loans over $1100 while retaining Alcon’s 99% cap on loans below $1,100. The amended version passed the House. Since the House and Senate versions differed, a committee of Senate and House members was appointed to negotiate to achieve a single bill on which both chambers could agree. That committee never met, both bills died and the 175% loan rate remains in place.
Why HB132 Is Good for NM
- HB 132 would cap all small loans at 36%, inclusive of fees and other charges used to increase the total debt obligation. The federal small loan rate cap of 36% for military families, who are often young and with little savings, sets a good example of what should be the cap for low-income families in our state.
- HB 132 includes $150K in funding for financial literacy programs.
Whys is HB132 Needed in NM?
- Predatory lenders target the most vulnerable New Mexicans.
- Currently the cap on small loans in NM is 175%
- Roughly 80% of short-term loans are refinanced or rolled over rather than paid off, and many New Mexican wind up taking out multiple loans to pay off the first one.
- The current financial strain on many New Mexicans due to the COVID-19 pandemic calls for helping those in need, not taking advantage of them and putting them even deeper in debt.
- According to Think New Mexico, there is one storefront lending location for every 3,800 residents in New Mexico, six times more than the number of McDonald’s per resident. And 85% of those lenders are owned by out-of-state corporations.
- A 36% interest rate cap would discourage predatory lenders in our state, a business that has proliferated since the legislature ended interest rate caps for all loans in 1981.
- A 36% interest rate cap would bring New Mexico in line with most other states in the nation.
- Lower interest rates improve repayability of loans, reducing default rates and risk to lenders.
In Hearings You will hear
- Without these lenders, desperate consumers would have no options
Industry lobbyists would assert that in the absence of Pay Day loans, individuals would have no recourse. But a Pew Research study found that when you are spending more than you earn, there are three ways one can approach that situation: earn more; spend less; and borrow. And if you can’t access traditional loans, borrowing means seeking Pay Day loans. And when Pay Day lenders are lurking, many people clearly opt for borrowing. But Pew found that there are other strategies that can be employed, as the table at right reveals.
When faced with a cash shortfall and payday loans were unavailable, 81% of borrowers say they would cut back on expenses. Many also would delay paying some bills, rely on friends and family, or sell/pawn personal possessions.” Certainly none of these options are easy or appealing, hence the attraction to storefront lenders, but while understandably tempting, loan at 175% or even 99% only send borrowers into never-ending of cycle of refinancing loans to meet immediate needs with compounding interest and fees, resulting in increasing levels of debt, most often taking out multiple types of loans. From a Consumerist study:
“The report found that 55% of car-title loan borrowers also have taken out a payday loan; 63% of payday loan users also have a credit card.” with multiple high interest loans, consumers often must declare bankruptcy, exposing themselves to losing their car and other assets. With their car often being their means of getting to work, the hole only gets deeper, the desperation more profound.
- Prosperity Works
- Think New Mexico
- NM Center on Law and Poverty