Predatory Pay Day Lending by Meg Meltz

predatory-1In Brief:  Small, short-term loans commonly referred to as “Payday Loans” may be car title loans, payday loans, check cashing, cash advances, tax refund anticipation loans, etc. In the US, Payday loan borrowers spend approximately $7.4 billion annually at 20,000 storefronts and hundreds of websites, plus additional sums at a growing number of banks. In New Mexico these loans start at an annualized interest rate of 400%.

The loans are a highly controversial form of credit, as borrowers find fast, short-term relief but most often struggle for months to repay obligations which were marketed as lasting only weeks. While proponents argue that payday lending is a vital way to help underserved people solve temporary cash-flow problems, opponents say that the practice preys on overburdened people with expensive debt that is usually impossible to retire on the borrower’s next payday. For more on this click here from a Pew Trust study.

Who Borrows? Why? And Are There Alternatives?

predatory-2“Most borrowers use payday loans to cover ordinary living expenses over the course of months, not unexpected emergencies over the course of weeks. The average borrower is indebted about five months of the year.” Pew Charitable Trust.

PEW Charitable Trust’s survey asked borrowers why they first took out a payday loan. Borrowers’ initial reasons stem from an ongoing need for income, rather than a short-term need to cover an unexpected expense.

Over four times more storefront borrowers used their first payday loans for a recurring expense (69 percent) than for an unexpected expense (16 percent). These findings provide a sharp contrast with the conventional image of payday loans, which are advertised as short-term, small-dollar credit intended for emergency or special use. Industry, advocates, and regulators all suggest that using payday loans for recurring expenses is not an effective use of high-cost credit and that, rather, such credit should only be used to cover unexpected expenses for a short period of time.Yet, previous research, as well as discussions with industry leaders, and state-level reports, all make clear that a typical borrower uses payday loans many times per year, and much of this borrowing comes in relatively quick succession once someone begins using payday loans.” And as this report describes, there are other alternatives to borrowing from predatory lenders, alternatives that do not straddle people with a mountain of non-payable debt.

predatory-3A Typical NM Pay Day Borrower. From a 2012 report by the Pew Charitable Trust, this case study: “On April 14, 2011, Sherrie Cline went into New Mexico Title Loans to make a payment on a car title loan she originally took out the year before. She owed about $500, but she didn’t have the money to pay it off. In fact, she needed more money just to pay the bills that were piling up. So she did what she and millions of other Americans have done before her: she rolled the original loan into a new one. She took $250 cash and refinanced $490.14 into a loan of $740.14 that would be due in full just one month later, on May 14. But 30 days later, Cline was no closer to having $750 than she had been in recent memory. Her financial situation hadn’t changed. In her 50s and living with several health conditions, including diabetes, Cline was disabled and living on a monthly disability check that couldn’t even cover the loan.

So on May 20, she went through what became a ritual. She drove over to New Mexico Title Loans, made a payment of $66, then borrowed $200 more and rolled the $750 into a new loan. At an interest rate of 360 percent, that meant come June, Cline would owe more than $275 in interest on top of the new principal of over $900. For the next few months she managed to scrape together enough to pay the interest, between $250 and $275, but never managed to put a dent in the principal, which remained around $1,000.

It might seem that only an emergency could push someone to borrow money this way, but Cline’s situation wasn’t unusual. About 70 percent of storefront lending customers use the money to pay for everyday living expenses like rent, utilities, credit card bills or food, according.”

What would borrowers do without Payday Loans?

predatory4Lobbyists for the industry assert that they serve a vital need in providing loans to individuals who would not be able to access loans. But: “In 2009 Washington State imposed restrictions on Payday lenders. As the chart at left reveals, the restrictions essentially stopped most all people from using storefront lenders, as the amount of lending in dollars dropped by 75% from 2009 to 2010 and continued to drop thereafter. But what could people without access to pay day lenders do to address their cash needs?

Industry lobbyists would assert that in the absence of Pay Day loans, individuals would have no recourse. But 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 there are other strategies that can be employed, as the table at right reveals. predatory5When 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.”  Unfortunately in 28 “Permissive” states, New Mexico being one of them, the unrestricted operations of Pay Day Lenders results in thousands of vulnerable individuals paying 400-900% in interest. And as the research above describes, if a state legislature stands up to lobbyists and predatory lenders, these same individuals find other ways to address their perceived need to borrow.

Many States, Like Washington, Are Imposing Restrictions

States are beginning to regulate Pay Day Lenders in many states with some, so called “restrictive states” prohibiting storefront sites entirely (Restrictive), some predatory-6maintaining the store front lenders, but imposing restrictions (Hybrid); and others, like New Mexico doing essentially nothing to regulate lending activities (Permissive).

  • 28 “Permissive States” (in green), like New Mexico, which allow single-repayment loans with APR of 391% or higher.
  • 8 Hybrid States (orange) which have payday loan storefronts, but maintain more exacting requirements, such as lower limits on fees or loan usage, or longer repayment periods; and
  • 15 Restrictive States which have no payday loan storefronts.

 

What About New Mexico?

Interest rates in New Mexico are not regulated by statute, with the limited exception of the effective 400% rate for “payday loans” that is part of the Small Loan Act. In 2014 the New Mexico Supreme Court issued a decision, State of New Mexico et al v. B & B Investment Group Inc. et al, holding that certain interest rates were unconscionable, ordering restitution of all interest in excess of 15 percent of the loan principal for the loans identified in the suit.

The Attorney General reported that the New Mexico Financial Institutions Division’s (NMFID) 2015 Annual Report indicates that interest rates vary wildly in New Mexico, ranging from 0% to 456.3% on title loans, 929% on unsecured installment loans, 600% on installment loans secured with a vehicle title, 5,460% on secured installment loans, 9,000% on refund anticipation loans, and 386.3% on other loan products. Many of these interest rates exceed those found by the Supreme Court in B & B Investment Group Inc.to be unconscionable.

Why are these loans still legal in New Mexico?

“Storefront lending companies and associations gave nearly $140,000 in political donations in 2013 and 2014, in addition to the money they spent on lobbying. The bulk of that — $115,805 — went to dozens of elected officials, including Republican Gov. Susana Martinez, Democratic Attorney General Hector Balderas and more than half of the members of the New Mexico Legislature, Democrats and Republicans alike. Top of the list, Nate Gentry, R-Albuquerque.

The 18 companies and associations also gave $23,333 to political action committees closely tied to Democrats and Republicans, a New Mexico In Depth analysis shows.”

In 2007, the US Congress passed the Military Lending Act, placing an all-inclusive 36 annual percentage rate (APR) cap on loans made to all active military personnel and their families. This bill provides a model for curbing Pay Day and other forms of predatory lending.  Click here for a short brief on the Act.

Back in 2015, a who’s who of lobbyists looked on as Republicans on a legislative committee shelved two bills that would cap what storefront lenders could charge in interest. Former House Speaker Raymond Sanchez, brother to former Democratic Senate Majority Leader Michael Sanchez and one of New Mexico’s Democratic National Committee members, was among them.  He sat with former Republican National Committee man Mickey Barnett and longtime lobbyist Scott Scanland. From a Trip Jennings report in New Mexico In Depth:

“From May through December of last year [2015], Barnett, Scanland, Sanchez and a number of other lobbyists hired by the payday lending industry spent more than $300,000 on New Mexico’s public officials — wining, dining and contributing to the campaigns of state lawmakers, political candidates, and other elected officials, according to a New Mexico In Depth analysis of data from the New Mexico Secretary of State’s office.”  Jennings went on to quote Ona Porter, president of Prosperity Works and co-chairman of the New Mexico Fair Lending Coalition, which supports the bills that would cap interest rates at 36 percent, who didn’t hesitate when asked what she thought the effect of the money was. “They are buying votes,” she said. Click here for the full NM In Depth report.

And they are at it again.  HB 26 and SB 15 would curb rates at 36%.  But as reported in the Santa Fe New Mexican, Sanchez and Barnett are back on the Roundhouse floor, spinning tales while raking in huge pay days themselves:  “Former House Speaker Raymond Sanchez, a lobbyist for the Consumer Installment Loan Association, told the committee how his father couldn’t get a loan from a bank when he was starting a business after World War II. He said Roybal Caballero’s bill “would wipe out loans for people like my father.”  I am guessing Sanchez would find an alternative source of funds for his father, rather than subject him to paying 400-900% interest.

The New Mexican goes on to report “The governor would veto it anyway,” former Sen. Steve Fischmann, co-chairman of the New Mexico Fair Lending Coalition said, referring to House Bill 26, sponsored by Rep. Patricia Roybal Caballero, D-Albuquerque. But Fischmann, a Mesilla Park Democrat, said supporters of the bill are in negotiations with certain parts of the industry that are backing another bill aimed at regulating businesses that offer small loans at high interest rates. “I think we are getting close to a deal,” Fischmann said. That bill, HB 347, sponsored by Rep. Patty Lundstrom, D-Gallup, would in effect set maximum interest rates of 175 percent.”

And so justice prevails: a cap is near, a cap that would cap loan rates at a mere 175%.  Raymond Sanchez and his lobbying ilk should be proud of their work. And we should be ashamed that our representatives have seen fit to again capitulate to the influence of money and lobbyists.