The Lending Shuffle

Interest rate cap on small-dollar loans has perhaps its best shot ever, but challenges for reform remain

The most recent push in a yearslong fight to rein in interest rates and fees for short-term, small-dollar loans in New Mexico must clear several hurdles—old and new—as this year's legislative session passes the midway point.

Senate Bill 66 would align New Mexico with most of the US, not to mention federal law designed to protect military families, by capping the total amount of rates and fees from storefront lenders at 36%.

The rate now is restricted to 175%—the result of 2017 "compromise" legislation that still left New Mexico among a tiny number of states that allows triple-digit interest rates. That's a hallmark of what's often called "predatory lending," as SFR reported in a cover story on Jan. 12.

This year's bill, co-sponsored by Democratic Sens. William Soules of Las Cruces and Katy Duhigg of Albuquerque, passed the Senate Tax, Business and Transportation Committee on Feb. 9 on a 7-4 vote, with each of the committee's Republicans against.

Next up was the Senate Judiciary Committee, where members heard three hours of testimony and debate Monday, which began with an agreement to postpone a vote until a substitute version of SB 66 could be prepared for a second hearing today.

Monday offered a preview of support and opposition.

Several high-profile lobbyists, including former state House Speaker Raymond Sanchez, lined up in the Zoom waiting room to rail against the measure.

Sanchez's arguments, some of which were echoed by business owners and the committee's three Republican members, were familiar to reformers who have pushed for tighter regulations on the industry for more than a decade: Restricting storefront lenders will shutter small lending shops, leaving low-income people high and dry and with no other way to secure a little cash in a pinch.

"The claim that all the lenders will leave the state, that they can't do business at lower rates, that it will harm people rather than help people—all of those are the same arguments that were raised when there was a multi-year effort to eliminate payday lending," Karen Meyers, an Albuquerque-based consumer attorney and an expert witness for SB 66's sponsors, tells SFR.

That regulation finally came in 2017 and did away with single-payment, short-term loans in which the rates were 400% to 1,000%. Loans still allowed are multi-payment, with a rate of 175%.

"That's still excessive, in my opinion," says Meyers, who was speaking generally about the years she's spent fighting for reform, not responding directly to specific senators during this year's session. "The number of companies doing business in New Mexico has been reduced slightly, but is still around 600 licensees. You can still drive up and down many streets and see high-cost lender after high-cost lender."

Soules tells SFR he remains optimistic about the chances for his bill to pass. And Gov. Michelle Lujan Grisham listed lending reform among her priorities for this year's session.

But in Senate Judiciary, all three Republicans—Mark Moores of Albuquerque, Greg Baca of Belen and Cliff Pirtle of Roswell—indicated Monday that they're likely to vote against it. And even if the bill receives enough votes from the committee's six Democrats to move to the full Senate, a new strain of opposition raised at Monday's hearing may stand in its way.

Sen. Daniel Ivey-Soto, D-Albuquerque, grew frustrated several times during Monday's hearing when trying to determine whether SB 66 would constrain refinancing of small, short-term loans—a tactic used by the industry and often cited by reformers as a way to trap borrowers in ever-increasing debt.

Proponents conceded that the proposal caps interest rates and fees, but does not prohibit "rollover loans."

"It appears we are just trying to contain the predatory practices instead of addressing them," Ivey-Soto said. "I would like to see a more comprehensive approach."

Had SB 66, without Ivey-Soto's suggested expansion, been law 15 months ago, it may have saved Michael Yazza some money, but not the experience of a typical industry pattern.

In December 2019, Yazza wanted to buy Christmas gifts for his children, 10 and 8, and his nieces and nephews. Yazza's auntie told him about The Cash Store, an installment loan chain located near his home in Navajo, New Mexico.

He easily took out a $300 loan. But when he went into the store to make a payment before the COVID-19 pandemic began last spring, employees convinced him to refinance for $800 and then again for $1,000.

Yazza was short on cash, had just lost a family member and had transferred to a new job that hadn't paid him yet, so it didn't take much to push him into taking out larger and larger loans.

He quickly fell behind on payments for the refinanced loan, which carried a hefty 174% APR. Now, The Cash Store is suing Yazza for the amount, upwards of $1,100.

SFR reviewed documents detailing Yazza's loan; they confirm industry tactics decried by reformers.

Yazza tells SFR he thinks the cap would be "really good," considering the high interest rate on his loan and how the lender convinced him to roll it over.

"They made it sound like it was a good opportunity, they didn't really explain…the financing charges," Yazza says.

Soules tells SFR he would consider an amendment from Ivey-Soto to address the refinancing issue.

"As long as it's not gonna slow it down or weaken the bill, that's not a problem," he says. "However, that's a more nebulous thing to try and figure out. So, I think it's important that we get this through with a 36% all-in cap and, if [a new refinancing strategy] is a way the industry tries to get around that cap, maybe we come back with legislation in two years for rollovers."

The senator more quickly brushes off arguments against reform from the industry, its lobbyists and his Republican colleagues—particularly the notion that alternatives to storefront lending from credit unions, banks and others keep those most in need of a quick cash infusion less than $1,000 or so from getting it.

"This is not about access to credit," he told the Judiciary Committee on Monday. "It's about exposure to debt. If companies can't afford to make small-dollar loans at 36%, they shouldn't make the loans."

Wednesday's hearing is scheduled for 1:30 pm. If the bill passes, it would likely head to the full Senate either Friday or early next week. The legislative session ends March 20.

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