The potential morass of a debt spiral spread out from a car accident.
An Española man, sole caregiver for his granddaughter, took a financial risk that thousands of New Mexicans do each year: He borrowed $8,545 from a local storefront lender to help cover expenses stemming from the accident. The money, however briefly, came in handy—until the grandfather realized the interest rate was 130.68%.
Quickly, the gravity of the situation began to hit him as he realized he now had 48 monthly payments to make over four years at $962 a pop. With various finance and other charges stacked on top, it all added up to an impossible-to-meet $30,000-plus over the term of the loan.
The man's monthly income on Social Security: $1,248 a month.
By signing the loan documents, he was well on his way to debt that could crush him.
The rescue came from Guadalupe Credit Union President and CEO Winona Nava and her team who, along with counseling services and even local law enforcement, had created an association in the summer of 2019 specifically to help grandparents raising their grandchildren.
"He was going to lose his car because [the lender] didn't care if he could afford to pay them," says Nava, who recounted the man's plight for SFR. "He gets home and realizes that…they're either going to have to live in the car and make that payment, or he's going to lose the car and won't have a way to go get groceries, take his granddaughter to school, all that stuff. He was really panicked. So…the counselor told him to go to Guadalupe Credit Union and they'll help you, and that's what we did."
Nava and her team created ways to catch people before they start circling the drain of debt. This story is not a deviation from the norm of what happens when people, desperate to make ends meet, take out a short-term loan with dizzyingly high interest rates.
New Mexico is among the last states in the nation to allow triple-digit interest rates on short-term, small-dollar installment loans—not to mention stacking fees and other costs common for this sector of the lending industry.
The 175% rate cap here is third-highest nationally for a $500, six-month loan, and highest in the country for a $2,000, two-year loan, according to the National Consumer Law Center.
Government consumer protection lawyers have won court victories that could have reined in the "predatory loan" industry, but enforcement has been sparse in the handful of years since. And legislative attempts to align New Mexico with national best practices, such as a mean rate cap for these types of loans at around 35%, have foundered for more than a decade, as the industry has showered politicians of both parties with campaign donations and deployed powerful lobbyists to lean against reform.
Our state's 175% cap came in 2017, with what many lawmakers called a "compromise" that would at least place some limits on the industry.
That didn't go nearly far enough, reformers say, pointing to a Morning Consult poll from January 2020 that shows New Mexicans favor much stiffer regulation by a wide margin. A week ahead of the 2021 legislative session, there's fresh hope that a more progressive Legislature might tighten the screws.
State Sen. William Soules, D-Las Cruces, tells SFR he'll sponsor a bill—and not for the first time—that would force lenders to restrict annual interest rates, including fees and costs, to 36%.
This year's bill, which is still in the works, is modeled after legislation in other states and the 2006 federal Military Lending Act, which restricts lenders to a 36% rate cap for active service members and their families, plus several other rules.
The new legislative landscape, with its leftward turn during last year's elections, taken together with economic hardships brought on by the COVID-19 pandemic, have created a feeling of more urgency this year, Soules says.
"Many of the more conservative legislators who were against this in the past I think are not around anymore," he says. The pandemic "has just exacerbated inequities and inequalities, and it has made it even more crucial for us that we don't let more people get trapped into that debt cycle, because this is tough for everyone and can get even tougher for those on the bottom levels."
Soules expects resistance from familiar corners. The southern New Mexico senator, who has been in the Legislature since 2013, and others acknowledge that Gov. Michelle Lujan Grisham's agenda for the session isn't likely to feature lending reform prominently, given the lengthy list of weighty issues awaiting lawmakers starting Jan. 19.
"I am hopeful. There's a strong coalition, there's a lot of community support," says Karen Meyers, an Albuquerque-based consumer attorney with decades of experience working on storefront lending concerns, including a stint as Consumer Protection Division chief at the state Attorney General's Office and another at the Consumer Financial Protection Bureau in Washington, DC. "More and more people are understanding that 175% was perhaps the first step toward reducing the rate, but isn't anywhere near what's affordable for New Mexicans. And New Mexicans know that."
Tripp Stelnicki, a spokesman for Lujan Grisham, says it's too early to comment on whether she'd sign a bill that hasn't yet been filed, but adds: "In general, the governor is supportive of cutting down or cutting out predatory lending to protect New Mexico workers and families."
Slippery slope of debt
To present a picture of how the storefront lending industry operates in New Mexico and elsewhere, SFR interviewed lawmakers with lengthy histories of pushing for reform and two consumer attorneys with lengthy histories in the state. SFR also reviewed campaign finance filings and data and analyses gathered by the National Consumer Law Center, the Center for Responsible Lending, the Consumer Federation of America and Think New Mexico, a Santa Fe-based think tank that is aiding in this year's push for a 36% rate cap.
Of the companies with the biggest footprint in the state, as identified by Think New Mexico, SFR tried to contact 21 of them. Only two got back to us: OneMain Financial, which already imposes a 36% cap on its loan products, and Regional Finance, whose representative declined to comment.
Maps created by SFR and advocacy groups show that the lending stores are almost always clustered in lower-income neighborhoods and, in many cases, near Native American communities.
For example, SFR analyzed the locations of the 16 lending storefronts in Santa Fe County. Just one is located near downtown, or the north side of the city, which also has the lowest percentage of Hispanic/Latino residents and significantly higher median incomes by Census tract.
The other 15 stores are located on the Southside and middle sections of Santa Fe, where the percentages of Hispanic/Latino residents are at least 50% and as high as 77%, with median incomes between $30,000 and $54,000.
Reform advocates point to sales tactics and marketing techniques used by the lenders that offer the promise of short-term relief for those struggling, but leave out what comes after borrowers sign on the dotted line.
"Looking at many, many loan files over the years, what's evident is that these loans put people in long-term debt which they struggle to get out of," Meyers says. "Many times they cannot, so they refinance or roll over the loan repeatedly, keeping them in debt for years."
She points out that debt has been shown to create financial instability for families and, in turn, negatively impacts health outcomes, their ability to maintain housing, provide adequate food for children and other intractable problems, including emotional impact "because of the stress that debt causes."
"When they default, they are subject to debt collection, which can be abusive," Meyers says.
Albuquerque-based attorney Raymond Sanchez, who wielded the speaker's gavel in the state House for years, does lobbying work these days. Among his clients are short-term lenders, and he tells SFR he'll oppose Soules' reform bill—as he has with previous efforts.
His reasoning: The cap would put mom-and-pop lenders out of business and push bigger companies out of New Mexico and online instead, all the while further disadvantaging low-income people in the state.
"Installment lenders have been around since the '50s and they've been a mainstay in the state of New Mexico where banks or credit unions don't lend money to people who don't have any background with financial institutions," Sanchez tells SFR. "They take care of the local people and they'd be out of business. I've talked to all of them. They'd be out of business if 36% goes into effect."
Sanchez admits that while the lenders that he represents might sometimes require an APR that is higher "than people would like," the owners of the companies are still running a business and have to make a profit.
"I don't understand what Soules and anybody else is doing trying to do this," Sanchez tells SFR. "I guess it's a political issue. If I were in the Legislature, I wouldn't be introducing stuff like that. It just makes no sense. Why run people out of state and have people go to the internet to borrow money where there is absolutely no regulation?"
The former speaker's argument is familiar to advocates and policymakers who have wanted to change the lending industry.
Meyers points out that 85% of the lending companies that operate in New Mexico, many of which are massive, multi-state corporations, are based in other states. Their business models target states with weak regulation where they can come in, set up storefronts and take profits out of the state, she says. In 2019, those companies charged over $220 million in finance charges to New Mexicans.
"If a profitable business means that they are exploiting New Mexicans, I don't think that's a reason to allow them to continue to profit by putting people into long-term debt," Meyers says. "There are some of these companies that have complied in states with much lower rates that have continued to do business. It's their choice: how much profit they say they need to continue doing business."
Companies with storefronts in New Mexico also operate in Arkansas, which has a 17% rate cap, and Georgia, where the cap is 36%. Those are states with similar generational poverty to what's seen in New Mexico.
Even with the lax regulatory and legal framework in New Mexico, not all storefront lenders charge borrowers the full 175% interest.
OneMain Financial, a lender with storefronts across the state, voluntarily imposes an APR cap of 36% on all loan products, according to spokeswoman Kelly Ogburn. OneMain also helped about 2,500 customers in New Mexico by allowing more people to qualify for borrowers' assistance and suspending income verification requirements and late fees for 40 days, she says.
GCU to the rescue
Sanchez' contention that banks and credit unions don't offer lower-interest loans to many low-income people also falls flat.
Guadalupe Credit Union created two programs specifically to help people spiraling into debt, including Predatory Debt Relief Loans, which help people who have already taken out a loan from a storefront lender and are struggling to pay it off. Guadalupe helps people pay off their loans by offering interest rates around 20% versus the rates in the 100s that most lenders require.
The borrower also has to agree to meet twice with a financial coach to make sure they can afford to pay the loan with Guadalupe, Nava, the credit union's CEO, tells SFR. Other requirements include that the payment has to be 20% or less of the borrower's monthly income, they have to have been employed for two years and they have to commit to meet monthly with a financial coach once they are accepted for a loan.
The requirements were put into place for a specific reason: Guadalupe has to make money, too.
"They have to come in and see a financial coach," Nava says. "This allows them to show some commitment to wanting to improve the situation."
Guadalupe also has a Borrow and Save loan, which helps low-wealth households build savings and reduce reliance on high-cost loans. The interest rates are in the low 20% range and with each installment, money goes into savings as well as to the borrower.
Nava says most credit unions offer small-dollar loans, but that the Predatory Debt Relief Loan program is "unique" to Guadalupe.
Several municipal employers around the state also have begun to offer short-term, lower-rate loans as well. Members of Nava's staff will testify at this year's legislative session in support of the upcoming bill. Nava herself is "100%" in favor of the reform.
"I would love to in my lifetime see that type of lending go away," Nava says of short-term loans with sickeningly high interest rates. "I don't believe they're necessary because…you can join a credit union and get a small-dollar loan."
‘New Mexico is one of the last’
Beginning at statehood, New Mexico had what's known as a usury statute that essentially capped interest rates on all kinds of loans. It was abandoned in 1981, opening the door to decades of a gold rush of largely unregulated small-dollar lending, including what used to be known as "payday loans."
Legislative reform efforts have been stymied for years, as lending companies have hired teams of lobbyists and spread campaign contributions around the state.
The most recent campaign finance filings reviewed by SFR show more than $40,000 donated by the industry to a nearly evenly split number of Democratic and Republican lawmakers during the 2020 season.
New Mexico Senate Majority Leader Peter Wirth, D-Santa Fe, took his first shot at reducing the rate cap to 36% in 2009, with a bill supported by then-state Attorney General Gary King. He ran into an industry-backed brick wall.
He supports Soules' effort this year, pointing out that aside from a small handful of states that have essentially no limits on interest rates other than the legal distinction of "unconscionability," New Mexico's current rate of 175% is topped only by Oklahoma and Mississippi for the two largest installment loan categories.
"Once again, New Mexico is one of the last to fix something like this, and I think now more than ever it's time to give it a real shot," Wirth tells SFR. "With the poverty issues that we deal with and now with COVID and the financial crisis that's facing many families, this particular option is a really dangerous path for them to take."
Soules has tried to get a 36% rate cap passed in the Legislature for years as well.
The best chance for reform came in 2017, but the bill that ultimately passed, presented during legislative debates as a "compromise," resulted in the 175% rate.
Wirth and Soules described similar experiences with a difficult choice: Make some incremental change in an area in which it was sorely needed, or stand against what they both believed was a law that would not protect New Mexicans enough.
Both voted against the measure; Soules called it his toughest-ever vote during eight years in the Senate.
"I decided that I couldn't sleep with myself if I voted for 175%," Soules says. "Now, I get attacked by people saying, 'How could they possibly be promoting 36% interest? That's outrageously high. How could you do this to poor people?' I explain to them that currently it's 175%."
Reformers anticipate at least two voices they've heard during past legislative sessions to once again stand in the way of a 36% cap: Sen. Mark Moores, R-Albuquerque, and Rep. Patricia Lundstrom, the Gallup Democrat who chairs the House Appropriations and Finance Committee. Lundstrom, in particular, has long been considered an ally to the lending industry and co-sponsored the 2017 legislation.
Neither Moores nor Lundstrom responded to SFR's requests for interviews.
For John Thompson, a former colleague of Meyers in the AG's Office who now works for the Consumer Financial Protection Bureau in DC, the hurdles to change in the Legislature aren't surprising.
"Our efforts to do something substantive at the legislative level tended to die in committee," he tells SFR. "My stomach turned every time I went to the Roundhouse."
So, along with Meyers, he set his sights on litigation, spearheading two landmark cases in which government lawyers won significant court victories in 2013 and 2014 that could have laid the groundwork for more enforcement going forward.
"When [lenders] constantly hector existing borrowers to take out new loans for increasing amounts; when they constantly try to upsell borrowers into loans for larger amounts than they even asked for; when they try to get borrowers to refinance their loans rather than pay off their loans and get off that debt treadmill that they're on, that is a procedurally unconscionable," Thompson says, using the court's verbiage. "And it is at the core of small-dollar lending. It is a crucial component of their profitability. The New Mexico Supreme Court said you can't do that and gave the AG's Office the power to investigate businesses that engage in those practices."
There appears to have been little, if any, such investigation in recent years.
Thompson favors reform through a different mechanism: ballot initiative. Nationally, Arkansas, Arizona, Montana, Ohio and others have put the question on the ballot. Montana, a historically red state, passed it by a margin of 72-28 in the 2010 midterm elections, which saw a red wave across the country.
Soules tells SFR the ballot initiative route in New Mexico would be difficult, because voters are only asked questions about proposed amendments to the state constitution. But he is hopeful that, finally, his bill has a real chance to pass this year with support from multiple corners, including most New Mexicans.
"Every time voters have been given the opportunity, no matter whether they are red or blue voters in red or blue states, they have voted by a supermajority to cap interest rates for small-dollar lenders," Thompson says. "I don't think the poor in New Mexico are different from the poor in Arkansas, Ohio or Montana, in that the experience of poverty just isn't that different."