ALBUQUERQUE—Senator
Bernadette Sanchez (D-Bernalillo) announced that she will introduce legislation
to cap the interest rate allowed on payday loans, auto title loans, and tax
refund loans.
"Triple-digit rates are bad for consumers, bad for our economy, and are
creating a cycle of debt for too many New Mexicans," said Senator Sanchez,
citing the average 520 percent interest charged on a payday loan.
The bill, called the Consumer Loan Act, will cap interest rates at 36 percent
APR and maintain the same fees for licensure as currently required. Fifteen
states have enacted similar interest rate caps and lending volume remained the
same.
"We know that caps work and similar laws in other states have given consumers
more time, lower rates, and access to credit," said Ray Prushnok, NMPIRG
consumer advocate. "Fifteen states have caps and we believe that New Mexicans
deserve the same."
Sanchez introduced similar legislation to regulate payday loans in 2003, but
the bill failed 19 to 20 in the New Mexico Senate. New Mexico removed its interest
rate cap in 1981 for all lenders with the exception of pawnshops. Since, a new
industry has emerged charging high-interest rates for small advances.
According to NMPIRG, a nonpartisan consumer organization, payday lenders have
returns of 30 percent or more, twice that of the pharmaceutical industry. Unheard
of a decade ago, there are now four payday lenders for every McDonald's restaurant.
In other states, lenders have evaded reforms by requiring insurance, fees, and
even the sale of furniture. The bill will prevent such loopholes while protecting
consumers. The bill exempts banks, credit unions, and other mainstream lenders.
A fundamental problem is repeat borrowing. Borrowers, on average, receive eight
to 13 payday loans per year from a single payday shop and often take out multiple
loans at once. Typically these are loan flips (rollover extensions or back-to-back
transactions) where the borrower is paying a fee for no new money, never paying
down the principal owed. Only one percent of all payday loans go to one-time
emergency borrowers who pay their loan within two weeks. An interest rate cap
will lower the payments and provide consumers with more time to repay loans.
Alan Sanchez, executive director of the Catholic Conference, the public policy
voice for the three Catholic Bishops in New Mexico, states that the Catholic
Conference has made capping interest rates a priority for the upcoming legislative
session. The Catholic Church views this as a social justice issue and they work
with many of our state's working poor that have fallen into a predatory lending
debt trap.
"The level of support for an interest rate cap has increased in addressing
this visible, problematic issue," said Senator Sanchez citing many New
Mexico organizations including AARP, ACORN, the Conference of Churches, Human
Needs Coordinating Council, Lutheran Office of Governmental Ministry, McKinley
County Health Alliance, the Native American Human Resources Association, New
Mexico Voices for Children, the Navy, and Department of Defense.
