Lawmakers work to make payday loans more manageable

July 14, 2006 - Albuquerque, New Mexico

In the two minutes it takes to drive west on Menaul Boulevard from San Mateo to Carlisle boulevards, you'll pass seven payday and/or car-title loan stores.

Between 1st Payday Loans at 5115 Menaul Blvd. N.E. and All American Cash Advance in the 3600 block, there's Cash Smart, which has a drive-through window; Cash Advance, which is now open longer hours; Fast Bucks, where they understand and speak Spanish; and a couple of others.

The job of making small, short-term and very high-interest loans is one of the fastest growing businesses in the United States. New Mexico has 700 payday and car-title stores. Around the country: more than 22,000.

And in New Mexico, a poor state and thus fertile ground, the payday and car-title industry is pretty much free to stampede because no laws control it -- even though some of the state's most prominent political figures are passionate about reining it in.

So why haven't they done so?

Attorney General Patricia Madrid can tell you something about that.

A voice crying in the desert

Madrid has vivid memories of the 1999 legislative session, her first as attorney general, when she spoke to lawmakers in fervent support of a Senate bill that would have capped interest rates at 45 percent.

"I gave a good, spirited speech," she said during an interview at her Albuquerque office. "I was quoting the Bible, the Talmud, the Koran. It was great."

The bill Madrid championed using the ringing tones of an Old Testament prophet was sponsored by state Sen. Cisco McSorley, an Albuquerque Democrat. It was intended to outlaw the three-digit annual percentage rates charged by payday and car-title lenders.

It seemed like a slam-dunk to Madrid. Such outrageous interest rates -- usury is the word -- were clearly wrong. The writings in the Bible, the Talmud and the Koran said so. Surely New Mexico lawmakers knew it, too.

"The newspapers all supported the bill," Madrid said. "I thought sure it was going to pass.

"Was I naive. Sitting in the back while I was making my speech were hordes of lobbyists for the small-loan industry."

It wasn't even close. The Senate defeated the bill by a vote of 28-11.

In sessions since then, other bills designed to regulate what Madrid calls the predatory lending industry have been introduced. Madrid liked and backed some of them and was appalled by ones she felt did little more than legalize industry practices she considers abusive.

One thing the bills have in common, however, is that none of them passed.

McSorley said that's because legislators, always in need of campaign funds, are influenced by large, corporate donations from the payday and car-title loan industry, which would just as soon not be controlled by state law.

"Twenty years ago, you would never have seen the influence donors have now because campaigns were not so expensive back then," he said. "But now, when you have consumer groups on one side who have almost nothing to give and lobbyists on the other side who do, the outcome is almost a foregone conclusion.

"Money solves all moral and ethical dilemmas."

The regulators

The closest New Mexico has come to curbing the payday and car-title lending industry is a set of proposed regulations worked out by the governor's and attorney general's offices and announced in May. If they pass the muster of public input, they could go into effect as soon as next month.

Among other things, the regulations cap the fee on loans to $15.50 per $100 borrowed. As it is now, some payday loan companies charge as much as $25 or more per $100 borrowed.

"This is a tremendous step forward," Madrid said of the proposed regulations.

But they apply only to payday lenders, not car-title lenders. The car-title business requires a set of regulations specific to its way of operating and such regulations, according to Ed Lopez, supervisor of the state Regulation and Licensing Department, will be devised by the state soon.

One thing missing from the proposed payday regulations is a cap on annual percentage rates, an element most consumer advocates consider essential to a strong law.

As much of an improvement as that $15.50 per $100 fee cap sounds, it still translates into an annual percentage rate of 372 percent.

But John Rabenold, vice president of government affairs with Check 'n Go, a Cincinnati-area company with 1,300 payday stores in 33 states, including New Mexico, said an annual percentage rate is not the best way to measure a two-week-long loan.

"A 36 percent APR on $100 for two weeks yields $1.38 gross revenue," Rabenold said during a phone interview from Des Moines, Iowa. "That's a prohibitively low rate. We couldn't afford to pay our utility bills."

He said his company doesn't operate stores in states that cap interest rates at 36 percent.

"If we're not there, people will go back to what they were doing before -- bouncing checks," he said. "Or they will go find loans on the Internet."

Consumer advocates insist that annual percentage rates are important. They say that's because loan companies know full well that many of their borrowers can't afford to pay off loans on time and will continue to renew or roll over loans and pay interest on them for months or years -- eventually paying back many times the value of the original loan.

"The industry is based on a business model where companies make money because people are caught in a debt trap," said Jeanne Bassett, executive director of New Mexico Public Interest Research Group.

She said the cleanest and easiest means of regulating the industry is setting an APR cap.

"With an interest cap, the industry can lend any way it wants but there are no loopholes, no way to get around it," Bassett said.

That's the way it used to be in New Mexico. The Small Loan Act of 1955 capped interest rates at 36 percent for loans up to $150, 12 percent for loans between $150 and $300 and 10 percent for all loans a year after the original due date.

But those limits were repealed in 1981, apparently due to concerns that then-escalating mortgage rates might exceed the caps and hamper mortgage lending in the state.

In the last 15 years, the payday and car-title loan business exploded not just in New Mexico but across the country.

"The industry started when customers realized banks and credit unions were not offering small loans and when they realized their fees for bounced checks at banks were soaring to $25 and $30," Check 'n Go's Rabenold said. "People will use our service to avoid a bounced-check charge and to avoid having their bounced checks reported to credit-rating services."

Payday and car-title businesses found an especially good market in states like New Mexico that do not have interest caps.

Most of the 700 payday and car-title stores in New Mexico are concentrated in areas populated by low-income communities.

According to the Attorney General's Office, the biggest concentration per capita -- about one lender to every 500 residents -- is in Gallup, where many of New Mexico's American Indians live. By comparison, the ratio is about one to 2,500 in Albuquerque and one to 7,000 statewide.

The industry, Rabenold said, puts its stores where they are most likely to be used.

"We locate where the people are and target 70 percent of the population," he said. "The wealthiest 15 percent have other means and the poorest 15 percent don't qualify because they don't have a job or a steady source of income. One-hundred percent of our customers have checking accounts, but their financial institutions are not providing them with a specific need."

Gone with the whim

Even though payday regulations are pending, most people who favor limitations on the industry think they would have more teeth as a law passed by the Legislature.

"Regulations are subject to the whim of whoever is governor," said state Rep. Al Park, an Albuquerque Democrat.

No doubt the well-organized presence of industry lobbyists has played a significant role in thwarting efforts to create such legislation.

Their ranks include or have included those who know the ins and outs of the legislative chambers, people such as:

Albuquerque lawyer Mickey Barnett, a former state senator and one-time Republican national committeeman.
Albuquerque lawyer Dick Minzner, once a majority floor leader of the state House and former state taxation secretary.
John Underwood, a Ruidoso lawyer and former state representative.
Former House Minority Whip Joe Thompson.
Former House Speaker Raymond Sanchez, who's now a University of New Mexico regent.

"I call payday lending the full lobbyist employment industry," Park said.

But he said a fracture among people, including legislators, who want to reform the industry is also to blame for the fact no law has found its way into the books.

Legislation proposed in recent years has been viewed by people on both sides as either too industry-friendly, and thus anti-consumer, or too consumer-friendly, and thus anti-business. Some lawmakers focus primarily on protecting consumers while others feel that payday and car-title lenders fill a need and should not be legislated out of business -- a development that would also cost hundreds of New Mexicans employed by the industry their jobs.

Proposed Regulations

Gov. Bill Richardson and Attorney General Patricia Madrid recently proposed regulations aimed at controlling the payday loan industry in New Mexico. The state is analyzing public comment on the regulations, but they could go into effect as early as next month. They apply only to payday lenders, however, not car-title companies.

The regulations would:

Set a flat fee for new loans and renewals at $15.50 per $100.
Give consumers the sole discretion of renewing a loan two times at a maximum of $15.50 per $100.
Cap the amount of borrowed money at 25 percent of the borrower's gross income.
Give consumers the chance to enter into a longer-term payment plan - up to 130 days - with no additional fees after a second loan renewal.

Legislators are also split between those who think any law is better than none and those who would prefer no law to one they consider inadequate.

Madrid was relieved when a payday bill sponsored by state Rep. Patricia Lundstrom, a Gallup Democrat, died in the 2006 session. Madrid considered the bill so business-friendly that she referred to it as "the industry bill."

Lundstrom and Park, who supported the bill, thought of it as a good piece of compromise legislation.

Lundstrom said even she did not agree with everything in her bill, which included:

Limiting the amount of loans to 30 percent of the borrower's gross monthly income or $1,500, whichever is less.
A three-tiered approach to fee caps.
A maximum of one loan renewal per consumer.
A 98-day payment plan after the one permitted renewal.
A data-collection system that ensures compliance with the law's limits.

But Lundstrom said the payday industry should be regulated and that her legislation was better than nothing.

Stewart, however, contends that the bill and no bill at all amounted to the same thing.

"I'd rather not do anything than to say we took a stab at it or got a start," she said. "I don't think that's the answer for something so egregious."

Check 'n Go's Rabenold said the industry was probably more adamantly divided on Lundstrom's bill than legislators were. He said the moderate faction, which includes his company, supported her bill.

"It was tough love, but we thought we could survive under her bill," he said. "The toughest part was the mandate to create a data base to track individual loans. Our customers don't like that big brother stuff."

He said his company is still reviewing the proposed payday regulations, but he knows it will be even more difficult for the industry to live with than Lundstrom's bill.

State Sen. Bernadette Sanchez, an Albuquerque Democrat who has been trying to get payday legislation with APR caps passed for several years, is not concerned about what the industry can live with.

"The industry claims caps would put them out of business," she said. "But there are 14 states with caps at 36 percent. They might not have four (payday or car-title lenders) to every McDonald's like we do, but they are still in business in those states.

"Besides, I don't think we need 19 payday stores in Gallup or one right after the other on Menaul."

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The Albuquerque Tribune, Ollie Reed Jr., Tribune Reporter

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Lawmakers work to make payday loans more manageable

July 14, 2006 - Albuquerque, New Mexico

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