The New Mexico Legislature has shown everyone how slow and ugly progress can be.
In response to years of horror stories about predatory lenders, the Legislature capped interest rates on small loans.
An ice pick to the throat sounded as comforting as the lawmakers’ solution.
They set the cap at 175 percent.
It’s a staggering fee, but one that conflicted and embarrassed lawmakers called an improvement.
“That was the toughest vote I’ve ever taken,” said Sen. Bill Soules, D-Las Cruces.
Soules voted against the 175 percent cap, a rate he considered immoral.
But during debate on the bill, he encouraged fellow senators to approve the bill setting that cap.
“It was a compromise,” Soules told me last week. “Some lenders were charging 1,000 percent, and the average was over 300 percent. I was pushing for 36 percent, which is still high.”
Soules said he couldn’t bring himself to vote for a 175 percent interest ceiling on small loans. He also didn’t want to see a continuation of the system in which uncontrolled interest rates trapped poor people in a life of debt.
The cap of 175 percent took effect in January 2018. At the time, one person in the state was paying an interest rate of 1,679 percent on an installment loan.
Now, with people in financial pain because of the coronavirus pandemic, Soules says he again will push to lower the interest rate on small loans to 36 percent.
Operating independently of Soules, the public policy organization Think New Mexico also is advocating for a maximum rate of 36 percent.
Fred Nathan, executive director of Think New Mexico, has another proposal to complement a cut in the interest rate. He says legislators should make financial literacy a requirement to graduate from high school.
Nathan’s organization just compiled a historical report on interest rates in New Mexico and distributed a copy to all 112 state legislators.
It shows the state capped interest rates on small loans at 36 percent from the 1950s until the early 1980s.
“The interest rate cap worked well until an accident of history intervened,” Nathan and colleague Kristina Fisher wrote in their report.
High inflation in the 1970s and early ’80s drove up national interest rates. In reaction, the Legislature in 1981 ended limits on interest rates for all loans.
Floodgates opened and predatory lenders poured in. The state teems with stores selling small loans.
By Nathan’s count, there is one lending store for every 3,800 residents in New Mexico. McDonald’s has one restaurant in the state for every 23,000 residents.
Nathan and Fisher say stores selling small loans continued to thrive after lawmakers instituted the 175 percent cap on interest rates.
Eighty percent of the loans were refinanced because customers couldn’t pay the balance in the agreed-upon period.
The state tracks these small loans through the Regulation and Licensing Department. New Mexico, with a population of about 2 million, had 592,398 small loans last year. The total amount of the loans was $666 million.
Think New Mexico’s report is full of other depressing numbers.
New Mexicans pay more for a $500 loan due in six months than residents of all but seven states.
Oklahoma allows 204 percent interest, and Mississippi permits 305 percent.
Delaware and Missouri have no cap on interest. A related system exists in Idaho, Utah and Wisconsin. They have no cap unless an interest rate is deemed “unconscionable.”
On a two-year, $2,000 loan, New Mexico’s 175 percent interest rate also is one of the nation’s highest. It is exceeded by eight states without any cap, or a standard of certain rates being unconscionable.
For a $2,000 loan, 33 states cap interest rates at 36 percent or less. Arkansas has the lowest rate at 17 percent.
Many of New Mexico’s more high-powered lobbyists have packed the Capitol to argue that a 36 percent interest rate would be bad for business and consumers who can’t qualify for standard bank loans. They found plenty of receptive lawmakers.
In 2015, when Soules sponsored a bill to cap interest rates at 36 percent, lobbyist Scott Scanland said he represented a lending company with 12 stores in New Mexico. Store employees made an average of $24,000 a year with benefits, Scanland said.
“This bill will kill jobs because my client will go out of business,” Scanland told the Senate Corporations Committee.
Scanland is married to state Rep. Doreen Gallegos, D-Las Cruces, the House majority whip.
The Corporations Committee killed Soules’ bill. It was chaired by then-Sen. Phil Griego, D-San Jose, who was always a friend to corporate interests.
Griego resigned from the Senate soon after. He was the target of an ethics investigation. Griego later served a state prison sentence in a public corruption case unrelated to the lending industry.
Soules and Nathan said a 36 percent interest rate strikes many people as exorbitant. They have settled on that rate as their objective for one reason: Congress in 2006 approved an interest cap of 36 percent for military families, who often are young and have little in savings.
“This federal law already protects 17,741 active duty, National Guard and reserve members in New Mexico from high-interest predatory loans,” Nathan said.
Still, lobbyists have moved certain New Mexico lawmakers with their claim that a 36 percent cap will drive lending companies out of business.
Sen. Mark Moores, R-Albuquerque, told me he prefers a free-market system in which companies compete for the lending business.
Soules says a free-market system works well enough in many cases, but not this one. An imbalance of information exists between poor people desperate to pay a bill and lending companies charging 175 percent interest. This gives the company an opening to ensnare customers in a cycle of debt, he said.
Moores said at least the state’s 175 percent interest rate is regulated, a system he finds preferable to the days of loan sharks collecting enormous interest payments or responding with violence.
New Mexico lawmakers will go to work for 60 days starting in January. To be seen is whether the pandemic restricts attendance at the Capitol.
A surer bet is all the lobbyists for lenders will be working overtime, in or outside the building.
With their spin, the terrible law allowing a 175 percent interest rate will become something beneficial to the little guy. Lobbyists will say it helped feed a family and make sure the kids received Christmas presents.
No mention will be made of those presents not being paid off until Easter — of 2024.