Regulations on small loans law do not adequately protect borrowers

ALBUQUERQUE— The Financial Institutions Division issued regulations today implementing a state law that caps interest rates on storefront loans. The FID made almost no changes to the minimal regulations it proposed earlier this year, even though New Mexicans overwhelmingly asked the state to improve enforcement by collecting data on the industry, closing loan renewal loopholes, and requiring lenders to disclose the true costs of loans to borrowers and to make those disclosures in the language a borrower understands.

“All New Mexicans deserve access to fair and transparent loans under reasonable terms, but unfortunately, these regulations completely fail to fulfill the legislature’s  primary intent to protect borrowers,” said Lindsay Cutler, attorney at the New Mexico Center on Law and Poverty. “In fact, they are so lacking in teeth that New Mexico families have no guarantees that the terms of their loans will be clearly explained to them. Worse still, the regulations are completely bare of mandatory data reporting requirements, which will make it impossible to verify that storefront lenders are actually following the law.”

Before passage of HB 347 in the 2017 legislative session, many small loans were unregulated and borrowers were frequently charged interest rates of 300 percent APR or more. Reforms to the Small Loan Act went into effect January 1, 2018, capping interest rates at 175 percent APR and eliminating traditional short-term payday and title loans.  All storefront and online loans made in 2018 must have a minimum loan term of 120 days, and require a minimum of four payments.

However, the FID did not issue regulations to reflect the new standards until today, a full eight months after the law went into effect. The regulations the division did issue do not require lenders to provide borrowers with meaningful information about the costs of their loans and the consumer protections required by the new law. The regulations also fail to address the need to make disclosures and financial information available in a language that the borrower understands.

“It’s unfortunate that New Mexico FID did not take the opportunity to include language assistance as part of the new regulations, knowing that a majority of border town small loans are from Navajo consumers. It is important that we continue to advocate for legal contracts to be explained in the Navajo language or any other language in which consumers are able to fully comprehend the contracts they are signing,” said Leonard Gorman, executive director of the Navajo Nation Human Rights Commission.

The new regulations also fail to close loopholes in loan renewals, which may extend old loan terms, leaving borrowers vulnerable to interest rates and fees that are now illegal under the law. In addition, the regulations do not require lenders to provide data on small loans, making it impossible to tell if storefront lenders are adhering to the law and how the law is impacting New Mexicans. The FID failed to explain why it elected to ignore the dozens of comments submitted by New Mexicans asking the division to enact meaningful consumer protections.

Without meaningful regulations and reporting requirements, the FID and legislators cannot verify that the consumer protections intended by the new law are reaching New Mexico families. This means that the small loan industry, which makes hundreds of millions of dollars from New Mexico families, will continue to operate without transparency.

“We’re pleased that the FID has, at long last, finalized and posted regulations to implement the 2017 law. However, these regulations do very little to address our concerns and lack the substantive consumer protections we have been advocating for,” said Michael Barrio, director of advocacy at Prosperity Works. “An appropriate regulatory framework that adequately addresses areas that allow lenders to continue to circumvent limitations and protections that have been put in place by the 2018 small loan reforms is absolutely necessary if we hope to honestly protect hard working New Mexicans from predatory lending practices.”

The finalized FID regulations can be found here: http://164.64.110.134/nmac/nmregister/adoptedxxix16

A factsheet on regulations the FID should enact to enforce the small loans act can be found here: http://nmpovertylaw.org/fact-sheet-fid-must-enact-regulations-to-enforce-the-small-loans-act-2018-07/

Indian Affairs Committee asks for FID report on law capping store front loans  

CHAMA—At a legislative hearing in Chama today, the New Mexico Indian Affairs Committee passed a resolution asking the Financial Institutions Division to report on how it is enforcing a new law that caps interest rates on small loans and to provide data collected from lenders on the loan products they sell. The FID report is due for presentation to the committee later this fall.

“All New Mexicans deserve access to fair and transparent loans under reasonable terms, but generations of low-income families and Native American communities have been aggressively targeted by unscrupulous store front lenders,” said Lindsay Cutler, attorney at the New Mexico Center on Law and Poverty. “The FID has a duty to enforce the new law and protect families from unfair lending practices. The new law went into effect in January, but FID still hasn’t updated its regulations to reflect the new standards. Without information on FID enforcement, we don’t have a clear picture of how the small loan industry is doing business with New Mexico families and how the new law is affecting New Mexicans. We’re grateful that the Indian Affairs Committee has asked the FID to report on its enforcement efforts.”

Before passage of HB 347 in the 2017 legislative session, most small loans were unregulated and borrowers were frequently charged interest rates of 300 percent APR or more. Reforms to the Small Loan Act are now in effect, capping interest rates at 175 percent APR and eliminating traditional short term payday and title loans. The new law requires lenders to provide clear information about the costs of loans, allows borrowers to develop a credit history when they make payments on small-dollar loans, and sets minimum contract terms for small loans, including at least four payments and 120 days to pay off most loans. Refund anticipation loans are exempt from those requirements.

The FID proposed regulations to implement HB 347 in late February 2018 to eliminate inconsistencies between the new law and the old payday lending regulations. Loan renewals, however, are not addressed by the FID’s proposed regulations. This loophole could leave borrowers vulnerable to interest rates and fees that are now illegal under the law for new loans. The Center urges the FID to close this loophole by clarifying that renewals are subject to the law’s fee limit, interest rate cap, and payment schedule requirements for new loans.

“Passing HB 347 was a necessary first step, but enforcing regulation and compliance with the law is the critical next step in protecting our families and ensuring that all New Mexicans have equal access to affordable loans and protection from predatory lending practices,” said Michael Barrio, Director of Advocacy for Prosperity Works. “The data and reporting transparency we seek is necessary to close loopholes that could render HB 347 ineffective, and to augment existing consumer protections in New Mexico. Our focus, now, is on creating transparency and eliminating loopholes that can be used to continue exploiting hard-working New Mexicans. We’re making progress every day.”

The FID’s proposed regulations can be found here: www.rld.state.nm.us/financialinstitutions/

The Center’s comments on the proposed regulations can be found here: https://wp.me/a7pqlk-10H

A factsheet on regulations the FID should enact to enforce the small loans act can be found here: http://nmpovertylaw.org/fact-sheet-fid-must-enact-regulations-to-enforce-the-small-loans-act-2018-07/

FID must fix loopholes in regulations to protect New Mexicans from predatory loans

GALLUP— The New Mexico Financial Institutions Division must close loopholes in storefront loan renewals and ensure greater transparency in the small loan industry, said the New Mexico Center on Law and Poverty at a hearing in Gallup today. The FID held the hearing to gather public comment on its proposed HB 347 regulations. The law, passed during the 2017 New Mexico legislative session, imposes a 175 percent APR interest rate cap on small loans. Previous to its passage, most small loans were unregulated and interest rates were even higher.

Gallup, which is almost 50 percent Native American, has the highest concentration of storefront lenders in New Mexico with nearly 50 licensed lenders for a population of less than 23,000. Storefront lenders have long aggressively targeted low-income families and Native communities in the state, pushing loans with high-interest rates or arbitrary fees with little regard for an individual’s ability to repay.

“The Navajo Nation Human Rights Commission office receives a variety of consumer complaints about small loans that Navajo citizens enter,” said Leonard Gorman, executive director of the Navajo Nation Human Rights Commission. “Often times the Navajo consumer is an elder who has been misinformed or not informed of the conditions involving their loans.”

HB 347, in addition to the APR cap, strictly limits the fees that lenders are permitted to charge borrowers, eliminates interest-only payments on the majority of storefront loans, and stipulates that all such loans, except refund anticipation loans, have an initial maturity of 120 days.

Loan renewals, however, are not addressed by the FID’s proposed regulations. This creates a major loophole that leaves consumers vulnerable to interest rates and fees that are now illegal under the law for new loans. The Center urges the FID to close this loophole by clarifying that renewals are subject to the law’s fee limit, interest rate cap, and payment schedule requirements for new loans.

“All New Mexicans deserve access to fair and transparent loans under reasonable terms, including low-income families. But we have a lot of work to do to create a more inclusive economy in our state,” said Christopher Sanchez, supervising attorney at the New Mexico Center on Law and Poverty. “Predatory lending has hurt New Mexican families and our economy in concrete ways, draining millions of dollars from the pockets of those who can least afford it. The FID can meaningfully address this damage to consumers in 2018 by first fixing the loopholes around loan renewals in its regulations.”

In New Mexico, storefront lenders frequently market and encourage borrowers to “renew,” “refinance,” or “rollover” their existing loans. High-cost small loans, with interest rates and fees that add up to several times the loan principal, are often nearly impossible for borrowers to pay off in the short terms that lenders offer.

For many people, the only solution at the end of the repayment period is to renew the loan and pay costly fees and extended high interest payments. Repeated renewals dramatically increase the cost of a small loan and make it extremely difficult for a borrower to calculate the long term financial consequences of the extension.

For example, a Zuni man with a full-time income was struggling to make payments on a $125 loan he took out from a Gallup company 10 years ago. When he was unable to pay back the principal, interest, and high fees by the date the loan was due, he renewed the loan rather than default. He has now renewed his loan over a dozen times and paid the company thousands of dollars in interest and renewal fees. He still cannot pay off the principal.

The FID’s proposed regulations also fail to address the lack of transparency in storefront lending practices. It is all too common in the industry for storefront lenders to mislead borrowers about the true cost of small loans through confusing contract terms, expensive and often useless add-on products, and by marketing loans that conceal long term costs. Because of this intentional subterfuge, it is often difficult or impossible for consumers to calculate the true costs of their loans.

“We should all be able to walk into a small loan store and see how much a loan will actually cost,” said Sanchez. “The market operates more effectively when all members of the public can understand the terms of the contracts they are entering. It’s important that the regulations ensure that loan terms are disclosed to borrowers in clear, straightforward terms.”

The Center also suggests the regulations include improved methods of data collection, greater protections for borrowers of refund anticipation loans, and expanded language accessibility.

“While a small loan business may have a Navajo employee interacting with the Navajo customers, our Navajo plaintiffs indicate that the Navajo employee does not speak the Navajo language well enough to communicate effectively with Navajo elders,” said Gorman. “The new administrative rules must include provisions for explaining the small loan entirely in the language preferred by the customers. Without a language assistance provision, Navajo consumers with difficulty understanding the English language will continue to be disenfranchised because they cannot fully understand the loan documents.”

The FID’s proposed regulations can be found here: www.rld.state.nm.us/financialinstitutions/

The Center’s comments on the proposed regulations can be found here: https://wp.me/a7pqlk-10H

The Center’s suggested changes to the proposed regulations can be found here: https://wp.me/a7pqlk-10I