Fischmann: Stop "Legal Loan Sharking"

Dec 3, 2013

Credit Steve Fischmann

  Nobody does a better job of stomping on the poor in New Mexico than predatory storefront lenders.  Under the guise of helping low income folks survive short term financial emergencies, they load outrageously expensive debt on those who can least afford it and help perpetuate the cycle of poverty.  The most common victims are single moms, the elderly and former military personnel.

I compiled reported small lenders activity over 175% Annual Percentage Rate (APR) from the New Mexico Department of Regulation and Licensing Financial Institutions Division and found these statistics for 2012.  

·         396,000 loans totaling $216 million originated from storefront lenders.

·         Predatory lenders collected $99 million in interest and fees - the equivalent of $230 from each man, woman and child living in poverty in New Mexico.

·         APR's averaged about 350%

·         Secured auto title loans carried an average APR of 280% compared to about 2.5% for highly qualified used car buyers going through traditional banks.

·         A large percentage of loans were refinanced or renewed.  Typical payday loan borrowers, for example, took out 6.6 loans during the year.

An accountant I know describes clients that use storefront loans as "addicts".  They keep using, their financial problems keep growing and so do the economic woes of their local community.  Borrowers have less money than ever to spend with local businesses while lending profits are vacuumed up by out of state corporations that own the vast majority of storefront lending locations. 

Small lenders have no shortage of regulations. Very specific loan products and underwriting standards have been developed. The question is who are the regulations benefitting? Hard won legislative reforms to payday loan products in 2007 have resulted in this borrowing profile for the typical payday loan user for 2012:  Average borrowings of $382 for a total of 4.8 months and total payments of $768 to pay it back. Tinkering with lending rules has only perpetuated storefront lending thievery.

A couple of decisive steps will go a long way towards protecting consumers, helping our business climate, and simplifying regulations. 

1. Install a 36% APR cap or lower on all loans.  Fourteen states have recently implemented this policy to good effect. Many predatory storefront lenders went packing when the cap was installed in Arizona in 2010.

2.  Support development of alternative financing sources for low income borrowers.  A number of models have been developed.  These include specialized Low Income Credit Unions and Community Development Financial Institutions (CDFI's.)  CDFI's provide affordable credit and support it with credit counseling services targeted to low income customers.  

Authorization of modest loan capital investments from the state permanent fund, New Mexico Finance Authority, or state and local government treasuries would go a long way towards helping these kinds of institutions get established.  These might not be the highest return investments, but they hold far more potential to permanently stimulate our economy than expensive tax incentive, capital spending and corporate welfare schemes.

Our choices are straightforward.  We can continue condoning legalized theft from the economically disadvantaged, or we can foster the growth of financial institutions that help communities prosper.  Let the Governor, your legislators, and local elected officials know which you prefer.

Steve Fischmann is a former State Senator district 37 in Las Cruces, and Thursday host of Let's Talk Las Cruces on KSNM 570.