It is time for New Mexico to enact a usury cap at 36 percent for all loans to protect ourselves against exorbitant interest rates and abusive lending practices. Some time ago, the U.S. Department of Defense adopted a 36 percent annual rate cap to protect the military and their families from abusive and predatory lenders. New Mexico should do no less for its other citizens.
Many people believe that our laws already prohibit high-cost lending and that a usury cap exists to prevent abuse in the credit market; not so. Until 1981, New Mexico did cap interest rates for small consumer loans at the rate of 12 percent per year. However, under pressure from lenders, the legislature changed the law — which gave rise to a burgeoning statewide high cost lending market for payday loans, car title loans, and installment loans — charging 100% to over 1,000 percent — that continues to grow to this day.
As Attorney General, I successfully sued high cost lenders making loans at 580 percent to 1,500 percent; a twelve month loan of $100 cost the borrower $580 to $1,500 in finance charges. In one case recently brought by my office against two specific lenders, the New Mexico Supreme Court declared the companies' lending practices and the loans themselves — made at annual interest rates in excess of 1,000 percent per year — unconscionable and illegal under state law. The court found that these loans were grossly disproportionate to their price, that the companies took advantage of the borrowers and that the companies tried to made an end run around legal protections. The court ordered that restitution be paid to all borrowers who took out loans from these companies. This landmark case is the first step in stopping the abusive lending practices that are now common here. For the future, the genie can be put back in the bottle; if only our law and policy makers will act to reinstate a usury cap.
State statistics show more than 100 million dollars was paid in interest and fees in New Mexico in 2012. Seventy-five percent of the companies that profit from these fees are out-of-state businesses. These companies target single parents, the working poor, those on fixed income, veterans, and Native Americans. The facts show that most loans are taken out to pay monthly expenses because a family's income is inadequate to meet basic needs. These lenders also claim that these are "one-time" loans. However, the evidence in our trials and the admissions of industry representatives prove that the companies' profit depends on keeping borrowers in debt by persuading them to refinance, extend, or renew their loans over a period of years. Training documents produced by one company demonstrate that "cycle of debt" is the company's business model.
Other states have acted to cap rates to protect their consumers. A poll conducted this year shows high support in New Mexico for a 36 percent interest rate cap. Though we have made significant strides in court, the final solution will require action by the legislature and governor.