State lagging in its preparations for payday lending law

New Mexico is months behind in preparing for a new payday lending law that will take effect at the beginning of 2018.

Consumer advocates heralded the law, passed earlier this year, as a step toward protecting low-income New Mexicans from quadruple-digit interest rates and ruinous debt. They have pushed for years for limits on rates imposed by storefront lenders.

But such lending companies, which have proliferated in some of New Mexico’s poorest communities, have fought back, opposing any caps on interest rates.

Among other requirements, House Bill 347 caps rates for most small loans at 175 percent — still much higher than the 36 percent some legislators proposed — and requires that short-term loans are repayable in at least four installments rather than all at once, effectively ending payday loans. Consumer advocates view the law as a victory but have raised concerns that it will be incomplete and that sections might be unclear without additional regulations, such as rules on the sort of information that lenders must provide consumers about their rights.

State regulators told lawmakers Wednesday that while the legislation will have the force of law Jan. 1, they have yet to draft various new rules to specify how it will be implemented, largely because of staffing shortages in the agency that is responsible for regulating New Mexico’s banks, mortgage firms and a range of other financial services, along with the more than 600 licensed small lenders.

“I anticipate it will take a few more months,” Kevin Graham, legal counsel for the state’s Financial Institutions Division, told a legislative committee.

Legislators already provided time for the state to come up with such rules, a process that involves collecting public comments and potentially holding hearings around the state.

By default, a state law takes effect July 1 of the year it is passed, but legislators wrote this bill to take effect six months later to provide regulators and lenders more time to prepare.

“There’s no reason to wait until March” to adopt the regulations, Ona Porter, president and CEO of the advocacy group Prosperity Works, said after Wednesday’s hearing. Prosperity Works was one of the organizations that had proposed regulations.

Christopher Moya, acting director of the Financial Institutions Division, told the Legislative Indian Affairs Committee that the delay has stemmed from a shortage of resources at his agency.

“A lot of things in our division have been put on the back burner due to a shortage of resources, not resources in terms of funding but resources in terms of manpower,” he said.

HB 347 passed with bipartisan support. Under the law, lenders will have to report to credit agencies, with the idea that borrowers who pay back their loans can build credit scores and later tap into tradition financial services such as banks.

The law also will create a fund for promoting financial literacy.

And it changes what counts as a small loan, raising the amount to $5,000 from $2,500.

But the law largely will exempt what are known as refund anticipation loans, which borrowers pay back with their tax returns and have emerged as an alternative to payday lending in many markets.

Lenders, who maintain their loans are a financial lifeline for people who need cash in an emergency but are not served by traditional financial companies, have argued that the law’s interest rate cap will hurt business.

The legislation might have had an effect already. Based on unrenewed business licenses, three lending companies are closing about 50 stores around the state, Porter said.