Big banks filling state’s small lending gap

Loans under $1,000 are usually restricted to established customers

When House Bill 132 passed the New Mexico Legislature last year, some predicted the end of small loans in the state. The law, which went into effect Jan. 1, 2023, impacted high-interest lenders by capping small loan interest rates at 36%, down from a whopping 175%. Opponents of the cap predicted that so-called payday lenders would flee the state, leaving New Mexicans with no opportunity to take out small personal loans for unexpected expenses.

However, three major banks in the state have seemingly filled in the gap left by payday lenders. Wells Fargo, Bank of America and U.S. Bank, which represent more than 100 bank branches in the state, now all offer loans under $1,000 that follow the new state regulations.

“Not all of them (payday lenders) have left,” said Fred Nathan, executive director of Think New Mexico, a think tank that advocated for the 36% cap. “Some of them have adapted, and sure enough, can make money at 36%. But we pointed out that the market would correct and that other banks or other lenders would fill the void — and that’s exactly what’s happened with Bank of America, Wells Fargo, and U.S. Bank.”

Nationwide, six of the eight largest banks now offer similar products. Pew Charitable Trusts reported that just five years ago, no large banks offered small loans of this type. In recent years, however, more and more states have been capping interest rates at 36% — and more and more banks are offering small personal loans.

Alex Horowitz, a consumer finance researcher at Pew, said in May 2022 regulators at the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of Currency issued guidance to

banks around the country about making small loans, which opened the floodgates for new offerings.

But there’s some fine print. It may not be as simple as walking into a bank and walking out with a loan, especially for people who aren’t already customers of one of the three banks.

“They can’t get these loans,” Horowitz said. “These are only for the bank’s customers.”

Rio Rancho resident and Southwest Public Policy Institute president Patrick Brenner attempted to apply for all three loans at Bank of America, U.S. Bank and Wells Fargo without having a previous account with the banks. Despite opening checking accounts with all three banks and depositing funds in them,

Brenner’s applications were denied by both Bank of America and U.S. Bank and he was unable to apply for a loan less than $3,000 at Wells Fargo.

All three of the banks only offer loans to current customers, and require a certain relationship length with the bank. Horowitz said that’s because banks offering small loans base eligibility on their relationship with the bank, rather than credit score.

“Instead of relying on a credit report and credit score, the banks are relying on account activity and the relationship to determine eligibility,” Horowitz said. “And that opens up access to small loans to many customers, millions of customers, who wouldn’t otherwise get access.”

Only about 5% of Americans are “unbanked” and don’t have a checking account. Although they would be unable to apply for the loans offered by Bank of America, Wells

Fargo and U.S. Bank, unbanked people are also unable to qualify for payday loans, which require checking accounts as collateral.

Not all banks and credit unions offer these loans, so some customers are barred from applying for them — at least for now. As more banks and credit unions start offering small personal loans, Horowitz said, more Americans will be able to access loans on demand. Customers can generally apply for these loans online and receive funds almost immediately, Horowitz said, which keeps costs low for consumers due to the “negligible” labor needs.

“The application process is quicker than any payday loan,” Horowitz said. “... The bank can largely predetermine if the customer is eligible, and only show them the loan if they’re eligible.”

Credit unions around the state also offer small loans to their customers.