Payday Loan Regulations a Flop

By Richard Metcalf
Copyright © 2010 Albuquerque Journal
Journal Staff Writer

Payday lending and financial literacy

Use of payday loans could point beyond financial desperation to a more basic problem like financial illiteracy.

Loans have many variables, which can make them seem complicated. The variables include — but are not limited to — term or length of loan, interest rate, fees, payment schedule, penalties and whether the loan is secured or not.

The traditional payday loan starts out fairly simple.

A typical scenario might involve the borrower giving the payday lender a $500 check in return for $400 cash, putting the interest rate of the loan contract at 25 percent. The check would be postdated two weeks out, representing the term of the payday loan. When the two weeks were up, the lender would deposit the check.

If the check was good, the loan was paid off and the deal was done.

But if the borrower's check bounced, the loan would automatically roll over for another two-week term, requiring another $100 interest payment by the borrower. The two-week rollovers would continue, each requiring a $100 interest payment, until the borrower managed to pay off the original $400 principal, plus the additional charges.

Under these circumstances, the annual percentage (interest) rate, or APR, on the original $400 loan was 600 percent. If the $400 loan rolled over for an entire year, the interest payments would amount to $2,400 on a $400 loan.

Source: UNM law professor Nathalie Martin

State legislative leaders wrestled with the proliferation of payday loans for much of this decade, finally passing regulations in 2007 that included a loose limit on the effective interest rates and a ban on what are called rollovers.

They also required classic payday loans with terms of 14 to 35 days be entered into a database, which was designed to prevent borrowers from burying themselves in multiple payday loans.

Gov. Bill Richardson, Lt. Gov. Diane Denish, Sen. Bernadette Sanchez, D-Albuquerque, and Rep. Patricia Lundstrom, D-Gallup, were key players, and Richardson even predicted that the rules would drive plenty of lenders out of business.

But the regulations haven't worked, according to Nathalie Martin, a University of New Mexico law professor who has studied the issues surrounding payday loans.

"The industry found its way around them," she said. "Their product changed very rapidly and very significantly."

For starters, lenders extended the terms of payday loans to 36 days or longer, putting them outside the range of the state regulations and thus not required to be entered into the state database.

That became part of the sales pitch for lenders, who could assure borrowers that by making the loans for slightly longer periods their names would stay out of the database.

The new loan products include installment loans, which have no limit on the interest rate. As described by Martin, a typical scenario might involve getting $100 in cash upfront and committing to repay $150 in four equal monthly payments. The APR in this scenario would be 200 percent interest.

Another product is the car title loan, where the borrower hands over the title to his or her car to the lender until the loan is paid off. A common loan of this type might carry a 25 percent interest rate over one-month, rolling over if not paid off in time. The APR in this scenario would be 300 percent interest.

Industry appears to be thriving

The industry appears to be thriving by a couple of unscientific measures. The Dex Yellow Pages shows about 80 companies that would fall into the payday lending or title loan industry, as well as more than six pages of advertising by the same businesses, including four full page ads.

A drive down almost any section of San Mateo, Menaul or Central shows lending stores every few blocks.

Gubernatorial candidate Denish, a self-professed crusader against payday lending for years, has promised further crack downs and touted her effectiveness in recent TV ads. After the 2007 session, she led a task force in charge of coordinating implementation of the approved regulations with the Department of Regulation and Licensing.

As governor, we're going to impose very strict regulations or, if that's not possible, outlaw them," Denish told the Journal on Friday. "It's hard to do. The Capitol is crawling with lobbyists who will do anything to stop it.

"I do not accept the premise that this is a necessary evil for a segment of the population," she continued. "These people strip the wealth of our communities."

Responding to Denish's comments, Steve Kush, spokesman for the Dallas-based Fastbucks payday lending chain, said: "The lieutenant governor should be paying more (attention) to the corruption in the administration she serves, rather than an industry that provides a valuable service to the people of New Mexico."

Fastbucks made more than 100,000 loans last year, but generated fewer than a dozen complaints, he said, adding, "I challenge any bank to make that claim."

In a further comparison to mainstream banks, he said, "Our fees are fully disclosed in large print on posters in the stores, not the fine print that banks rely on."

More than 90 percent of Fastbuck customers repay their loans on time, he said. A minority of borrowers end up paying the high interest rates cited by Martin and others simply because they are not complying with the loan terms, he said.

As far as the role payday lenders play in providing financial services to consumers, he said, "For many people, going to a payday lender is the difference between having the electricity shut off and keeping the electricity on."

Plenty of takers

There is no shortage of customers.

A Federal Deposit Insurance Corp. survey released at the end of 2009 showed that one-third of New Mexico households do little or no mainstream banking, but instead rely on payday loans, rent-to-own plans and check-cashing services.

For minorities, the rate is even higher — more than half of Native American households and nearly 41 percent of Hispanic households.

Despite the rates, people still take out payday loans and fork over the exorbitant interest and fees.

"It's a pretty rough world out there in terms of economics — a lot of job loss, a lot of financial stress," Martin said.

Martin said a survey of customers leaving payday lending stores in Albuquerque that she conducted using students paid with grant money, showed that nearly two-thirds of the people who take out payday loans use the money to pay such things as rent, mortgage, and utility and phone bills.

The need to borrow money to pay everyday bills is a clear sign of financial stress. "In the end, it's another bill for them to pay," she said.

Martin said the challenge of regulating payday lenders goes back to the intent behind the effort.

Is the goal to allow payday loans to continue to be available to those who need them, she asked, or is the goal to drive payday lenders out of the state?

That has been done in some places.

"If this dries up, what's the alternative?" she said. "Some people don't have options."

The alternative could wind up being loans made in an "underground economy," or the kind of loan shark financing portrayed in Hollywood movies.