CONDITIONAL REPRINT RIGHTS GRANTED BY ALBUQUERQUE JOURNAL
on 01 - 11, 2006, per yearly reprint agreement:
For a reprint agreement contact the Library at 505-823-3492

Payday Loans a Risky Business
Sunday, August 29, 2004

By Mike Gallagher
Journal Investigative Reporter
    In 1992, New Mexico had 23 payday and title loan outlets. Now, there are hundreds doing business in a state where nearly 20 percent of the population falls below the poverty line. The state's Small Loan Act has no limit on how many times a loan can be rolled over, and there is no cap on interest rates. If the borrower agrees, the sky is the limit. It can be a recipe for economic disaster.
    District Judge Ted Baca wanted to know how anyone could charge 651 percent interest.
    "I don't think I have ever seen an interest rate that high," Baca said during a hearing in which Fast Bucks Inc. was seeking court approval for a judgment of more than $2,000 on what started out as a $190 loan.
    But 651 percent isn't all that shocking in the world of payday loans in New Mexico, where there is no limit on interest rates.
    Attorney Michael Seibel, who was representing Fast Bucks Inc. in Baca's Albuquerque courtroom, argued that the interest rate was legal and that the company was lending to high-risk borrowers who often default on small loans.
    "I have seen an interest rate as high as 4,000 percent," Seibel told the judge.
    The borrower, a Navajo woman, wasn't in court. There was no lawyer to argue on her behalf.
    But Baca had already declined to approve the proposed $2,000 judgment without a hearing. He had questions.
    "This is a very high interest rate," he said. "It's not my job to advocate on behalf of any party, but there has to be some sort of balance."
    Seibel said, "If you find the interest rate unconscionable, we can work out something."
    Baca decided the rate was unconscionable and asked Seibel to submit a new judgment based on interest rates used for high-risk credit cards— normally 25 percent to 30 percent.
    Outside of Baca's courtroom, Seibel said this wasn't his first encounter with judicial reluctance over high-interest loans. But it's not always that way.
    "I've had judges approve the 651 percent and others who won't," Seibel said. "It's really all over the place."
    Attorney General Patricia Madrid says a major rewrite of the state's Small Loan Act is way overdue.
    "This is predatory lending," she said.
   
'It snowballed'
    Angela McGuire-Pike doesn't remember why she took out her first payday loan.
    "You think it's going to be a temporary thing," she said in an interview. "You need the money, and it's just until next payday."
    The first loan— her recollection is that it was about $200— was for two weeks.
    To get the money, McGuire-Pike had to write out a check for the full amount, plus a loan fee. In theory, she would bring in cash on the due date and the lender would rip up the check. Or, she could tell the loan company to just go ahead and cash it, settling the account.
    But McGuire-Pike couldn't pay off the loan when payday arrived, and the check wouldn't clear.
    So McGuire-Pike fell into the cycle of "rolling over" the loan, where the borrower pays regular interest payments without any reduction in principal.
    "I was paying $50 to $75 every two weeks, just on interest," she said.
    "It snowballed. We were taking out payday loans to repay other payday loans. It was taking almost 50 percent of my husband's wages."
    McGuire-Pike says that, at one point, she had 10 loans from almost as many different loan companies for about $200 to $300 each.
    Getting the loans was easy. All the companies required was an open checking account and verification of employment. There was no cross-checking between lenders.
    She said no one checked her credit history. And no one checked her ability to repay the loan.
    "We were going crazy," McGuire-Pike said.
    "One time, we didn't get to the loan place on time, and they cashed the check. It took our rent money," she said. "We had to do something."
    She was able to negotiate with several of the loan companies to pay off the loans at $20 every two weeks. But several were unwilling to let her off the hook.
    "One company kept presenting the check to the bank so that it would bounce," she said. "Others sent the loans to collections agencies."
    In two instances, collection company tactics overstepped the federal Fair Debt Collection Act, and McGuire-Pike was able to successfully sue in federal court.
    But there have been long-term consequences, she said.
    "We have to do everything by cash or money order," McGuire-Pike said.
    There was so much "insufficient fund" activity on the old family checking account that they can't get a new one.
    "We own everything in our home. We have no credit card bills," she said. "But people don't always understand why you're not paying with a check or a debit card.
    "It's been a bumpy ride."
   
Piecemeal enforcement
    Small loans are defined as $2,500 or less. They come in various forms: payday loans, check-cashing loans and car title loans.
    Current law in New Mexico allows unlimited interest rates and fees, unlimited loan rollovers and abusive collection practices, according to consumer advocates.
    It's one of two states with virtually no regulation of industry practices, although it does have licensing and registration.
    In New Mexico, payday lenders charge between $20 and $25 per $100 loaned. A $200 loan will cost $50. Most loans are for two weeks. To secure the loan, the borrower writes a check to the lender for $250.
    At the end of two weeks, the borrower has to pay the lender $250.
    If the borrower pays only the $50 interest, the lender will "roll the loan over." This can go on indefinitely.
    Madrid and consumer advocates say the state's Small Loan Act needs an overhaul, and many lenders agree changes are needed.
    The industry is willing to compromise on rollovers and collection practices but opposes any cap on interest rates.
    So far, the lenders have succeeded in blocking reform attempts in the Legislature.
    The industry argues that if the loan is repaid in a timely manner, the interest rate or fee is around 20 percent— comparable to the amount charged to higher-risk credit card holders.
    They say that's a reasonable rate for high-risk borrowers.
    Consumer advocates respond that lenders could reduce their loan risk by:
   

Evaluating the borrower's ability to repay;
    Checking credit histories;
    Cross-checking with other lenders to determine if the person has multiple small loans with other lenders.
    The law allows for a repository for this information, but it hasn't been set up by the industry.
    The law doesn't direct lenders on what legal route they should take to recover their losses and gives little direction to judges on how these loan lawsuits should be handled.
    Judges either follow the letter of the law or make hip-pocket decisions that lenders generally don't want to appeal.
    Michael Seibel, Fast Bucks' attorney, has faced this situation all over the state.
    In Metropolitan Court, he said, the policy changes courtroom to courtroom. Some judges award the stated interest rate; others limit the amount owed to three months.
    Payday lenders like Fast Bucks, which has 19 offices statewide, argue they perform a needed service for high-risk borrowers, and Seibel said the company only pursues legal remedies against people who have made no effort to pay on their loans or who ordered their bank to stop payment to the loan company.
    Both Baca and Seibel said the state's Small Loan Act needs major revisions.
    "There are huge holes in the law," Seibel said.
   
On the margins
    Life on the economic margins often means not having access to credit cards, home equity loans or traditional bank loans to make it through an emergency.
    One car repair or a refrigerator breakdown can mean the difference between food on the table or paying the rent.
    Rosalie Begay found out how expensive payday loans can get. She was sued for $1,547 on a $190 loan. She was charged a 651.8 annual percentage rate. She settled the case for $900.
    Douglas Skeet had his wages garnisheed. He owed $2,020.54 on a $250 loan. He was also charged a 651.8 annual percentage rate.
    Their stories are told in a couple of the hundreds of lawsuits filed year-round in the state by payday loan companies. Fast Bucks alone filed 79 lawsuits during an 18-month period.
    Payday Plus of Farmington has filed 96 cases in San Juan County Magistrate Court since August 2003.
    Judgments in hand, lenders can then try to collect. Garnishment of wages and seizure of assets are two avenues available.
    There are plenty of potential customers in a relatively poor state like New Mexico. The 2000 Census found more than 19.6 percent of the state's population living below the poverty line.
    Their access to cheap credit and traditional loans is limited.
    To fill this niche, enter the payday loan, the car title loan, and the check cashing services.
    Enter the 651 annual percentage rate loan.
    Pay it off on time, and the cost is only $20 to $25 for every $100 borrowed. Fail to pay, and the interest accumulates at a rate of $20 to $25 per $100 borrowed every two weeks.
    Within a year, a borrower can owe almost $1,300 on a $200 loan.
    It's completely legal. And prospering.
    The payday lending industry grew nationwide from $10 billion in 2000 to $25 billion in 2003. The Center for Responsible Lending estimates that 5 million people each year are trapped in multiple payday loan debts.
    The state's Financial Institutions Division is collecting data from small loan companies in New Mexico this year in an attempt to do an analysis of the industry statewide.
    According to a study by the New Mexico Public Interest Research Group, the number of short-term small loan offices in the state jumped from 23 in the early 1990s to 349 in 2001.
    In 2004, there were 160 small loan offices registered with the state's Financial Institutions Division as doing business in Albuquerque. The vast majority registered after 1998.
    Based on franchise advertisements, the expected rate of return on a payday loan office franchise is 58 percent in the first 18 months of operation.
   
A lack of laws
    Critics say that stories like McGuire-Pike's are all too common but that there is little the state can do to help people who get caught on a "treadmill of debt."
    New Mexico and Wisconsin are the two states with very little in the way of substantive rules governing short-term loan brokers.
    Thirteen states have laws that keep payday loan companies from doing business. The rest allow payday loans but have varying degrees of regulation and limits on interest rates.
    For the last six years, legislation has been introduced in New Mexico that would cap fees and interest rates payday loan companies could charge.
    Several of the bills would have restricted the number of times lenders could "roll over" the loans.
    But none has reached the governor's desk.
    "We have no usury law in New Mexico," Madrid said. "It was repealed in the early 1980s."
    The usury laws were repealed after several years of rapid inflation pushed interest rates above the state usury caps of 10 percent for secured loans and 12 percent for unsecured loans. Courts also ruled that state usury laws didn't apply to federally charted banks.
    Current statutes require short-term lenders to register and be licensed by the state's Financial Institutions Division of the Regulation and Licensing Department.
    Financial Institutions Division director Michael Verant said the Legislature authorized his office to gather financial data from short-term lenders to help lawmakers decide what action is needed.
    New Mexico Public Interest and Research Group has called for caps on interest rates and fees. It also wants to restrict the practice of rolling over the loans.
    Jean Ann Fox, director of Consumer Protection for the Consumer Federation of America, said New Mexico is lagging behind other states in regulating the industry.
    "New Mexico doesn't provide any consumer protection in the area of tax refund loans, car title loans and payday loans," Fox said. "It is one of only two states in the country without substantive regulations of the industry."
    Assistant Attorney General Joel Cruz Esparza, who heads the AG's consumer division, said that, under current laws, his office focuses on complaints that involve truth in lending and collection tactics.
    "The loans at whatever interest rate are legal," he said.
    Cruz Esparza said the office is receiving more complaints about the way payday loan companies are operating.
    "A few years ago, there were hardly any complaints," he said.
    "We need something with teeth in it so we can protect consumers."
   
Providing a service
    Industry lobbyist Charles Young says payday loan companies provide a service that many people can't get anywhere else.
    "The largest segment of borrowers are using a payday loan to avoid bounced checks," Young said. "The bank fees and the merchant fees for a bounced check are higher than the fees charged by short-term lenders."
    Young said the industry agrees with its critics that "rollovers" must be limited.
    "Everyone believes rollovers should be carefully handled," Young said.
    But even in states that limit loan "rollovers," there is nothing to prevent the borrower from going to another lender and borrowing money to pay off the original loan.
    Steve Solomon, general counsel for Fast Bucks Inc., said the company usually forgives loans that have been rolled over four or five times.
    By the fourth or fifth rollover, the borrower has repaid the original loan.
    "We are looking at creating a short-term installment loan," Solomon said.
    The industry maintains that annual percentage rates— ranging from 500 percent to 700 percent— contained in the loan documents are misleading.
    If a customer borrows $200 for 14 days and pays a $40 fee, the annual percentage rate is 521 percent. The same loan and fee made for 10 days has an annual percentage rate of 730 percent.
    "These are short-term loans and should be treated as such," Young said.
    Solomon said that the rate of default on loans in New Mexico is higher than in the other Western states where Fast Bucks does business.
    "Typically, we are suing people who put a stop payment on the check they gave us for the loan," Solomon said. "We believe that is fraud."
    Solomon said the company tries to screen potential lawsuits to avoid suing borrowers who made four or five interest payments on their loans.
    He said the company routinely settles for one half or one third of what is owed.
    Attorney General Patricia Madrid wants to see the growing small loan industry more strictly regulated.
    Among the changes she recommends in state law:
    Capping interest rates on small loans; 38 percent has been suggested.
    Specific authority for the state to regulate the industry.
    Limit or eliminate rollovers.
   

Clear statement that small loan companies fall under fair collection practices, regulations and laws.