However, critics say New Mexico’s new law fails to safeguard borrowers - often the poor - from becoming trapped in debt.
Payday Loans are short-term advances of cash against a borrower’s future paycheck or when a lender holds a borrower’s personal check and agrees to cash it later to cover the debt. The loans can be up to $2,500.
The new state law caps fees, limits the length of a loan and restricts the total amount consumers can borrow. Financial regulations implementing the law’s provisions also go into effect.
The law was enacted after years of battling in the Legislature. Consumer advocates contend that the poor are targeted by payday lenders offering short-term, high-interest loans.
Gov. Bill Richardson said the law and regulations “will protect New Mexicans from predatory lending and the spiraling debt often associated with these loans.”
But the Center for Responsible Lending, a nonprofit research and policy group, contends that New Mexico’s law doesn’t impose a meaningful cap on loan costs and won’t prevent borrowers from becoming mired in debt.
“In those states that have those types of protections that New Mexico is just now implementing, they have some of the worst debt-trap lending in the country,” said Uriah King, a policy associate with the group in North Carolina, which published a report last year on payday lending.
Under the state’s law:
• Payday loans can have a maximum term of 35 days but no less than 14 days, unless the borrower agrees in writing to a shorter length.
• Fees are charged instead of an interest rate. Those fees can be no more than $15.50 for each $100 borrowed. King said the fees are the national average for payday loans. The fees would be the equivalent of a 417 percent annual percentage rate of interest for a $100 loan paid off in 14 days, said Bob Hagan, a spokesman for the state Regulation and Licensing Department. The interest rate would be about 47 percent for the $100 loan if paid through a 130-day extended repayment plan allowed under the law, Hagan said Tuesday.
• A consumer cannot renew or “roll over” a loan to repay an existing loan.
• Individuals cannot have outstanding payday loans of more than 25 percent of their gross monthly income. Lenders are to use a computerized database, which will allow them to determine whether borrowers have loans from other lenders and whether they qualify for a new loan.
• A borrower unable to repay a loan can enter into an installment payment plan to retire the debt over at least 130 days. There can be no additional fees or interest charges for using the repayment plan. Borrowers couldn’t get a new loan until 10 days after completing their obligations under the extended payment plan.
Under the state’s regulations, lenders must provide written information about the payment plan offer and must read a notice to the borrower in either English or Spanish, with the consumer deciding which language.
With the new law, King said, “it’s still by no means cheap to get a payday loan in New Mexico. Nor does it address the debt trap.”
Borrowers in New Mexico still can become entangled in a long-term web of debt under the new law, he said, if they pay off a payday loan, obtain a new loan as soon as possible and then keep repeating that cycle.
To truly help consumers, King suggested, New Mexico should impose an interest rate cap of 36 percent or less on payday loans.
A new federal law took effect in October that imposes a 36 percent cap on payday, car title and some other loans to military personnel and their families.
By : Tribune
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