Sometimes, when a bill dies in committee, it is best to let it rest–especially if the passage of that bill means that a financial lifeline for countless New Mexicans would be severely compromised, if not totally eradicated.
The bill in question (in play now in the 2022 legislative session) is House Bill 132, legislation that died in committee last year but was recently reintroduced by a cohort of Democratic legislators, with House Speaker Brian Egolf at the helm. The two most impactful provisions of the bill include 1) a 36 percent interest rate cap on personal loans and 2) restrictions on the ability of small and mid-size banks to partner with third-party loan servicers–such as fintech (companies that utilize financial technology to improve and automate the delivery of financial services) and credit unions–to provide loans to consumers.
Proponents of this bill say that it is a way for the New Mexico State Legislature to end “predatory lending” once and for all. But what proponents of this bill fail to take into account is the fact that many of the consumers who seek loans from fintechs, credit unions, or other third-party servicers are doing so because they don’t meet the requirements to take out loans from most banks. They usually have poor credit scores and, in some cases, might not even have a bank account because they don’t have enough money to meet a balance minimum. Roughly 7 million Americans are without bank accounts.
Another reality that advocates of HB 132 might be uncomfortable admitting is that more often than not, it is minorities who are disproportionately underbanked and suffering from low credit scores. 54 percent of Black Americans report low credit scores, and 41 percent of Hispanic Americans suffer from poor credit, an obstacle that makes it nearly impossible to secure loans from a typical bank.
But the fact that underbanked individuals can look elsewhere, to fintechs or credit unions, for credit when they are experiencing cash shortfalls is a positive development in the free market that should be celebrated, not narrowly framed as “predatory.” If the goal of HB 132 is financial security for all New Mexicans, it doesn’t make a whole lot of sense to punish residents who are underbanked or have low credit scores by making it harder for them to access credit. But that’s exactly what imposing restrictions on small and community banks’ ability to work with third party loan providers would do.
To see how restrictions on lending have failed before, we need to look no further than the Military Lending Act (MLA). The Military Lending Act capped interest rates on loans to veterans and active-duty service members at 36 percent–the same percentage proposed in HB 132. The lawmakers behind this bill thought that it would help military members along the path to financial security. Unfortunately, it turns out that the bill had the opposite of intended effect. According to a HarrisX Poll, 51 percent of active-duty service members report being turned down for credit and are more worried about paying their debts than they were before the bill existed.
Evidence that the MLA has failed suggests that interest rate caps don’t lessen the risks of borrowing–they simply restrict who can borrow.
When access to credit is dried up, it is not unusual for individuals looking for relief to take desperate measures to make ends meet. This includes paying bills late and even pawning off personal items like a car. The result is a deeper and demoralizing cycle of debt and borrowing that makes a bad situation worse.
We all like the sound of our neighbors never having to deal with “predatory loans” again. But HB 132 is a seriously misguided policy attempt to achieve this goal. In the long run, HB 132’s provisions would do very little in the way to help the people that it professes to be looking out for. Placing a 36 percent rate cap on personal loans and placing strictures on small and mid-sized banks’ ability to work with third party loan servicers would ultimately punish poor people and deprive them of the chance to build up their credit and eventually exit a cruel cycle of debt.
Access to quality credit is a lifeline for countless New Mexicans. If lawmakers in the State Legislature really want to help our state’s most vulnerable, then they have a duty to make sure HB132 is stopped, again, and this time for good.
Larry Sonntag is an Air Force veteran, Albuquerque Police Department retiree and small business owner who now works in support of several non-profit organizations. He has lived in New Mexico for over 50 years.