New Mexico sets strict interest rate caps on consumer loans
Starting next year, New Mexico will join a handful of other states (including California, Illinois and Colorado, among others) setting strict interest rate caps on consumer loans. . House Bill 132, which Governor Michelle Lujan Grisham signed on March 1, 2022, will reduce the annual percentage rate (APR) applicable to loans made under the Small Loans Act of 1955 (SLA) and the 1959 Installment Bank Loans (BILA)). During the signing of the legislation, Governor Grisham said, “After many years of effort by advocates and legislators, I am pleased to finally sign this legislation and provide common sense protections for Newcomers. -Vulnerable Mexicans in rural and urban communities across the state. Although his supporters see House Bill 132 as necessary to limit what he deems predator loans, its critics predict that lowering the maximum APR will significantly limit the availability of loans to consumers who are underbanked or have lower credit scores. INFiN, a separate trade group that represents small dollar lenders with branches across the country, said in a statement last month that New Mexico’s rate cap “will leave consumers with little choice but to turn to more expensive, riskier and less regulated alternatives” for credit.
Currently, lenders can charge a maximum APR of 175% on loans up to $5,000 made under SLAs and BILAs. But starting Jan. 1, 2023, the maximum APR will drop to just 36% and apply to loans up to $10,000. In calculating the APR, the lender must, with some exceptions, include:
Charges payable by the consumer and imposed by the lender as an accessory or condition of the granting of credit;
Fees for any ancillary product or service sold or any fees charged as part of or in conjunction with the extension of credit;
Credit insurance premiums and costs; and
Single premium credit insurance charges and any other insurance-related charges.
The legislation also includes additional anti-avoidance provisions to close any remaining loopholes around the 36% APR cap. Importantly, the law attempts to cripple attempts to use the partnership banking model through an “anti-avoidance” provision. These provisions apply to a person purporting to act as an agent, service provider or otherwise for an exempt entity if, among other things:
The person owns, acquires or retains, directly or indirectly, the preponderant economic interest in the loan;
The person markets, negotiates, arranges or facilitates lending and has the right, obligation or first right of refusal to purchase loans, receivables or interest in loans; Where
The totality of the circumstances indicates that the person is the lender and that the transaction is structured in such a way as to circumvent the requirements of the SLA. In deciding whether the totality of the circumstances indicates that a person is the lender and that a transaction is structured to circumvent the SLA, all relevant factors may be considered, including whether the person (1) indemnifies, insures or protects an exempt entity for all costs or risks associated with the loan, (2) primarily designs, controls, or operates the loan program, or (3) purports to act as an agent, service provider or to another title for an exempt entity while acting directly as a lender in other states.
In addition, the law prevents escape by persons who “disguise[e] proceeds of the loan in the form of cash rebate for the fictitious installment sale of goods or services”.
Take away food : New Mexico has decided to join the growing list of states enforcing onerous price caps for essential consumer credit products, as evidenced by overwhelming market demand. The ultimate effect of this and other similar rate cap laws will be to reduce the availability of credit in the market. Additionally, anti-evasion provisions ̶ which unfairly presuppose that partnerships between fintechs and licensed depository institutions are set up to “evade” licensing and usury laws, which is wrong given decades of history and legal activity, and which will almost certainly stifle innovation in the space. Now more than ever, stakeholders need to work with trade groups and their councils to ensure that financial institutions and their partners are able to provide access to credit in new and innovative ways designed to better serve consumers. .
© 2022 Bradley Arant Boult Cummings LLPNational Law Review, Volume XII, Number 69