Beginning next year, New Mexico will join a handful of other states (including, among others, California, Illinois, and Colorado) setting stringent interest rate caps on consumer loans. House Bill 132, which Gov. Michelle Lujan Grisham signed on March 1, 2022, will slash the annual percentage rate (APR) applicable to loans made under New Mexico’s Small Loan Act of 1955 (SLA) and Bank Installment Loan Act of 1959 (BILA). Upon signing the legislation, Gov. Grisham stated, “After many years of effort by advocates and legislators, I am glad to finally sign this legislation into law and deliver common-sense protections to vulnerable New Mexicans in rural and urban communities statewide.” Although its proponents view House Bill 132 as necessary to curb what it deems predatory lending, its critics predict that lowering the maximum APR will severely 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 the costlier, riskier, and less regulated alternatives” for credit.
Currently, lenders may charge a maximum APR of 175% on loans up to $5,000 made under SLA and BILA. But effective January 1, 2023, the maximum APR will fall 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 incident to or a condition of the extension of credit;
- Charges for any ancillary product or service sold or any fee charged in connection or concurrent with the extension of credit;
- Credit insurance premiums and fees; and
- Charges for single premium credit insurance and any other fees related to insurance.
The legislation also provides additional anti-evasion provisions to close any remaining loopholes around the 36% APR cap. Critically, the act endeavors to hamstring attempts to utilize the bank partnership model through an “anti-evasion” provision. These provisions apply to a person who is purporting to act as an agent, service provider, or in another capacity for an exempt entity if, among other things:
- The person holds, acquires or maintains, directly or indirectly, the predominate economic interest in the loan;
- The person markets, brokers, arranges, or facilitates the loan and holds the right, requirement, or first right of refusal to purchase loans, receivables, or interests in the loans; or
- The totality of the circumstances indicate that the person is the lender and the transaction is structured to evade the requirements of the SLA. In deciding whether the totality of the circumstances indicate that a person is the lender and a transaction is structured to evade the SLA, all relevant factors may be considered, including whether the person (1) indemnifies, insures, or protects an exempt entity for any costs or risks related to the loan, (2) predominantly designs, controls, or operates the loan program, or (3) purports to act as an agent, service provider, or in another capacity for an exempt entity while acting directly as a lender in other states.
In addition, the statute prevents evasion by persons who “disguise[e] loan proceeds as a cash rebate for the pretextual installment sale of goods or services.”
Takeaways: New Mexico has decided to join the growing list of states applying onerous rate caps for credit products that are critical for consumers, as evidenced by the overwhelming market demand. The ultimate effect of this and other similar rate cap legislation will be to reduce the availability of credit in the market. In addition, anti-evasion provisions ̶ which unfairly presuppose that partnerships between fintechs and chartered depository institutions are set up to “evade” licensing and usury statutes, which is untrue based on decades of history and legal activity , and which will almost certainly stifle innovation in the space. Now, more than ever, stakeholders should work with trade groups and their counsel to help ensure that financial institutions and their partners are able to provide access to credit in new and innovative ways designed to better serve consumers.