I taped the KNME episode of The Line yesterday that will air tonight at 7:00 pm (don’t forget to watch), and one of the topics we spoke about briefly was payday loans. As luck would have it, the New Mexico Senate Corporations & Transportation Committee is going to hear Senate Bill 475 (SB475) today. This is the bill backed by Attorney General Patricia Madrid that limits profitability for lenders – never mind that the 30 day session is supposed to be focused on budget issues. Let’s take a look at two of the most troubling aspects of this proposal:
- Interest shall be charged at $5.50 per $100 for 120 days (66% APR) and $4 per $100 for each additional 30 days (54% APR). Interest for loan renewal shall be charged at $4 per $100 for each additional month (54% APR).
- A payday loan may only be granted if it is equal to or less than 25% of a consumer’s net monthly income or total payday indebtedness of $1,000.
Basically, the first point comes down to limiting gross profitability to about 54%. Well, how does this makes sense in a free enterprise system? Do we limit how much a restaurant can charge its patrons for a meal? How about the markup of those shirts you just bought your kids? Or maybe, we should limit the gross profitability of the concession stands at The Pit to 54%. That would be ridiculous, right? Although, you have to wonder which industry Patsy would target next.
And what about that second point of a “sale” that is limited to 25% of a consumer’s net monthly income? Super Bowl Sunday is this weekend. How many families responded to the advertising circulars and went ahead and bought a big screen television on credit that is more than “25% of the consumer’s net monthly income or total payday indebtedness [read how much of their monthly income is going to pay credit related bills] of $1,000. I think you’ll find the answer to be many. That is why advertisers push no payments for 18 to 24 months. The consumers are spending more than they can afford. Is outlawing this practice next?
If the legislature wants to have an impact on predatory lending practices, this is not the way to go about it. This is an education issue. Instead of after the fact (i.e. measures that deal with poor personal fiscal responsibility practices), they should be mandating personal economics as part of the curriculum for our middle and high school students.
Oh, those of you who would leave a comment that says this is about protecting the poor, save it. There are many hardworking families that havemanagedd to get by over the years on the most meager of incomes. The difference between them and the “victims” of predatory lending is that they make smart choices.