In the 2022 New Mexico legislative session, legislators approved an interest rate cap on certain loan products. The cap reduced the allowable interest rate on consumer loans, effectively setting a price control on borrowed money. In Jan. 2023, that rate cap took effect. Although consumers were immediately affected by the restriction on credit, only now are we seeing the real repercussions to consumers of the government’s meddling in the marketplace.
About nine months passed between the institution of the rate cap and the beginning of a survey commissioned by the Online Lenders Alliance, which focused on former borrowers of small-dollar short-term loans in New Mexico. The Southwest Public Policy Institute, an independent research institute and think tank, received an advanced copy of the survey results, and the analysis is disheartening. Since the rate cap took effect, many lenders have stopped offering loans to higher-risk consumers or have left the state entirely.
Survey respondents painted a dismal picture of personal credit access in New Mexico. Over half of respondents reported that they used loan funds for utilities, car payments or repairs, debt consolidation, or medical bills. Over 90 percent of respondents reported that their loan helped them manage their financial situation at the time. Since their lender stopped offering loans in New Mexico, 32 percent reported that their financial well-being declined. Only 11 percent reported that their financial well-being improved in the aftermath of the rate cap.
The peddled narrative from proponents of rates caps tells a few horror stories of consumers being taken advantage of by predatory lenders. But have partisan political hacks bothered to ask consumers directly how they perceive alternative financial products? The answer is no, and the reason is clear: short-term small-dollar borrowers, like their lenders, know the product and are worse off without access to credit. We know the negative impact because we’ve been able to ask them.
Surely, banks and credit unions have begun offering alternative loan products to fill the gap, right? Well, when scoring their confidence in approval for a personal loan from their bank or credit union, 40 percent strongly disagreed or somewhat disagreed with the statement. Another 30 percent preferred not to say or didn’t have an opinion, leaving less than a third of respondents who believe they can get potential approval for a loan from their bank or credit union.
The Southwest Public Policy Institute’s groundbreaking research on consumer access to small-dollar short-term credit through traditional banks and credit unions supports consumers’ lack of confidence. In “No Loan For You!,” SPPI found that no banks offered easy and quick access to small-dollar short-term credit. Similarly, in “No Loan For You, Too!,” SPPI found an 86 percent denial rate from credit unions. When consumers need credit with alacrity, three weeks of loan hunting is a luxury that many borrowers cannot afford.
As we dissect the impact of the rate cap in New Mexico, it’s crucial to acknowledge a developing story in the world of consumer finance. Aaron Klein’s recent exposure of the practices of credit unions in California hitting their customers with high-cost fees offers a startling parallel to New Mexico’s credit situation.
Like New Mexico, California imposed caps on certain loan products, giving consumers fewer options when they need credit. Credit unions are often portrayed as consumer-friendly lenders. Klein reveals that some credit unions have been profiting significantly from overdraft fees, traditionally seen as a high-cost product and burden to their customers. This is especially concerning considering the survey results from New Mexico, where many consumers now find themselves unable to access short-term, small-dollar credit. The question arises: if credit unions are adopting these practices, how is the consumer better off?
The respondents of the Online Lenders Alliance survey in New Mexico paint a picture of a real need — a need for funds to cover essential expenses. With rate caps, consumers have fewer options. With credit unions potentially hitting consumers with their own high-cost products, these consumers face a double bind. Not only have their usual credit sources dried up due to the rate cap, but the supposedly “safer” alternatives might not be so safe after all. There is a need for broader financial reforms that consider all aspects of consumer credit, ensuring that measures like rate caps don’t leave consumers stranded without viable, ethical alternatives.
Patrick M. Brenner is the president of the Southwest Public Policy Institute, a think tank dedicated to improving the quality of life in the American Southwest by formulating, promoting, and defending sound public policy solutions. Our mission is simple: to deliver better living through better policy.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller.