'Payday Loans' Plague New Mexico's Working Poor

New Mexico's high poverty rate has created a climate for a practice that many question but the government does not yet regulate: loans made against paychecks. Legislators have failed in the past to control the loans, but they're trying again.

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Next we'll report on credit for people who don't quite make it from paycheck to paycheck. They get so-called payday loans, which, as the name suggests, are meant to get you to the next payday. The problem is that if you do not pay it back fast, you may face interest rates and fees of more than 500 percent.

You can find people struggling to pay back these loans almost anywhere, and it's a major problem in the state of New Mexico. That's one of the poorest states, and as Eric Mack reports, it has almost no rules on payday lending.

ERIK MACK: Fifty-six-year-old Ken Collins(ph) is pulling a company car over to the curb on a quiet residential street in Gallup, New Mexico. In the passenger seat is Roger Manuelito. He's a developmentally disabled man, and he's getting dropped off here for work.

Mr. KEN COLLINS: You're going to start here and go this way?

Mr. ROGER MANUELITO: (Unintelligible)

Mr. COLLINS: Okay. Okay.

MACK: Collins works for a local non-profit that assists disabled people. He's been doing this work ever since he recovered from a brain injury suffered in a snowmobile accident. He says after the injury his behavior became more impulsive and he started to have trouble controlling his spending.

Mr. COLLINS: I can teach it. I can talk to Roger and Ted and Lionel and other consumers that I work with about money management and making sure that they don't bounce checks and all that, but for some reason I can't do it, you know? I can't do it.

MACK: Collins started using some of Gallup's nearly 40 payday loan stores a few years ago when he needed cash fast to fix his car. He went back to pay a veterinarian bill, and that's how it started.

(Soundbite of door closing)

Unidentified Woman: How are you?

Mr. COLLINS: Oh, not good.

Unidentified Woman: Not good?

MACK: Today, Collins is visiting the handful of payday loan stores he's borrowed from. He's deferring his payments again until his next payday.

Mr. COLLINS: I can't make (unintelligible) I can't yet because I've only got, like, 12 bucks in my account.

Unidentified Woman: Oh, okay. Do you want to just do an arrangement for...

Mr. COLLINS: I've had to use them because I don't have that good a credit. All I've been able to do now is just make interest payments. I've been averaging about probably four or five hundred dollars a month just on interest alone.

MACK: And many consumers are in an even tighter spot than Collins.

Ms. ANGELICA ANAYA-ALLEN (Senior Citizens Law Center, Albuquerque, New Mexico): I've talked to consumers who have as many as 20 payday loans.

MACK: Angelica Anaya-Allen is with the Senior Citizens Law Center in Albuquerque.

Ms. ANAYA-ALLEN: Most borrowers end up going to another lender to take out a loan to pay back the interest or the fees on their first loan. And it just builds from there.

MACK: According to figures compiled by the state, the average annual percentage rate for interest on a payday loan in New Mexico was 564 percent in 2005. That's the third highest in the nation. And the average borrower takes two months, or at least four pay periods, to pay it off. After fees and interest are added, that person will end up paying back almost twice the original amount borrowed.

Christina Hawkes(ph) owns two payday loan stores in Albuquerque, and she concedes the loans are high cost, but argues that her interest rates are actually better than the alternative.

Ms. CHRISTINA HAWKES (Payday Loan Store Owner): If you look at overdraft protection that the banks offer, your convenience pay that a bank will offer, they're in triple and quadruple digits. We're an alternative to an overdraft fee.

MACK: It's an alternative that does well in New Mexico, where widespread poverty is combined with the absence of payday loan regulation. The state is one of three that Morgan Stanley recently described as saturated with payday lenders, with one for every five thousand residents. In Gallup, there is one for about every 500 residents. Both legislators and Governor Bill Richardson have tried in recent years to regulate payday loans, but Lieutenant Governor Diane Denish says so far the lending industry has succeeded in holding up the process.

Lieutenant Governor DIANE DENISH (Democrat, New Mexico): There is a very powerful lender lobby out there. The last count I knew, there were something like 22 payday lenders represented by lobbyists in Santa Fe in the last legislative session.

MACK: But this year there's a strong push for a 36 percent cap on interest for small loans, riding off the momentum of new federal legislation setting that same limit for loans to all military families, including many in New Mexico.

Christine Hawkes says extending the cap to all New Mexicans would shut down the payday loan industry overnight.

Ms. HAWKES: That would put us out of business. We couldn't even pay the light bill. We'd be in the same predicament that the people coming in to borrow money to pay their light bill would be in.

MACK: The New Mexico legislature is set to consider rules for payday lending in the session currently underway. Two competing bills have already been introduced by the same legislators who have been trying unsuccessfully to put limits on lending for the past five years.

For NPR News, I'm Eric Mack.

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