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F I S C A L I M P A C T R E P O R T

SPONSOR SCORC

ORIGINAL DATE

LAST UPDATED

02/02/06

2/10/06 HB

SHORT TITLE Payday Load Fees and Regulations

SB 636/SCORCS

ANALYST McSherry

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

$200.0

$200.0

Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Companion to House Bill substitute 409

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY06

FY07

FY08 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

$10-$110 $10-$110 $20-$220 Recurring General

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Regulation and Licensing Department (RLD)

Office of the Attorney General (AGO)

SUMMARY

Synopsis of Bill

The Senate Corporations and Transportation Committee Substitute for Senate Bill 636 proposes

to amend the New Mexico Small Loan Act of 1955 to addresses small loan licensees payday type

loan requirements, permitted charges, prohibited acts, collection practices, and additional re-

quired disclosures.

If enacted, the bill would:

•

Define a payday loan and renewed payday loan as: “A loan in which the licensee negoti-

ates a personal check tendered by the consumer and agrees in writing to defer present-

ment of the check until the consumer’s next payday or another date agreed to by the li-

Senate Bill 636/SCORCS – Page

2

censee and the consumer”

Including:

o

Money advances or credit arrangements or extensions of credit for which the li-

censee accepts a dated personal check or debit authorization for the purpose of re-

paying a payday loan or holding a dated instrument prior to negotiating or depos-

iting, paying the consumer, or another person the amount to the instrument actu-

ally paid in exchange for a fee finance charge or other consideration.

And excluding:

o

Overdraft products and services offered by banking corporations, savings and

loan association or credit union and installment loans (pg. 4).

•

Increase the small loan lender licensee fee and renewal fee from five hundred dollars

$500 to seven hundred and fifty dollars $750 (pg. 13).

•

Increase the annual examination fee from two hundred dollars $200 to four hundred dol-

lars $400 (pg. 14).

•

Require licensees to provide the borrower, if requested, a statement in Spanish with the

amount of the loan, payment descriptions, dates, name of licensed office, amount of prin-

cipal, agreed rate of charge, and all other state and federal disclosures (pg. 23).

•

Add a section regarding payday loans requirements providing (pg 29):

o

That a licensee cannot make a loan to a consumer with outstanding payday loans

exceeding $1,500.00 or thirty percent of the consumer’s gross monthly income,

whichever is less,

o

The consumer is limited to 2 outstanding payday loans, and no loans for consum-

ers under a payday loan repayment plan (pg. 30),

o

That payday loans can have a minimum term of 14 days and a maximum of 35

days, and

o

That there should be a scheduled pay date for the consumer within the term of the

payday loan and the right to rescind the payday loan transaction.

•

Amend the Small Loan Act section “Fees and Costs” and “Payday Loan Products” to:

o

Cap delinquency fees to 5 cents per dollar and total delinquency charges on any

installment to 10 dollars (pg. 27)

o

Caps the number of delinquency fees charged to one per installment, regardless of

the number of periods the particular installment is late.

o

Cap the maximum fee amount that a payday lender can charge. For a new loan,

for the first $300.00 the lender may charge $17.00 per $100.00, $15.00 per addi-

tional $100.00 up to $500.00, and an additional $13.00 per hundred up to

$1,500.00. If the consumer renews the payday loan, the lender may charge, for

the first $300.00, $15.00 per $100.00, $13.00 per additional $100.00 up to

$500.00, and an additional $11.00 per hundred up to $1,500.00. The lender can

only charge one $15.00 fee for insufficient funds to pay the payday loan (pg. 32).

•

Prohibit certain practices when a small loan licensee makes payday type loans, such as

(pg 35-37):

o

The licensee could not use the criminal process to collect on a payday loan,

o

The licensee could not charge a fee to cash a check representing the proceeds of a

payday loan and the licensee cannot have more than one payday loan to a con-

sumer at a time for all licenses operated under the same trade name.

o

Agency or partnership agreements are prohibited if they are used as a scheme or

contrivance to circumvent the Act.

o

The new section also addresses additional consumer protections.

•

Limit payday loan renewal to one time (pg. 38).

Senate Bill 636/SCORCS – Page

3

•

Require the licensee to allow a consumer that has renewed a payday loan one time to en-

ter a repayment plan which allows the consumer to payoff the payday loan in equal in-

stallments up to 98 days fee free (pg. 38).

•

Require the consumer to have a 7 day waiting period before entering into a new payday

loan agreement if certain conditions are met (pg. 39).

•

Require the Director of the Financial Institutions Division to certify a commercially rea-

sonable method of verification to be used by payday lenders in order for them to meet the

requirements of the bill regarding payday loans (pg. 39).

•

Require additional disclosures on a payday loan document (pg. 43).

•

Make the effective date of the changes November 1, 2006 (pg. 44).

FISCAL IMPLICATIONS

According to RLD, the proposed bill would generate additional revenue for FY07 with the in-

crease in original and renewal license fee from $500.00 to $750.00 and the increase in examina-

tion fees from $200.00 to $400.00.

Revenue estimate is based only on the increased dollar amount of the renewal license and ex-

amination fees and not the total revenue generated. Currently there are over 700 small loan li-

censees. With the new provisions regarding Payday lending, estimates regarding how many li-

censees would choose not to renew their license indefinite, however therefore; an estimate of 600

is used for the calculation.

License increase of $250.00/license, number of (renewals estimated at 600): $150,000.00

Reduced by the loss of 100 licensees ($500*100) ($50,000.00)

Examinations increase of $200.00/exam (estimated at 600) $120,000.00

Reduced by the loss of 100 licensees ($200*100) ($20,000.00)

Total $200,000.00

RLD asserts that there may be additional budget impact beginning in FY07. The Financial Insti-

tutions Division projects that it could need to hire more examiners to monitor the licensees for

compliance with the provisions of the bill.

Estimated cost per examiner:

Salary @ $30,000 + 30% benefits $39,000

Office space @ 150 sf @ $20 per sf 3,000

Per Diem @ $275 per week times 26 weeks 7,150

Car 6,000

Estimated cost per examiner $55,150

The estimated additional operational impact above has been estimated based on the increased

workload for the new requirements costing in the range of $10 thousand (some increased work-

load, potentially contracted) to $110 thousand (hiring an additional 2 examiners 350 licen-

sees/inspector)

SIGNIFICANT ISSUES

It is not clear how many businesses which currently make payday loans would continue to do so

Senate Bill 636/SCORCS – Page

4

under the proposed provisions and therefore it is unknown how much revenues and oversight

would change with the proposed amendments.

Workload for the Financial Institutions Division and how the licensee pool could increase or de-

crease with the proposed changes depending upon the level of licensee pool changes which result

from the proposed regulations.

According to the Office of the Attorney General, subsection (A) would increase the total amount

of debt that consumers may incur and would place consumers at greater financial risk. OAG as-

serts that most states limit payday loans to $500.00. The amendment triples that typical limita-

tion.

OAG further asserts that:

Subsection (C), which removes the 14-day minimum loan term, would permit the lender

and borrower to agree in writing to a term shorter than 14 days. This amendment signifi-

cantly increases the cost to borrowers of this loan product. At a 14-day term, the permit-

ted $17 per $100 borrowed equates to 443% APR. If the loan is, e.g., for a 3-day term,

the APR is 2,068%. Consideration of the APR permitted by the provisions of HB 409 is

important. The federal Truth-in-Lending Act requires disclosure of finance charges, in-

cluding an Administrative Fee such as the one contemplated by this proposed legislation,

so that consumers have the opportunity for “an informed use of credit.” 15 USC 1601(a).

“It is the purpose of [the Truth-in-Lending Act] to assure a meaningful disclosure of

credit terms so that the consumer will be able to compare more readily the various credit

terms available to him and avoid the uninformed use of credit, and to protect the con-

sumer against inaccurate and unfair credit billing and credit card practices.” Id. The de-

scription of this finance charge as an “Administrative Fee” appears to circumvent the in-

tent of the federal Truth-in-Lending Act to provide consumers with a uniform system of

disclosure that will permit meaningful comparisons of the cost of credit.

OAG cites:

Section 13, 58-15-33 as a section which would result in an increase in finance charges to

the consumer, again increasing the effective APR of the loan transaction.

Subsection (E) adds a new “electronic verification fee” amount, to be determined

by Director, that could be charged upon execution of a new payday loan.

Subsection (G) adds a prohibition on more than one redeposit of a rejected check

or electronic debit without the consumer’s consent. This provision protects the consumer

from the existing abusive practice of repeated re-deposits and related bank fees.

PERFORMANCE IMPLICATIONS

If more examiners are needed to monitor compliance with the bill, but funds are not appropri-

ated, examiners currently on staff may need to also monitor compliance with this bill in addition

to their current examination responsibilities. This could affect the Financial Institutions Divi-

sion’s performance measure of examination turnaround in 30 days.

ADMINISTRATIVE IMPLICATIONS

Starting in FY07 the Financial Institutions Division may need to redistribute, or hire examiners

to monitor for compliance with the bill. According to RLD, it is difficult to determine what ef-

fect the new provisions of the bill will have regarding the number of small loan licensees.

Senate Bill 636/SCORCS – Page

5

The Financial Industries Division will have the additional responsibilities of indexing the Ad-

ministrative Fee to the CPI at least every three years; promulgating regulations for the consumer

reporting service and determining an appropriate fee to be charged consumers for verification

through the consumer reporting service.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Substitute Senate Bill 636 is a duplicate of substitute House Bill 409 relates to Senate Bills 548,

475, and 448. The bill also relates to NMAC 18-12-4 “Mandatory Signage for Payday lenders

and title loan companies.”

OTHER SUBSTANTIVE ISSUES

The substitute bill removes military-specific provisions included in the originally-introduced bill.

According to RLD, the rules promulgated by the Attorney General regarding Payday lending are

significantly different than the proposed bill. The Attorney General’s rule becomes effective on

2-25-06 and the provisions of the bill become effective 11-1-06.

OAG cites the following sections and potential problems:

Section 12 The description of the finance charge as an “Administrative Fee” appears to cir-

cumvent the intent of the federal Truth-in-Lending Act to provide consumers with a uniform sys-

tem of disclosure that will permit meaningful comparisons of the cost of credit.

Section 13 The requirement that the administrative fee be fully earned and nonrefundable

may violate the Federal Rebate Act, 15 U.S.C. 1615(a), in certain circumstances. The Act pro-

vides that “If a consumer prepays in full the financed amount under any consumer credit transac-

tion, the creditor shall promptly refund any unearned portion of the interest charge to the con-

sumer.” The only exception to this is for refunds that are less than $1.00.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

The NM Small Loan Act will be maintained in its current state. Payday loan businesses would

not be required additional disclosures, caps on fees and charges, maximum loan amount, or other

restrictions which would be imposed by this bill.

POSSIBLE QUESTIONS

1.

What is the significance of the proposed start date of November 1, 2006.

2.

How are the attorney general rules different than the proposed bill.

3.

How many inspectors currently oversee small loan lenders. How many businesses does

each inspector typically oversee. What additional workload or time commitment per in-

spection is expected based on the new requirements included in this bill.

EM/nt:mt