New Mexico's highest court cracked down Thursday on small consumer loans carrying quadruple-digit interest rates.
The state Supreme Court said the high-cost "signature loans" violated the state's Unfair Practices Act and the interest-rate terms were "substantively unconscionable."
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The justices capped interest rates at 15 percent for loans by two companies that had been charging an annual percentage rate from 1,147 percent to 1,500 percent.
A $100 loan with a rate of 1,147 percent would carry a finance charge of about $1,000.
The court ordered the lenders to make restitution, repaying consumers any finance charges they paid above 15 percent.
The companies — Cash Loans Now and American Cash Loans — made the loans from $50 to $300 at offices in Albuquerque, Farmington and Hobbs. The companies' lawyer did not immediately return a phone call and email seeking comment on the ruling and how many consumers would receive payments.
Attorney General Gary King had filed a lawsuit against the lenders after receiving consumer complaints. "We consider it initially a huge win," King spokesman Phil Sisneros said of the court ruling.
Lawyers in the office, he said, were reviewing the decision to fully determine its effect on consumers and other lenders.
The court said the companies started offering the loans to avoid state restrictions imposed in 2007 on payday lenders, including a cap on fees.
The loans often went to the working poor, Hispanics and Native Americans, according to the court, and most borrowers had little knowledge about banking and credit transactions.
Payday loans are between 14 and 35 days. Signature loans are for a year and not subject to New Mexico's payday-loan regulations.
Signature loans, the court said, require only the signature of the borrower as well as verification of the borrower's identity, address and employment.
Payday loans are short-term advances of cash against a borrower's future paycheck or when a lender holds a borrower's personal check and agrees to cash it later to cover the debt.
Although New Mexico lifted most interest-rate caps more than 30 years ago, the court said it imposed a 15 percent limit on the loans because that rate was still in place in state law for contracts that didn't specify an interest rate.
In its ruling, the court pointed out that there had been testimony in the lawsuit about one consumer with a $100 loan who had paid finances charges of nearly $161. The individual would owe only $115 under a 15 percent rate cap, and the justices said the lender must refund the difference — about $46.
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