“Half of the harm that is done in this world
Is due to people who want to feel important.
They don’t mean to do harm – but the harm does not interest them.
Or they do not see it, or they justify it
Because they are absorbed in the endless struggle
To think well of themselves.”

T. S. Eliot, The Cocktail Party (1949)

DOI:  10.13140/RG.2.2.21790.10565/1

This report is also available as a PDF.


Imagine you are a married father of three. You own a home and make your mortgage payments on time. Your work history is solid, your credit scores are stellar (over 800), and you have no criminal record. By every measure, you are a well-qualified prospective borrower.

The scenario is not a fantasy for one of us (Patrick M. Brenner), who recently attempted to obtain a short-term, small-dollar loan from three national banks in the Albuquerque, New Mexico metropolitan area. His experience exposed an unpleasant reality that should disturb all who care about the customers and providers of financial services in the Land of Enchantment.

Last month, The Pew Charitable Trusts claimed that “five years ago, no large banks offered small installment loans or lines of credit to checking account customers with low or no credit scores.” But today, “six of the eight largest banks, measured by their number of branches, do.”

After reading about “the new availability of bank small-dollar loans,” Patrick was curious. Of the financial institutions Pew listed, three have branches in New Mexico: U.S. Bank, Wells Fargo, Bank of America. Over the course of a week, Patrick applied for a small-dollar loan at each of the financial institutions. His experiences were far from “consumer-friendly.”

For U.S. Bank, the process started easily enough: Patrick strolled into the lobby of a local branch and asked about a “Simple Loan.” The tellers didn’t understand his query and requested a manager, despite Patrick using U.S. Bank’s own name for the product.

“We don’t offer these loans in branch,” said the manager. “You’ll need to apply online.”

“But I don’t have an account with online banking access,” stated Patrick.

“Then you’ll need to open a checking account.”

Patrick did as told – supplying a $25 minimum to open a checking account, and agreeing to fees of about $5 per month. (An ATM was needed to withdraw the requisite cash.)

Patrick returned with the cash, and once the checking account was established – after a relatively simple application – online banking was set up. From there, applying for the loan was smooth.

The entire process, from entering the lobby until receiving the rejection notice, took about three hours, including transit time. Unfortunately, the application was denied.

The same procedure took place at Bank of America. Denial, again, was the result – after the same amount of time was wasted and the same amount of cash was lost. Now Patrick was down $50, and still didn’t have access to the small loan he “needed.”

Patrick needed a checking account to borrow from Wells Fargo, too. But after his first visit to a local branch, it was determined that an appointment was necessary. The earliest opportunity was 10:00 am the following morning.

Patrick arrived promptly at 9:55, but 10:00 am came and went, as other walk-in customers took up positions with the available bankers. Patrick was not seen until about 10:15 am. After a similarly lengthy process, Patrick finally left the branch with his new checking account, short by another $25. From there, the online application for the loan was rejected, again. Wells Fargo took over four hours of time, including transit to and from the branch, twice, as well as the delays in meeting the appointment time by the branch employees.

After visiting these three branches, it became clear: the lauded “consumer-friendly small-dollar loan products” offered by the big banks were anything but consumer-friendly. In the end, no small-dollar loan was offered.

To reiterate, Patrick is solidly middle class, with an excellent financial history and not so much as an outstanding parking ticket. He and his wife have access to revolving credit from numerous institutions, and their accounts are all in good standing.

So why was Patrick denied access to a small-dollar loan – three times?

‘Payday Loans’: Just the Facts

The Federal Deposit Insurance Corporation defines the “unbanked” as those who “do not have an account at a federally insured depository institution,” and the “underbanked” are those who “have an account and also use nonbank products or services that are disproportionately used by unbanked households to meet their transaction and credit needs.”

There are several reasons why Americans are unbanked/underbanked. For some, the expense of “maintaining a bank account, including meeting minimum balance requirements and paying fees for overdrafts and other services,” is too burdensome. Others have a “lack of trust in banks,” and some have a passionate “desire for privacy.”

In Albuquerque, New Mexico’s largest city, “a third of the households … do little or no mainstream banking, substantially higher than the national average.”

Fortunately, alternative financial services (AFS) exist to meet the needs of the unbanked/underbanked. Options include “[c]heck-cashing outlets, money transmitters, car title lenders … pawnshops, and rent-to-own stores.” The AFS marketplace includes what critics deride as “payday loans.” Whatever one calls them, they

provide fast cash to cover emergency situations or help pay a borrower’s expenses from one paycheck to the next. These unsecured loans have a short repayment period … . A balloon payment – full amount of the loan plus fees – is generally due on the borrower’s next payday after the loan is made. 

The loans are generally for $500 or less and come due within two to four weeks after receiving the loan. Loan lengths vary based on the borrower’s pay schedule or how often income is received – so the length could be for one week, two weeks, or one month.

Borrowers “tend to be relatively young and earn less than $40,000; they tend to not have a four-year college degree; and while the most common borrower is a white female, the rate of borrowing is highest among minorities.” As the Competitive Enterprise Institute noted, for the unbanked/underbanked, “a car breaking down or the need for emergency travel” can impose an obstacle that would not concern most middle- and upper-income households. And for people at the lower end of the socioeconomic scale “who could pay back [a small-dollar] loan in a few months, or even a few weeks,” the “options are limited”:

A bank typically won’t process a consumer loan of a few hundred dollars. Sometimes folks in a pinch can borrow money from relatives, but even when they can, for many this is a blow to their pride.

These individuals can also be late in paying their bills and credit card debt, bounce a check, or overdraw on their debit card. But these options not only result in lowering their credit scores, which affect their ability to better their lives through a new job or starting a business, they are often more costly than a payday loan would be.

It’s little wonder, then, that from close to zero just three decades ago, millions of Americans now conduct business with the short-term, small-dollar credit industry every year. And these types of loans are increasingly moving online. Clarity Services, the “leading credit reporting agency for near-prime and nonprime consumers,” found that between 2016 and 2019, the volume of “online single pay loans” more than doubled.

Missing the Point – and the Purpose

In 1998, the Consumer Federation of America contended that “[payday] loans sanction the writing of bad checks and entice consumers into relying on very expensive debt to live beyond their means.” It was one of the earliest attacks on an industry that deep-pocketed activists and media-savvy politicians on both the left and right label “predatory.”

In 2010, President Obama touted the federal government’s new Consumer Finance Protection Bureau (CFPB) as having “the potential to save consumers billions of dollars over the next 20 to 30 years,” via “simple stuff,” including “making sure that payday loans aren’t preying on poor people in ways that these folks don’t understand. In 2019, the cable-news commentator Tucker Carlson thundered: “Why is it defensible to loan people money they can’t possibly repay? Or charge them interest that impoverishes them? Payday loan outlets in poor neighborhoods collect 400 percent annual interest.”

When exploring the reality of short-term, small-dollar credit, Carlson’s accusation is the best place to begin. The industry’s enemies monotonously maintain that it imposes excessively high “interest rates” on borrowers. But as a Cato Institute scholar observed, calculating an annual percentage rate (APR) for the type of loans Carlson denounced requires “a little bit of hocus-pocus.” Customers typically pay a flat fee for borrowing, and by their very nature, the loans are of very limited length:

[F]ew, if any, borrowers take a whole year to pay off their payday loans. Data suggest most borrowers pay back the initial amount borrowed within six weeks, so it is highly unlikely that most borrowers would end up paying anywhere near the purported APR of the loan.

Economist Thomas Sowell exposed the fallaciousness of the APR artifice with two helpful analogies:

Using this kind of reasoning – or lack of reasoning – you could quote the price of salmon as $15,000 a ton or say a hotel room rents for $36,000 a year, when no consumer buys a ton of salmon and few people stay in a hotel room all year. It is clever propaganda.

As for Obama’s insinuation that borrowers are too stupid to know what they’re doing,

payday loans enjoy widespread support among their users. Surveys have found that 95 percent of borrowers say they value having the option to take out a payday loan. The same proportion also believe that payday loans provide a safety net during unexpected financial trouble. A 2009 comprehensive economic analysis of consumer demand for payday loans by George Washington University Economics Professor Gregory Elliehausen … found that 88 percent of respondents were satisfied with their last transaction. Less than 2 percent of the consumer complaints filed with the CFPB are related to payday loans, with the vast majority related to already illegal collection practices.

Small-dollar lenders are often more competitive on price and accessibility than traditional banks. Some customers prefer payday lenders because they are more transparent and provide better service. Rather than being hit with an unexpected overdraft fee, customers appreciate the transparency of a flat, predictable fee. Storefront payday lenders also foster personal relationships between the teller and the customer. Professor Lisa Servon … worked as a check casher and small-dollar loan teller. She found that many customers felt they got better service than at banks. According to Servon, not a single person she served complained about being charged too much or about quality of the products, or got into an argument with their teller. She and her colleagues were repeatedly tipped by their customers who appreciated the service.

Finally, while opponents of short-term, small-dollar credit assert that the industry operates in a “Wild West” environment bereft of government scrutiny, that is not the case:

Payday lending is highly regulated at the state level – including through usury limits, maximum loan amounts, and proscribed collection practices – and is subject to existing federal laws covering consumer credit generally, such as the Truth in Lending Act, Equal Credit Opportunity Act, Electronic Funds Transfer Act, and the Gramm-Leach-Bliley Act.

‘Helping’ by Hurting

Despite their vacuous claims, crusades against “payday loans” have proven successful in several states. A 36 percent “APR” cap, enacted via legislation on ballot initiative, is often the goal. Such a mandate was adopted by South Dakota in 2016, Colorado in 2018, California in 2019, and Nebraska in 2020.

Ironically, as the “consumer protection” has intensified, research undercutting its justifications has grown. In 2016, an investigation published by The Journal of Law and Economics concluded that “consumers switch to other forms of high-interest credit when payday loans become unavailable.” The following year, a professor at the University of Idaho found that Ohio’s “attempt to eliminate hardships caused by payday loan usage through prohibition .. may have inadvertently shifted the problem from one industry to another” – i.e., with “payday loans” curtailed, “consumers will seek alternatives and substitute across other financial service products, such as pawnbrokers, over-draft fees, and direct deposit advances.”

Clearly, “banning or limiting payday lending doesn’t alter the underlying reasons why people seek out such loans. Restricting payday loans pushes users to other options, which have tradeoffs of their own.”

A few months ago, a study of Illinois’s cap on the “interest rate” for short-term, small-dollar credit discovered that the restriction “decreased the number of loans to subprime borrowers by 44 percent and increased the average loan size to subprime borrowers by 40 percent.” Furthermore, “an online survey of short-term, small-dollar borrowers in Illinois” found that “only 11 percent of the respondents answered that their financial well-being increased following the interest-rate cap, and 79 percent answered that they wanted the option to return to their previous lender.”

Last month, data released by Colorado’s attorney general “confirmed previous studies’ findings that interest rate caps reduce access to credit for consumers who need it,” with “small dollar loans … less available for nonprime consumers in Colorado than in Utah or Missouri, states with fewer restrictions on small dollar lending.”

At the federal level, it is worth noting the impact of 2006’s Military Lending Act (MLA), which

imposed a 36 percent interest rate cap on consumer credit for active-duty service members and their dependents.

Research … shows that the legislation has offered no benefit to members of the military and their families, and may even have caused some harm. In 2017, researchers at the U.S. Military Academy at West Point found that payday lending has had no adverse effects on members of the military and that the MLA was unnecessary. Further, since the MLA was enacted, the number of financial services companies operating near military bases and serving military families has dropped. This has contributed to the high number of military personnel suffering from financial distress, which more than doubled between 2014 and 2019.

New Mexico Succumbs

The Land of Enchantment suffers from the fourth-lowest median household income in the nation. It “has long had some of the highest rates of alcohol and drug abuse.” The share of all state births to unwed mothers is third-worst. And the portion of its young-adult population that has dropped out of high school is the largest in America.

Given its profound socioeconomic pathologies – and “progressive” politics – New Mexico is fertile ground for the war on “payday lenders.” In 2005, then-Governor Bill Richardson, making vague assertions about “just a lot of abuses and problems in the state,” proposed “a reasonable cap.” But the industry’s defenders managed to forestall additional regulations for many years, despite a withering onslaught of criticism from city councils, county commissions, religious organizations, liberal lobbyists, taxpayer-financed academics, and a highly sympathetic (and at times, wildly biased) news media. (Dissenting voices were all but nonexistent, although in 2015, the Clovis News Journal’s editorial page gamely declared that it is “simply not government’s place to interfere with the free market.”) 

In 2017, legislation was passed barring any “lender, other than a federally insured depository institution” from making a loan “that has an annual percentage rate … greater than 175%.” Then-Governor Susana Martinez signed the bill into law.

But 175 percent is not 36 percent, and the short-term, small-dollar credit industry was far from safe. In 2020, efforts to tighten the cap strengthened, when a leftist “results-oriented think tank” launched its “End Predatory Lending” initiative. Two years later, Think New Mexico “successfully advocated for the passage of House Bill 132 … to reduce the maximum annual interest rate on small loans from 175% to 36%.” Enthusiastically signed into law by current Governor Michelle Lujan Grisham – in 2021, she had made ending “predatory lending practices by limiting annual interest rates and increasing maximum loan size” a legislative priority – the 40-page legislation became effective on January 1, 2023.

As the new year approached, the Santa Fe New Mexican reported that the law was “already changing the face of the state’s small-lending industry.” The New Mexico Regulation and Licensing Department disclosed that “the number of active licenses for small-loan companies has dropped 7.5 percent in recent months, from 452 in June to 418 in November, and employees in the industry say numerous lenders have closed up shop.” Three weeks later, the Albuquerque Journal reported that the “‘buy now, pay later’ service Afterpay” would “no longer be doing business in the state,” because of what the company called “regulatory changes.”

As the options for AFS dwindle in the Land of Enchantment, are other players in the financial-services industry stepping up? The Pew Charitable Trusts – based in Philadelphia – boasts about the growing availability of “safer and more affordable” options “for customers who previously would turn to high-cost payday loans or other alternative financial services, such as auto-title loans and rent-to-own agreements.” Santa Fe New Mexican columnist Milan Simonich – conducting no research of his own – makes the same gauzy assertion, writing that “banks are providing small loans to New Mexico customers at reasonable rates, all at a rapid clip.” Patrick certainly didn’t find that to be the case with the three Albuquerque-area banks he tested.


Feel-good public policy often has the opposite effect of what its backers seek to accomplish. Even at this early stage of the 36 percent “APR” cap, the Law of Unintended Consequences appears to be at work in New Mexico. The “successful” campaign against “payday loans” has been a dubious blessing for the state’s unbanked/underbanked. Rest assured, additional government interventions will be proposed to “solve” the problems created by well-intentioned but fundamentally ignorant activists and politicians. 

Policymakers in the Land of Enchantment should replace virtue-signaling regulation with “rules of the road” that foster greater competition in financial services. Clear, consistently enforced standards can ensure that the lending market is open to all providers, while at the same time protecting consumers. To truly aid the state’s middle- and low-income households, the goal should be increased choice, not the inhibition of nontraditional credit options. Ideology and optics are no substitute for a healthy marketplace.

DOI:  10.13140/RG.2.2.21790.10565/1

This report is also available as a PDF.

By Southwest Public Policy Institute

The Southwest Public Policy Institute is 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.

40 replies on “Report: No Loan for You!”

One can feel sorry for Patrick but I’m suprised that a person with his finacial Bonafide’s didn’t have a clue of how lending works.
Not sure of your point of this article. Is it to say 175% interest is well intentioned? Preying on desperate people at any cost is a good thing? Uncontrolled greed is good?
I agree the Pay Day loan business certainly has it’s place. But not with the RIGHT to crush people financially just because you can.
I’m sure that in “Red States” where white slavery, black slavery, all slavery is prevalent, Pay Day Loan companies are not regulated.

You’ve missed the point. It’s not “preying” on desperate people, it’s offering individuals who know what they are doing gain emergency access to funds–many of whom are unbanked.

But I’m sure that from your elitist condescending perch you think you know better than they. Now they have no recourse. Happy?

VERY enlightening article. Thank you for your dedication in actually spending time and money to research this firsthand. It seems like fairly typical behavior for the Big Banks. I would probably direct those underserved borrowers to a non- profit credit union, but never having to do this, (always had family and credit cards as a struggling youngster) I’m not sure of the outcome. As a loan officer, I always cringe when I see those high interest places on a borrowers credit report, but you have opened my eyes to a whole new segment of users. I know there are a ton of people just 1 blown transmission away from homelessness. You made me think!

I now understand the section of the borrower market that makes sense for the lender and the borrower as a bridge for obligations that cannot wait i now am aware of what services they provide but these borrowers have to work their way out of this situation as its not a good long term program

You are griping about not being able to charge 175% interest on a loan?? What a bloody rip off, and you are ripping off the poor among us! Try your scheme on the rich you don’t have over a barrel!!

Perhaps you would be willing to personally supply an emergency loan to the underbanked? As of now, they have nothing. 30% of the people in Abq are underbanked/unbanked and they may need an emergency loan. Do you not trust them to get it the way them deem fit? Most pay it off without incurring the huge interest–that’s what you should get from this article. And that they want and need this service. Stop.

I enlisted in the Navy in 1965 and went from Atlanta to Boot Camp in San Diego. We were paid monthly. Some of us had pay checks stack up; others borrowed $3 for $5 or $7 for $10 between paychecks. We each had the freedom to choose. We used to fight for those freedoms. I guess we’re losing the battle.

This is an interesting study. Most businesses will punish customers who follow the rules and reward those who don’t. Take the insurance companies for instance. The costs of those that abuse the insurance coverage, whether they be automobile drivers committing insurance fraud, or medical patients in chronically poor health due to lifestyle, are passed on to the rest of the customers in higher rates. It is too costly to investigate and prosecute, so those with perfect driving records, or rare doctor visits, still see their rates go up every year.
One would assume it is the same with the small lenders. Interest rates are high because some loans are never paid back, so those that do borrow and pay off the loan, absorb the risk. As a Christian, usury is a concern and sky-high APR rates fall into that category. A man that borrows $100 and can’t pay it back for a year, now owes $500! What are the chances he can ever pay it back? He probably won’t, so the short-term borrowers pay more in up-front fees and APR.
The answer is probably, not more regulation, but to bring the lending closer to the community (i.e. mom & pop lenders, as opposed to corporate lenders) that personally know their customers and can more accurately judge the loan risk and reject the poor risks without incurring the wrath of the State. Honest borrowers would benefit from lower rates and/or lower fees resulting from the lower risk to the lender. As an aside, this is how public assistance (welfare) worked under parishes and local churches, before the government got involved.

Real problem is the education system… WHAT do they teach about REAL life? Basic finance starting with having a checking account… Like it or not life revolves around a credit history — I have gone from an 800+ to 500 and back to a 820 a couple of times in my six decades of dealing with life & credit — Pretty much everything is based on your proving that you can be trusted to keep your word. If you buy on credit that you will pay for it; if you agree to rent that you will pay your rent; that you put money in a checking account that you will not write checks for more than you have in the bank without having an Overdraft Agreement; Insurance for a vehicle and your ability to go out on a limb because you can be trusted to keep your promise to repay is the basic credit rating. People are NOT taught how credit ratings are established and maintained. THE man who went to banks FAILED to keep the most basic trust with the credit rating establishments of an active credit HISTORY. YOU buy your credit rating and history by faithful performance of establishing credit worthiness.

I believe that 175% interest rate is ridiculous but for people who have no or a bad credit history it may be the price they must pay when they are out of options other than a private loan shark. Its a price forced on people by a failed education system which New Mexico has proven it succeeds at. People who have forced themselves to need the these “lenders” are asking others to take a chance — a gamble at best. If the house does’t win (make money) then there is no incentive to trust anyone else.

Instead of the gov’t being a babysitter and stifling those who are willing to take a chance trusting others who need some money, wouldn’t the gov’t be SMARTER demanding that the education system teach REAL world life survival knowledge & skills. NOT what to learn but HOW TO learn.

The issue that has become very apparent that in most New Mexico schools is that most current “teachers’ were schooled to indoctrinate students NOT teach. Teachers have been trained to ignore their ability to inspire people’s natural thirst for knowledge…. its an inherent human trait to learn more and be better at what inspires someone. Current teachers in college were indoctrinated to change the world not to INSPIRE their students.

None of the above surprises me when you realize that the elected gov’t and their appointees are actively accomplishing their goals to dumb down the citizenry to make them easier to manipulate and restore the system of serfs and rulers that has been the ruling hierarchy for thousands of years. The Governor proved it when she ignored her Covid lockdowns for a hair dresser and to buy jewelry.

So it appears that the majority of New Mexicans WANT the gov’t to be their babysitters and rule what rights and freedoms they are allowed to exercise & enjoy as slaves to the rulers.

Personally I think this education should be relegated to the parents. I teach my children Credit-worthiness. Asking the government schools to do this is yet asking for babysitting again don’t you think?

This is a solid argument for why increased choice is always the more equitable option. I’m sure anyone complaining about the injustice of a 175% APR loan has never been in those shoes. If they had been, they’d know that when you’re that desperate, you’ll go to the black market if there’s no other choice. But here we go again with the privileged and democratically-elected “solving” a problem they know nothing about.
I was curious why 36% and found a 2015 article (https://www.mercatus.org/economic-insights/expert-commentary/why-36-cap-too-low-small-dollar-loans) that explained it was calculated based on the costs of supplying a $300 loan in 1916. That took me five minutes to find out. I don’t know how much more evidence you need that New Mexico legislators and voters alike fail at their responsibilities of making informed decisions.

I see two aspects to this and one major element that was not addressed. The banks in the city exhibited callous disregard for the people their small loans programs were obstensibly designed for. In reality they are probably the result of federal programs requiring all banks to develop community-oriented programs. The regulations, however, don’t require compliance in fulfilling the requirements outlined therein. Secondly, the low monetary return to those banks offers little return which is probably lower than the cost of implementation. Underlying all of this is the failure to examine the somewhat invisible, underlaying causal factors; i.e. a lack of financial education in our schools. “Minimum payment due” clauses in billing consumers is click bait that draws the unknowing in long term debt. The effect of minimum payments can lead to charges exceeding the original loan amount. Education on such topics as amortization, annual percentage rate, and compounding interest and other innocuous terms would go far to reducing the impact of these predatory loan practices.

I actually read the entire article, and I had no idea that’s how it all worked. I do have to agree with the poster that said that Patrick was probably denied because didn’t have an established history with those banks (bank is a four letter word BTW) Credit Unions are the way to go. I work at one, and we have a “payday loan”, but it’s not called that. We’d rather help our members in house than have them go elsewhere. I also didn’t realize that the percent rate was annual. I figured it was for a short term period – 3 months etc. Thank you for writing this and enlightening the ones who really read it.

I have been in the finance/small loan business since 2016. When this bill was passed many of my friends/coworkers lost their jobs in New Mexico. Luckily my office was bought out by: World Finance, where you can still get a small or big loan in New Mexico. You can also get your taxes filed. So Patrick find a world finance near by and we would be happy to help you get a loan or file your taxes.

[…] The Southwest Public Policy Institute continues its ongoing probe of short-term, small-dollar lending. While the industry’s products are regularly derided as “payday loans” and erroneously referred to as “predatory” by politicians, ideologues, and activists on both the left and the right, our research – building on the work of many others – offers a compelling counterweight to the one-sided narrative that dominates discussions. Herewith, we present the first update to the March 2023 policy investigation No Loan For You!1 […]

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