STATE OF NEW MEXICO COUNTY OF CHAVES FIFTH JUDICIAL DISTRICT COURT

FASTBUCKS OF ROSWELL, NEW MEXICO, LLC, FASTBUCKS OF ALAMOGORDO, NEW MEXICO, LLC, FASTBUCKS OF GALLUP, NEW MEXICO, LLC, FASTBUCKS OF LAS VEGAS, NEW MEXICO, LLC, FASTBUCKS OF RIO RANCHO, NEW MEXICO, LLC, FASTBUCKS HOLDING CORP., FASTBUCKS, INC., and FASTBUCKS WAGE AND BENEFITS, LLC, Plaintiffs,v.

Case No.

GARY K. KING, Attorney General of the State ofNew Mexico, Defendant.

PETITION FOR WRIT OF MANDAMUS AND COMPLAINT FOR MALICIOUS ABUSE OF PROCESS Plaintiffs seek a writ of mandamus compelling Attorney General Gary K. King to abide by the limited authority of his office and prohibiting the Attorney General from exceeding his authority under New Mexico law. In addition, plaintiffs seek damages for the Attorney General's malicious abuse of process and damage to their property. INTRODUCTION Attorney General King and others in the Executive Branch have been vocal and active critics of the small/micro loan industry for many years. In spite of compelling evidence regarding the value for many New Mexicans of the micro loans offered by some of the plaintiffs and others, the New Mexico Executive Branch has advocated legislation to effectively prohibit anyone from making such loans. The New Mexico Legislature repeatedly has rejected such legislation.

In response to those failures, Attorney General King now is attempting to legislate by litigating. He has brought a civil action against plaintiffs and under the guise of pursuing violations of New Mexico common law and the Unfair Practices Act, hopes to convince the Court to establish some of the same constraints on plaintiffs' business which were rejected by the New Mexico Legislature. The Attorney General lacks both a reasonable belief that plaintiffs have violated the law and the authority to prosecute such a groundless civil action. This Court must prevent the Attorney General from exceeding the limited powers of his office in his unwarranted attempt to effectuate legislative policy. Moreover, his litigation has damaged plaintiffs' property and the Attorney General is liable for such damages. THE PARTIES, JURISDICTION, AND VENUE 1. Plaintiff FastBucks of Roswell, New Mexico, LLC is a New Mexico limited

liability company, a resident of Chaves County, New Mexico, and a defendant in a lawsuit brought by the Attorney General and captioned State of New Mexico ex reI. Gary K. King,

Attorney General v. FastBucks Holding Corporation, et al., No. DOl Ol-CV-2009-09l 7, pendingin the First Judicial District Court in Santa Fe County, New Mexico (the "AG Action") (a copy of the First Amended Complaint in the AG Action is attached hereto as Exhibit 1). 2. Plaintiff FastBucks of Alamagordo, New Mexico, LLC is a New Mexico limited

liability company, a resident of Otero County, New Mexico, and a defendant in the AG Action. 3. Plaintiff FastBucks of Gallup, New Mexico, LLC is a New Mexico limited

liability company, a resident of McKinley County, New Mexico, and a defendant in the AG Action.

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4.

Plaintiff FastBucks of Las Vegas, New Mexico, LLC is a New Mexico limited

liability company, a resident of San Miguel County, New Mexico, and a defendant in the AG Action. 5. Plaintiff FastBucks of Rio Rancho, New Mexico, LLC is a New Mexico limited

liability company, a resident of Sandoval County, New Mexico, and a defendant in the AG Action. The above five limited liability companies each operate a FastBucks location and provide small/micro loans to New Mexico consumers. Collectively, these plaintiffs are referred to herein as the "FastBucks Stores." 6. Plaintiff FastBucks Holding Corp. is is a Nevada corporation, a resident of Texas,

and a defendant in the AG Action. 7. Plaintiff FastBucks, Inc. is a New Mexico corporation, a resident of Dona Ana

County, New Mexico, and a defendant in the AG Action. 8. Plaintiff FastBucks Wage and Benefits, LLC is a Nevada limited liability

company, a resident of Texas, and a defendant in the AG Action. 9. Defendant Gary K. King is the Attorney General of the State of New Mexico and

the plaintiff in the AG Action. He is the chief law enforcement officer of the State of New Mexico. Plaintiffs sue Attorney General King in his official and individual capacities. 10. The Court has jurisdiction over the subject matter of this action and the parties.

Venue is proper in this district pursuant to NMSA 1978, Section 38-3-1(G) (1988) (for plaintiffs' request for a writ of mandamus) and NMSA 1978, Section 41-4-18(B) (1988) (for plaintiffs' claim of malicious abuse of process) because a plaintiff, FastBucks of Roswell, New Mexico, LLC, resides in Chaves County, New Mexico.

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BACKGROUND FACTS The Small Loan Industry in New Mexico 11. The FastBucks Stores are licensed, regulated, and their practices are governed by

the Small Loan Act of 1955 (NMSA 1978, 58-15-1 to -39 (1955, as amended through 2007)) (hereinafter the "SLA"). The New Mexico Legislature enacted the SLA for a number of reasons and with several goals in mind. Specifically, the Legislature: a) believed that "there exists among citizens of this state a widespread demand for

small loans" and the SLA will "provide legitimate sources of loan credit to a large class of borrowers throughout the state, who cannot otherwise obtain honest and lawful loan accommodations under the general laws of New Mexico governing money, interest and usury." Section 58-15-1(A), (D); b) determined that "the expense of making and collecting small loans . .. is

necessarily high in relation to the amounts lent" and that "experience has proven that such loans cannot be made profitably except under special permissive laws." Section 58-15-1(B); c) recognized that the small loans "are usually made on comparatively unsubstantial

security to wage earners, salaried employees and other persons of relatively low incomes." Id~; d) was concerned with insuring "more rigid public regulation and supervision of

those engaging in the business of making small loans", facilitating "the elimination of abuse of borrowers", and establishing "a system which will more adequately provide honest and efficient small loan service and stimulate competitive reductions in charges." Section 58-15-1(D).; and e) declared that the that the charges established by the SLA "are limiting maximums,

fixed after careful study of modernized, adequate and efficiently functioning small loan statutes of other states, which will permit licensees hereunder to meet the expense and loss hazard incident to the making and servicing of small loans, to the end that licensees may be encouraged

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to establish and maintain supervised and regulated loan agencies, whose competitive operations, while stimulating reductions from maximum allowable charges." !d. 12. Thus, the language of the New Mexico Legislature in the SLA reflects the State's

public policy relevant to the small/micro loan market. New Mexico believes that the making of small/micro loans, like the ones offered by the FastBucks Stores, is an important endeavor for its citizens and should be encouraged by the State. New Mexico appreciates that small loans are expensive to make and are unlikely to be available if lenders are forced to comply with the general laws of New Mexico governing lending. Accordingly, New Mexico enacted special laws permitting smalVmicro lenders to be licensed by the SLA and make small loans with the maximum amount of charges incident to those loans limited only by the amounts specified by the SLA. 13. As the market for small/micro loans evolved, the New Mexico Legislature eased

government regulations and allowed the contours and pace of that market to be shaped by the dynamics of competition and individual choice. For example, at one time the SLA contained a hard cap on interest. However, the New Mexico Legislature repealed that limit in 1981. Section 58-15-14.1 of the SLA limits the method of computing interest, but not the amount that may form the basis of that computation. One "limiting maximum" that the SLA specifies is any maximum explicitly stated by "any usury statute of this state". However, also in 1981, the Legislature repealed the general usury statute. In its stead, the Legislature enacted statutes

requiring the rates be specified in writing and that they be disclosed in a specific manner. These provisions were also later repealed in 1991. Finally, the Legislature specified that entities licensed under the SLA that make installment loans, such as the loans at issue in the AG Action, must comply with the New Mexico Bank Installment Loan Act of 1959. This Act also contained a hard cap on interest until that cap was also repealed by the Legislature in 1981. According to a 5

1999 submission for the New Mexico Legislature prepared by Frank D. Weissbarth, Assistant Attorney General, Consumer Protection Division, "the New Mexico legislature abolished virtually all limits on interest rates" in 1981. At the time, New Mexico regulated "neither the cost of credit nor the kinds of lending practices...." Fin. Inst. Div. Dir., Consumer Lending StudyCommittee Report for the Forty Fourth Session of the New Mexico State Legislature (as

requested by House Memorial 36) at 29 (1999) (attached as Exhibit 2 hereto). 14. In sum, as of 1981, the New Mexico Legislature made the public policy of the

State quite clear: the State would not dictate to private parties a maximum allowable rate of interest. Instead, the Legislature determined that parties could make their own business decisions. Plainly, as the Attorney General's Office itself recognized in its 1985 opinion on the issue, "the maximum rate of interest may now be that rate agreed to in writing by the parties".New Mexico Attorney General Opinion No. 85-1, 1985 N.M. AG LEXIS 5 (February 2, 1985)

(attached as Exhibit 3 hereto). The Executive Branch and the Small Loan Industry 15. In spite of the policy made by the Legislature, the New Mexico Executive Branch

has not been content to have government remain outside the business and choices of private parties. Instead, the New Mexico Executive Branch has sought time and time again to impose its own policy notions on New Mexicans. In 2005, after New Mexico Attorney General Patricia Madrid failed to persuade the Legislature to enact her policy beliefs through the proper course of legislation, she purported to enact regulations governing the loans made by smalVmicro lenders, including the FastBucks Stores. 16. Attorney General Madrid claimed to have the power to regulate small/micro

lenders pursuant to the Unfair Practices Act. Plaintiff FastBucks of Roswell, New Mexico, LLC and others sued Attorney General Madrid in February 2006, claiming that she was engaged in an 6

unconstitutional "power grab" aimed at circumventing the New Mexico Legislature and the Financial Institutions Division, which the Legislature designated to regulate small/micro loans. In March 2006, Attorney General Madrid agreed to stay imposition of the unconstitutional regulations. 17. But immediately thereafter, Attorney General Madrid sought to enact

substantially similar regulations, this time through the Financial Institutions Division of the New Mexico Regulation and Licensing Department and its Director William Verant. Again, Plaintiff FastBucks of Roswell, New Mexico, LLC and others brought suit to prevent the Executive Branch's attempt to unconstitutionally circumvent the Legislature by essentially modifying the terms of the SLA. The Second Judicial District Court in Bernalillo County, New Mexico ruled against the Executive Branch and granted a permanent injunction to prohibit it from enforcing its unconstitutional regulations. A copy of the injunction is attached hereto as Exhibit 4. 18. The Executive Branch and specifically the Attorney General continued to lobby

the Legislature against smalVmicro loans. In the 2007 legislative session, the New Mexico Legislature responded, but only by amending the SLA and adding eight sections that generally pertain to a specific type of micro loan known as a "payday loan'.'. 19. The Attorney General was not satisfied with the Legislature's action. Believing

the Legislature's policy was still too permissive, the Attorney General has continued to press the Legislature to eliminate the small/micro loan business. In 2009, Attorney General King directly sought from the Legislature more restrictions on small/micro loans. A copy of lobbying

information distributed by Attorney General King to the Legislature is attached as Exhibit 5. The Legislature rejected the policies advanced by the Attorney General thereby determining that the small/micro loan business was effectively serving New Mexicans.

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The AG Action 20. Despite the clear policy choices made by the Legislature and the injunction issued

by a Bernalillo County district judge, Attorney General King filed the AG Action in the hope of creating legislation through litigation. 21. The AG Action specifically concerns micro loans made to numerous New Mexico

consumers by the FastBucks Stores. It is undisputed that these loans are made in full compliance with all relevant statutory and regulatory mandates. Nonetheless, the basis of Attorney General King's complaint is that the loans made by FastBucks are "unconscionable both as a matter of New Mexico common law and under the terms of the New Mexico Unfair Practices Act". A careful review of the complaint (Exhibit 1) reveals that Attorney General is seeking to have a court make policies that the Legislature refused to enact. 22. Although plaintiffs are defending the specific allegations of the AG Action, this

Court should prohibit the Attorney General from usurping the province of the Legislature and along the way, damaging plaintiffs' property. Writ of Mandamus 23. 24. Plaintiffs reallege the previous paragraphs. The New Mexico Constitution strictly delineates the powers of government between

the three branches of government: The powers of the government of this state are divided into three distinct departments, the legislative, executive and judicial, and no person or collection of persons charged with the exercise of powers properly belonging to one of these departments, shall exercise any powers properly belonging to either of the others, except as in this constitution otherwise expressly directed or permitted. N.M. CONST. art. III, 1. 25. The New Mexico Supreme Court has long held that New Mexico statute created the

office of the Attorney General and defines and limits his power. The Attorney General has no other 8

authority to act. Although New Mexico statute pennits the Attorney General to prosecute and defend certain lawsuits when in his judgment the interest of the state requires such action, the Attorney General may not usurp the policy making function of the Legislature. The Legislature has determined the policy of the state regarding the making of small/micro loans and the Attorney General simply may not substitute his judgment for that ofthe Legislature. 26. The Attorney General's authority under the New Mexico Unfair Practices Act is

even more limited. The Unfair Practices Act requires that the Attorney General have a "reasonable belief' that a person is using an act or practice prohibited by that law before he can sue in the name of the state to prevent such act or practice. Again, Attorney General King cannot have such a reasonable belief in the face of the polices properly enacted by the New Mexico Legislature. 27. The Attorney General has no legitimate authority to prosecute the AG Action. Malicious Abuse of Process 28. 29. Plaintiffs reallege the previous paragraphs. Attorney General King initiated a lawsuit against plaintiffs without a reasonable

beliefin the validity of its factual and legal allegations against them. 30. Attorney General King's use of the process was not properIII

the regular

prosecution of the claim. 31. Attorney General King's pnmary motive in misusing the process was to

accomplish an illegitimate end. 32. 33. in bad faith. WHEREFORE, plaintiffs request that this Court: 1) enter a Writ of Mandamus prohibiting the Attorney General from exceeding the limited power of his office by prosecuting the AG Action; Plaintiffs have been damaged by Attorney General King's conduct. Attorney General King's conduct was malicious, willful, reckless, wanton, and/or

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2) enter appropriate temporary, preliminary, and permanent injunctive relief; 3) enter judgment in their favor and against Attorney General King and the State of New Mexico for actual damages in an amount to be proven at trial, punitive damages, costs, attorneys' fees; and 4) provide such other relief as this Court deems just. Respectfully submitted,

STREUBELKOCHERSBE MORTIMER LLC

onald F. Koc ersberger II David A. Streubel 320 Gold Avenue SW, Suite 610 Albuquerque, New Mexico 87102-3299 (505) 848-8581 (Voice) (505) 848-8593 (Facsimile) dkochersberger@skm-Iaw.com dstreubel@skm-Iaw.com

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ENDORSEDFIRST JUDICIAL DISTRICT STATE Olj'NEW MEXICO COUNTY OF SANTA FE STATE OF NEW MEXICO. ex TeL GARY K. KING, Attorney General, Plaintiff,

First Judicial District Court

NOV 25 2009Sfitl\#. FijI ~M ~1Aij#..p.1ii8

.

Santll Fe~ Rio Arriba & LOll Alamos Counties

f'lo 130x 2288

v.

No. DOIOlCV20090917

FASTBUCKS HOLDING CORPORATION, FAST BUCKS, INC., FASTBUCKS WAGE AND BENEFITS, LLC, FASTBUCKS OF ALAMOGORDO, NEW MEXICO, LLC FASTBUCKS OF GALLUP. NEW l\tIEXICO, LLC FASTBUCKS OF LAS VEGAS, NEW MEXICO. LLC FASTBUCKS OF RIO RANCHO, NEW MEXICO, LLC FASTBUCKS OF ROS\VELL, NEW MEXICO, LLC Defendants.

FIRST AMENDED COMPLAINT FOR VIOLATIONS OF THE NEW MEXICO UNFAIR PRACTICES ACT. FOR RESTITUTION AND CIVIL PENALTIES, AND FOR DECLARATORY, PRELIMINARY AND PERMANENT INJUNCTIVE RELIEF COMES NOW the State of New Mexico, ex reI. GARY K. KING. Attorney General, by Assistant Attorney General Karen J. Meyers, and alleges that: INTRODUCTION 1.

This is a suit seeking injunctive, declaratory and equitable relief. and

.

restitution and civil penalties pursuant to New Mexico common law and the New Mexico Unfair Practices Act, NMSA 1978 57-12-1 el seq. This action seeks to redress on behalf of the public in New Mexico lending practices by Defendant FASTBUCKS HOLDING FASTBUCKS CORPORATION. WAGE AND Defendant BENEFITS. FAST LLC, BUCKS, Defendant INC., Defendant OF

FASTBUCKS

EXHIBIT

1.1.

.

ALAMOGORDO, NEW MEXICO, LLC, Defenuant FASTBUCKS OF GALLUP, NEW MEXICO, LLC, Defendant FASTBUCKS OF LAS VEGAS, NEW MEXICO, LLC, Defendant FASTBUCKS OF RIO RANCHO, NEW MEXICO, LLC, and Defendant FASTBUCKS OF ROSWELL, NEW MEXICO. LLC (collectively "Defenuants") for loans made at an unconscionable interest rate in excess of 500% per annum, which loans are in violation of New Mexico law.

PARTIES, JURISDICTION AND VENUE2. Plaintiff is the duly elected Attorney General for the State of New Mexico.

He is authorized to bring this action pursuant to NMSA 1978, 57-12-8(A) (1967), and NMSA 1978, 8-5-2(B) (1933). Plaintiff has determined that the matters set forth in this Complaint are in the interest of the State of New Mexico. 3. Defendant FASTBUCKS HOLDING CORPORATION is a duly

registered Nevada corporation, with its principal place of business at 7920 Beltline Road, Suite 600, Dallas, Texas 75254-8154. 4. Defendant FAST BUCKS, INC. is a duly registered New Mexico

corporation, with its principal place of business in New Mexico at 2225 E. Lohman Street, Las Cruces, New Mexico 88001, and its principal place of business outside of New Mexico at 7920 Beltline Road, Suite 600, Dallas, Texas 75254-8154. 5. Defendant FASTBUCKS WAGE AND BENEFITS, LLC, is a duly

registered Nevada limited liability company, with its principal place of business at 7920 Beltline Road, Suite 600, Dallas, Texas 75254-8154. 6. Defendant FASTBUCKS OF ALAMOGORDO, NEW MEXICO, LLC is

a duly registered domestic limited liability company, with its principal place of business

Complaint for Violations of the New Mexico Unfair Practices Act Page 2 of 15

at no A South White Sands Boulevard, Alamogordo, New Mexico 88310. Defendant is also registered and licensed under the New Mexico Small Loan Act of 1955, NMSA 1978, Sections 58-15-1 el seq. 7. Defendant FASTBUCKS OF GALLUP, NEW MEXICO, LLC is a duly

registered domestic limited liability company, with its principal place of business at 605 West Highway 66, Gallup, New Mexico 87301. Defendant is also registered and licensed under the New Mexico Small Loan Act of 1955, NMSA 1978, Sections 58-15-1 el.w!q. 8. Defendant FASTBUCKS OF LAS VEGAS, NEW MEXICO, LLC is a

duly registered domestic limited liability company, with its principal place of business at

to 10 Mills Avenue, Las Vegas, New Mexico 8770 I. Defendant is also registered andlicensed under the New Mexico Small Loan Act of 1955, NMSA 1978, Sections 58-15-1el seq.

9.

Defendant FASTBUCKS OF RIO RANCHO, NEW MEXICO, LLC is a

duly registered domestic limited liability company, with its principal place of business at 1650 B. Rio Rancho Boulevard, Rio Rancho, New Mexico 87124. Defendant is also registered and licensed under the New Mexico Small Loan Act of 1955, NMSA 1978, Sections 58-15-1 el seq. 10. Defendant FASTBUCKS OF ROSWELL, NEW MEXICO, LLC is a duly

registered domestic limited liability company, with its principal place of business at 200 West Second Street, Roswell, New Mexico 88201. Defendant is also registered and licensed under the New Mexico Small Loan Act of 1955, NMSA 1978. Sections 58-15-1el seq.

Complaint for Violations of the New Mexico Unfair Practices Act Page 3 of 15

11.

1\t all relevant times Defendants have been. individually and collectively.

engaged in trade or commerce in New Mexico within the meaning uf NMSA 1978. 5712-2(C). 12.

Defendants have offered andlor originated- -the- -unconscionable---Ioan-- - - --- -- --

products at issue in this lawsuit and, upon information and belief. will continue to offer andlor originate such loan products. to residents located throughout the State of New Mexico, including in Bernalillo County. 13. The loan products Defendants offer to New Mexico consumer'i are not

expressly prohibited under the terms of the Small Loan Act. These loan products are, nonetheless. unconscionable both as a matter of New Mexico cOll1mon law and under the terms of the New Mexico Unfair Practices Act.14.

For purposes of the general venue stanlte in New Mexico, Plaintiff resides

in Santa Fe County. Venue in this judicial district is therefore proper pursu:mt to NMSA1978, 38-3-1(A). DEFENDANTS' BUSINESS PRACTICES

15.

Defendants are engaged in the practice of originating and servicing high-

cost installment loans throughout the State of New Mexico. As set forth in greater detail herein, these loans share a pair of common features that make them especially dangerous to New Mexico consumer welfare: (1) interest rates in excess of 500/,~ per annum; and (2) prolonged amo11ization periods which result in cumulative principal amount financed by as much as five times.paym~nts

that exceed the

16.

Upon infommtion and belief, Defendants routinely .Jriginate these highborrow,~rs'

cost installment loans without making any inquiry into the

reasonable ability

Complaint for Violations of the New Mexico Unfair Practices Act Page 4 of 15

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to repay the loans under the proffered terms. The exorbitant interest ratcs offered in these loans are adhesive elements of a "take-it-or-Ieave-it" bargain. 17. The Office of the New Mexico Attorney General has received multiple

complaints against the named Defendants.. Upon' fnfonnation and belief, Defendants FASTBUCKS HOLDING CORPORATION, FAST BUCKS, INC., and FASTBUCKS WAGE AND BENEFITS, LLC, are affiliated with the other named individual Defendants as parent companies, and have subsidiary LLCs operating throughout the State of New Mexico, all of which are engaged in the unconscionable trade practices complained-of herein. Further, and upon information and belief, Defendants

FASTBUCKS HOLDING CORPORATION, FAST BUCKS, INC., and FASTBUCKS WAGE AND BENEFITS, LLC, govern and control the business practices of the other named Defendants, including the unconscionable trade practices complained-of herein. To wit:

Phyllis Etdttv of Crownpoint. New Mexico18. On December 16, 2006, New Mexico resident Phyllis Etcitty took out an

$800 loan from Defendant FASTBUCKS OF GALLUP, NEW MEXICO, LLC. A copyof the "Installment Loan Agreement, Security Agreement, and Disclosure Statement" (hereinafter "Etcitty Agreement") is attached hereto as Exhibit A. 19.mIRUIR,

The Etcitty Agreement carries an interest rate of 521.49 perce"t per

TIle Agreement calls for the $800 loan to be paid in eleven monthly installments

of $348.66 starting on January 17,2007, with a final '"balloon" payment of $349,08 due on December 15, 1007. All told, the Etcitty Agreement calls for Ms. Etcitty to a pay a

total of$4,184,34 over a olle-year period on a loan of$800.

Complaint for Violations of the New Mexico Unfair Practices Act Page 5 of 15

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20.

A copy of the "Payment History" for the Etcilly Agreement is attached

hereto as Exhibit B. The Payment History retlects that Ms. Etciny made a total of seven installment payments on her loan. 21. The first"' installment, paid on January 17, 2007, was in the amount of

$365.76, of which $342.90 was allocated to the payment of interest, and $22.86 to reduction of the principal balance of the loan. The second installment, paid on February 14,2007, was in the amount of $348.66, of which $333.10 was allocated to the payment of interest, and $15.56 to reduction of the principal balance of the loan. The third installment, paid on March 14, 2007, was in the amount of $348.66, of which $304.66 was allocated to the payment of interest, and $44.00 to reduction of the principal balance of the loan. The fourth installment, paid on April 16, 2007, was in the amount of $348.66, of which $338.33 was allocated to the payment of interest,_ and $10.33 to reduction of the principal balance of the loan. The fifth installment, paid on May 23, 2007, was in the amount of $358.50, of which $358.80 was allocated to the payment of interest, and $0.00 to reduction of the principal balance of the loan. The" sixth

installment, paid on June 30, 2007, was in the amount of $700, of which $398.33 was allocated to the payment of interest, and $301.67 to reduction of the principal balance of the loan. The seventh and final installment, paid on August 8, 2007, was in the amount of $348.66, of which $344.68 was allocated to the payment of interest, and $3.98 to reduction of the principal balance of the loan. 22. Over a seven-month period, Ms. Etcitty paid Defendant Fast Bucks of

Gallup, NM, LLC a total of 52,818.90 in seven unequal installments. Of the $2,818.90

Complaint for Violations of the New Mexico Unfair Practices Act Page 6 of 15

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that she paid to Defendant, a total of $2,420.50 was allocated to the payment of interest, and only $398.40 to reduction of the principal balance of her $800 loan. 23. Moreover, and upon information and belief. the hme 30, 2007 installment

of $700 was paid via an ACH debit from Ms. Etcitty's banking account that Ms. Etcitty did not authorize.

Enclowa EndwClrrior of Rio Rancho. New Mexico24. On November 13, 2006, New Mexico resident Endowa Endwarrior took

out a $934 loan from Defendant FASTBUCKS OF RIO RANCHO, NEW MEXICO,LLC.

A copy of the "Installment Loan Agreement and Disclosure Statement"

(hereinafter "Endwarrior Agreement") is attached hereto as Exhibit C. 25. The Endwarrior Agreement carries an interest rate of 521.49 percent per

annum. The Agreement calls for the $934 loan to be repaid in twenty-three bi-weeklyinstallments of $194.92 starting on December 1,2006, with a final "balloon" payment of $197.32 due on October 19, 2007. All told, the Endwarrior Agreement calls for Ms. Endwarrior to pay Ii total of$4,680.48 over nearly a one-yearperiod on a loan of$934. 26. The Endwarrior Agreement is accompanied by a "Simple Interest

Amortization Schedule" (hereinafter "payment schedule"), which is attached hereto as Exhibit D. The payment schedule reveals that for each of the first six installments of $194.92 due under the Endwarrior Agreement, the full amount of each installment would be allocated to payment of interest on the loan. As such, the Agreement calls for Ms. Endwarrior to make a cumulative payment of $1,169.52 on her $964 loan before she reduces the principal balance of the loan by a single cent.

Complaint for Violations of the New Mexico Unfair Practices Act Page 7 of 15

27.

Of the $1,169.52 due under the seventh through twelfth installments, a

total of $ 1.101 would be allocated to payment of interest on the loan. and only $68.52 to the reduction of principal. As stich, for the first $2.339.04 that Ms. Endwarrior was obligated to pay under the terms of the payment schedule, a total of $2;270.52 would be-:- applied to payment of interest on the loan, while only $68.52 would be applied to reduction of the principal balance.

Angel Bustamante ofR(},f~welJ. New Mexico28. On December 8, 2007, New Mexico resident Angel Bustamante took out a

$500 loan from Defendant FASTBUCKS OF ROSWELL, NEW MEXICO, LLC. A copy of the "Installment Loan Agreement, Security Agreement, and Disclosure Statement" (hereinafter the "Bustamante Agreement") is attached hereto as Exhibit E. 29. The Bustamante Agreement carries an interest rate of 650.01 percent per

annum. The Agreement calls for the $500 loan to be paid in twenty-three bi-weeklyinstallments of $118.42 starting on December 8, 2007, with a final payment of $117.20 due on November 4, 2008. All told, the Bustamante Agreement calls for Mr. Bustamante to pay a total of$2,840.86 over an eleven-month period on a loan of$500.

Jolmn\' Romero of La.v Vega.v. New Mexico30. On July 25, 2008, New Mexico resident Johnny Romero took out a $500

loan from Defendant FASTBUCKS OF LAS VEGAS, NEW MEXICO, LLC. A copy of the "Imltallment Loan Agreement and Disclosure Statement" (hereinafter "Romero Agreement") is attached hereto as Exhibit F. 31. The Romero Agreement carries an interest rate of 649.99 percent per The Agreement calls for the $500 loan to be paid in eleven hi-weekly

annum.

Complaint for Violations of the New Mexico Unfair Practices Act Page 8 of 15

installments of $134.22 starting on August 8. 2008. with a final balloon" payment of S134.29 due on January 9, 2009. All told, the Romero Agreement caBs for Mr. Romero to pay a total of$1,610.71 over a five-month period on a loan of$500.

Lee Estenson of AllIIlwgordo.32.

Ne~v Me.\:ii.:() ------"

On May 2, 2008, New Mexico resident Lee Estenson took out a $1500

loan from FASTBUCKS OF ALAMOGORDO, NEW MEXICO, LLC. A copy of the "[nstallment Loan Agreement and Disclosure Statement" (hereinafter "Estenson Agreement" is attached hereto as Exhibit G. 33. The Estenson Agreement carries an interest rate of 519.97 percent per

annum. The Agreement calls for the $1500 loan to be paid in ten monthly installmentsof $662.59 starting on June 1, 2008, with a final "balloon" payment of $663.00 due on April 1,2009. All told, the Estenson Agreement calls for Mr. Estenson to pay a total of

7,288.90 over an eleven-month period on a loan of$1500.34. Upon information and belief, the Etcitty, Endwarrior, Bustamante,

Romero, and Estenson Agreements (collectively, the "FastBucks Loans") are emblematic of the thousands of high-cost installment loans Defendants have made to consumers throughout the State of New Mexico. 35. Defendants' practice of originating the FastBucks Loans, all of which

carry interest rates in excess of 500% per annum, constitutes an unconscionable trade practice under New Mexico law. 36. Further, and upon information and belief, Defendants' failure to inquire

into their borrowers' reasonable ability to repay these loans under the proffered telms,

Complaint for Violations of the New Mexico Unfair Practices Act Page 9 of 15

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constitutes an independent and adequate basis for finding that they have ~ngaged in unconscionable trade practices under New Mexico law. 37. By reason of the foregoing actions, Defendants have caused and. unless

enjoined, wilrcontinue to cause injury. loss and damage to the State of New Mexico and consumers located in this State. COUNT I: COM.MON-LAW UNCONSCIONABILITY 38. 39. The allegations set forth above are incorporated herein by reference. A contract is substantively unconscionable and lUlenforceable when the

content of the contractual tenns is illegal. contrary to public policy. or grossly unfair. The Fao;tBucks Loans are substantively unconscionable insofar as they require cumulative payments of as much as tive (5) times the principal amount borrowed in order to satisfy the debt. Loans that carry APRs ranging from 500-650%, and which are amortized over extended periods of time. are grossly unfair, contrary to public policy and. as a result, substantively unconscionable on their face. 40. The FastBucks Loans are procedurally unconscionable because (L) the

Loans were prepared entirely by Defendants for the acceptance by the borrowers on a "take-it-or-Ieave-it" basis and without an opportlmity for meaningful bargaining; and (2) Defendants used their superior bargaining power vis-ii-vis their borrowers to impose oppressive and unconscionable interest rates on their borrowers. 41. For all of the foregoing reasons, this Court should lind the FastBucks

Loans and all other loan agreements the Defendants have originated which offer the same or similar terms unconscionable as a matter of New Mexico common law. COUNT II: Complaint for Violations of the New Mexico Unfair Practices Act Page 10 of L5

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STATUTORY UNCONSCIONABILITY UNDER THE NEW MEXICO UNFAIR PRACTICES ACT

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The allegations set forth above are incorporated herein by reference. The New Mexico Unfair Practices Act defines an "unconscionable trade

practice" as "an act or practice in connection with ...the extension of credit... which to a person's detriment: (I) takes advantage of the lack of knowledge, ability. experience or capacity of a person to a grossly unfair degree; or (2) results in a gross disparity between the value received by a person and the price paid." NMSA 1978, 57-12-2(E)(l)-(2). The Act declares all such unconscionable trade practices to be unlawful. NMSA 1978, 57-12-3. 44. Defendants' practice of originating the FastBucks Loans, all of which

calTY interest rates in excess of 500% per annum, and, upon infonnation and belief, Defendants' ongoing practice of originating the same or similar loan agreements with consumers in this State,. constitutes an unconscionable trade practice under the New Mexico Unfair Practices Act. 45. Moreover, and upon information and belief, Defendants' practice of

originating the FastBucks Loans without inquiring into the borrowers' reasonable ability to repay under the terms proffered, constitutes an independent and adequate basis for this COLUt to find that Defendants have engaged in an unconscionable trade practice within the meaning of the Unfair Practices Act. 46. Fmlher, and upon information and belief, Defendants' practice of

originating the FastBucks Loans was done in knowing and willful violation of the prohibition against unconscionable trade practices in the Unfair PracticesA~t,

for which

Defendants should rightfully be held liable for payment of civil penalties thereunder. Complaint for Violations of the New Mexico Unfair Practices A~t Page 11 of 15

47.

For all of the foregoing reasons, this Com1 should find the FastBucks

Loans and all other loan agreements the Defendant has originated which offer the same or similar tenns unconscionable under the New Mexico Unfair Practices Act. 48. Moreover, this Court should order all Defendants to pay restitution to the

New Mexico consumers they have hanned as a result of their unconscionable trade practices pursuant to NMSA 1978, 57-12-8(B). COUNT III: REQUEST FOR DECLARATORY RELIEF 49. 50. The allegations set forth above are incorporated herein by reference. Plaintiff requests that this Court declare the FastBucks Loans and all other

loan agreements sharing the same or similar tenns unconscionable and unenforceable as a matter of New Mexico law. COUNT IV: APPLICATION FOR PRELIMINARY AND PERMANENT INJUNCTIVE RE'LIEF 51. 52. The allegations set forth above are incorporated herein by reference. Defendants have engaged in a pattern and practice of exploiting New

Mexico consumers through the origination of tIDconscionable high-cost installment loan agreements. New Mexico consumers have suffered, and will continue to suffer,

irreparable hann as a direct and proximate result of Defendants' wrongful acts if an injunction does not issue in this lawsuit. Further, there is no adequate remedy at law, as Defendants' violations of the Unfair Practices Act are present and continuing. Any harm resulting from the issuance of an injunction will be outweighed by the benefit to the public, and there is a substantial likelihood that Plaintiff will prevail at a trial on the merits of its claims. Complaint for Violations of the New Mexico Unfair Practices Act Page 12 of 15

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COUNT V: EQUITABLE RECOVERY UNDER PRINCIPLES OF RESTITUTION AND UNJUST ENRICHMENT

53. The allegations set forth above are incorporated herein by reference.

54. .. As a direct and-- proximate .result . of Defendants' origination of the FastBucks Loans and other loan agreements sharing the same or similar provisions, Defendants have been unjustly enriched inasmuch as they has received installment payments which, cumulatively, exceed more than 500% and as much principal amount financed. 55. This Court should fmd that Defendants have been unjustly enriched anda.~

650% of the

order Defendants to disgorge all monies collected under the tenns of the FastBucks Loans and any other agreements it originated with New Mexico consumers which share the same or similar tenns.

WHEREFORE, Plaintiff respectfully prays that the Court:A. Declare the tenns of the FastBucks Loans strucnlral1y unfair and

unconscionable as a matter of New Mexico common law and under Section 57 12-2(E) of the New Mexico Unfair Practices Act. B. Declare all of Defendants' loan products that share the same or similar

terms stmcnually unfair and unconscionable as a matter of New Mexico common law and under Section 57-12-2(E) of the New Mexico Unfair Practices Act. C. Declare aU loan agreements encompassed by Sections A. and B. above to

be void and unenforceable. D. Enter preliminary and pelmanent injunctive relief as follows:

Complaint for Violations of the New Mexico Unfair Practices Act Page 13 of 15

1.

Requiring Defendants to cease seeking future payments from . consumers under the tenus of the FastBucks Loans and from seeking future payments from any borrowers who have loan agreements with Defendants sharing the same or similar terms; and

2.

Requiring Defendants to cease originating any loans that share the 'same or similar terms as the FastBucks Loans.

E.

Order Defendants to pay restitution to all consumers determined during

the litigation to have been injured by Defendants' unconscionable trade practices; F. Order Defendants to cease all collection efforts on any loans that it has

originated in New Mexico; G. Order Defendants to pay a civil penalty of up to $5,000 for each violation

of the Unfair Practices Act determined to have been willful; H. Order Defendants to pay the taxable costs incurred by Plaintiff in

prosecuting this action;I.

Grant such other and further relief as it may deem just and proper.

Complaint for Violations of the New Mexico Unfair Practices Act Page 14 of 15

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RespectfulJy submitted, GARY K. KING Attorney General

Complaint for Violations of the New Mexico Unfair Practkes Act Page 15 of 15

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Consumer Lending Study Committee Report 'forthe Forty Fourth Session of the New Mexico State Legislature

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Submitted by the Financial Institutions Division Director, as . requested by House Memorial 36

EXHIBIT

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Executive SummaryHouse Memorial 36 Financial Institutions Division Director's ReportThis report was prepared at the request()f the New Mexico legislature. Following the formation of a committee comprised of ienders, consumer interest representatives and state government officials, a study of the consumer lending environment and lending practices was conducted to determine what if any legislation is necessary to . improve the economic environment for lenders and borrowers. All depository and market funded lending institutions participated and contributed. New Mexico and its borrowing consumers presently enjoy a highly competitive and comprehensive loan delivery system providing a full spectrum of consumer loan products and services. Loans are funded under a broad matrix Qf federal and state laws goverr}ing consumer disclosure, preventing certain abusive lending.practlces, lender licensing and the extension of consumer credit by lenders in general. The regulatQry environment was examined and revealed a rapidly growing lending industry accompanied by increasing regUlatory responsibilities. The Financial Institutions Division (FlO) has Increased it's productivIty to keep pace with the growth of regulated lending Industries. Consumer complaints concerning consumer lending aclivity received by FlO, the Attorney General's Office, the Better Business Bureau were analyzed 8:long with referral information from the Consumer Credit Counseling Services of the Southwest. The overall number of formal complaints was small compared to the volume and scope of consumer lending in the State. However, the trend of complaints recen11y toward residential home mortgage origination and servicing is significant. A great deal of important and relevant information regarding consumer lending was learned and analyzed by the committee. Factual findings about consumer lending In New Mexico and-nationwide were identified, documented and are Included in the report.

Two of the moresignifioant areas of information and findings were:

_ 1. Lender economic realities regarding the cost and pricing of very small closed end loans. 2. The preemptive Impact of the IIMost Favored Lending Doctrine " and exportation of uncapped interest rates from lenders domiciled in unregulated states to states having rate limitations.

Finally, as a result of the information and findings derived, specific recommendations to improve the consumer lending envIronment are provided.

Exhibit 2 - p. 2

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1999 New Mexico State Legislature House Memorial 36UQUESTING TJIZ DIUC'1'OR. 01' lJ'HB lI'INANCDL INSTI'1'tJTIONS DIVISJ:ON 011' THB 1tEGULATXON AND LICBNSING DBPARTHBNT '1'0 SELBCT A S'l'UDY COKMIT'1'BB IW)B UP 011' REPRESBNTATIVES OF THB LBNDING INDUSTRY AND CONSUMERS TO STUDY THB EXISTING REGULATORY STATt1'1'BS 011' AHD '1'HB: EXISTING LENDING PRACUCZS IN THE STA'1'J: '1'0 DBTBJUlINB WHAT, :IP MY, LBGISLATJ:ON IS HBCEBSARY '1'0 'RaVIDB A HBALTHY ECONOMIC BNVIRONHEm lI'OR BOTH LBNDBRS AND CONSUlmRS.

WHERBAS, many New Mexicans need access to short-term . and long-term loans; and WHEREAS, this need extends throughout the population, affecting persons with both substantial income and financial resources as well as those existing with little or no income and inadequate financial resources on a daily basis; andWHEREAS, computer and communications technology has made it possible to offer instant short-term high interest loans to people in dire financial circumstances without requirements for credit establishment or verification; and

WHZRZAS, serious questions arise about whether this relatively new fast loan industry is regulated adequately under current law1NOW I '1'HBRBI'OU, BE %'1' RBSOLVBD BY 'l'D HOUSB OF UPRBSEN'l'A'rIVBS 01' !I'D S'rATB or NEW HBXICO

that the director of the financial institutions division of the regulation and licensing department be requested to select a committee made up of representatives of all segments of the loan industrY and consumers within the state to study the existing regulatory statutes of and the existing lending practices in the state to determine what. if any, legislation is necessary to provide a healthy economic environment for both lenders and consumerSl and. BJI :Ior FUR'l'HE1t RBSOLVED that the director of the financial institutions division report to the second session of the forty-fourth legislature his findings and recommendations resulting from the study; andDB IT FURTHER RBSOLVBD that copies of this memorial be transmitted to the governor, the superintendent of regulation and licensing and to the director of the financial institutions division of the regulation and licensing departmen t .

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Exhibit 2 - p. 3

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Table of ContentsReport Introduction. .... . .. Page 5

Legal Environment Review.................... Page 6 Regulatory Environment Review............ Page 8 Consumer Complaint Review................. Page 9. .,

Most Favored Lender Doctrine..... ....... Page 11 Important Information & Findings Recommendations Report Conclusion...

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Page 12 Page 15 Page 16

Acknowledgements & Participants......... Page 17 Study Committee & Resource Material.. Page 19

Exhibit 2 - p. 4 . 4

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Financlallns'Ututions Division Directorls ReportIntroductionHouse Memorial 36 requested the Director of the Financial Institutions Division (FlO) to select a study committee and conduct a study of existing regulations, statutes and lending practices in the state for the purpose of determIning what If any legislation Is necessary to provide a healthy economic environment for both lenders and consumers. This report summarizes the selection and work of the study committee, provides an overview of all market funded lending operations and depository institutions actIvity and their Impact in the state, IdentIfies and analyzes relevant lending Issues and findings and prOVides recommendations to improve the lending' borrowing environment In New Mexico. The State of New Mexico and Its consumers presently enjoy a comprehensive and geographically disbursed loan delivery system comprised of depository and market funded lenders located throughout the state. This lending system Is highly competitive and provides a full continuum of loan products and servioes to New Mexico's borrowing public. Market funded lenders including small loan companies (installment loans, payday loans and title loans) and mortgage companies, maintain and operate over 900 lending offices In New Mexico. FlO estimates the lending volume for consumer loans (mortgages. auto, personal, etc.) exceeded twelve bIllion dollars ($12.000,000,000) in 199B. Additionally. th~re are approximately 200 Pawn Shops in New MeXico prOViding colJateralloan services to consumers. The Flnanciallnstitulions Division (FID). Regulation and L10ensing Department has regUlatory responsibility for state chartered depository Institutions and nearly all other market 1unded consumer-tending operations In the state. Depository InstltU1ions (banks, credit unions, saVings and loans) maintain and operate over 650 main offices and branches located througho\Jt New Mexico. As of December 31, 1998. the Financial Institutions Division (FlO) estimates that in New Mexico depository ins11tullon loan holdings exceeded eleven billion dollars ($11,000,000,000). This total Includes business loans, consumer mortgage loans and consumer loans for other purposes (personal, auto, home Improvement, etc.).There were 1829 lenders under FlO oversight on .December 31, 1998. Nearly all borrowing consumers whether possessing substantial Income and resources or wIth lesser income and resources have access to credit and loans in New Mexico. Economic reality drives the price of credit. Factors determining the price Include but are not limited to the following: The supply and demand of credit whether supplied by market funded lenders or depository institutions The availability and oost of lendable funds to lending institutions Direct and Indirect business costs of lending, administration and colle0110n Credit and repayment risk ( Loss and Charge off experience) for varying risk borrowers and different loan .products PrQduct research and development expense Cost to develop and deploy new technology Net profitability Ireturn on equity. Consumer demand and Industry lnnovalion have produced many new loan products and services, which are delivered through the comprehensive lender ne1work in New MexIco. The continuing challenge is to support and promote the availability of credit while providing appropriate consumer protection safeguards. InvItations to participate In the House MemorIal 36 Lending StUdy Committee went out to representatives from 1he lending community, consumer Interest groups and other appropriate parties. During the fIrst meeting, on June 21, 1999 participants were asked to Join one more working groups to stUdy and describe the state's lending environment, Identify relevant Issues and offer suggestions for improvements. Participants were free to move among groups but generally focused on one.

Exhibit 2 - p. 5 .

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The working groups were; Legal, Consumer and Lender. Each working group was given a specific initial direction and a number of oharges to initiate their work. Following a series of individual work group meetings, the collection and analysis of relevant Information, data and related research, the DIrector formed a Drafting Committee. This oommlttee's charge was to compile and summarize working group Information, do independent research and draft components of the final report. The committee met frequently from August 6 through November 3 to comptete Its work.

Legal Environment ReviewThe fOllowing Is a brief summary of Federal and State law relevant to consumer lending In New Mexico. This summary Is drawn mainly from a report prepared by Frank D. Welssbarth, Assistant Attorney . General, Consumer Protection Olvlslon~ Mr. Welssbarth led the Legal work group within the Committee.

Federal Laws and RegUlationsGenerally, Federal Laws focus on consumer disclosure and prevention of certain abusive lending practices. A very brief synopsis of each relevant law follows: Truth In Lending Act ("TILA")-Thls very Important Aot reqUires lenders to disclose loan terms and the cost of credit in terms that consumerS can understand Ina highly standardized format. It also regulates. how consumer credIt Is advertised and In certain credit transactions Involving a home, It prOVides for a three-day right to oancel the transaction. The Federal Trade Commission (FTC) . enforces thIs law. FaIr Credit Reporting Act- This Law applies to Credit reporting agencies. It addresses consumer privacy, gives consumers access to their credit history. sets limIts tor the retention of negative credit Information and provides a method for consumers to dispute Incorrect credit Information, The FTC enforces this Law. Fair Debt Collection Practices Act- This Law protects consumers from abusive collection practices and Is enforced by the Federal Trade Commission. Fair Credit Billing Act- This Law sets out a process Whereby consumers can dispute credit card billing errors.and unauthorized charges on their credit cards. Real Estate Settlement Procedures Act ("RESPA',- ThIs Law requires lenders to provide a "Good F.aith Estimate of Closing Costs" on home loans, requires a standardized disclosure 01 closing .. 'costs (HUO-1), and contains anti "Klckbaok" provisions to deter lenders from paying such fees to mortgage brokers. Federal Trade CommissIon rules regarding "Holder in Due Course" and credit practices- These rules prOVide buyer claims recourse to the holders of retail installment contracts to the same extent as the origInal seller. Also, the rules provide for dIsclosures to co-signers about con1ingent liability. The rules prohibit confession of Judgment olauses, prohibit waivers of state law debtor's exemptions and prohibit "pyramiding" of lale charges. HOME Ownership and EqUity Protection Act ("HOEPA"}-Thls Law combats predatory lending practices In low Income and minority communities. It applies to high cost refinance mortgages. The Federc;tl Trade CommIssion enforces thIs Law.

6

Exhibit 2 - p. 6

Equal Credit Opportunity Act- This Law ensures that all consumers are provided an equal opportunity to credit based upon relevant uniform credit qualification criteria. It prohibits lenders from making credit decisions based upon race, sex, marital status, age or other discriminatory factors. The Federal Trade CommIssion and other Federal lending institution regulators enforce thIs L a w . . Federal Limitations on State Laws- In certain areas Federal Law preempts or limIts the ability of states to enact or enforce state laws. Examples include slate laws limiting Interest rates on home mortgages and from banning "Due on Sale" provisions. Similarly, the "most favored lender" doctrine permits NatIonal banks located In states with permissive or no limits on Interest rates to "export" those rates to other states In which il does business. The effect Is to enable one state to control the lending polley including rate limitation of another staia.

New Mexico Law and RegulationNew MexIco laws include those that regulate depository finariclallnstitutlons that make consumer loans and those that regulate the extension of cOl1siJmer credit by lenders in general. A brief review of relevant State laws follows: .. . . Small Loan Act, NMSA 1978, 58-151 through 58-1531~ This law regulates lenders making loans. o~$2.500 or less. The Act contains a number of disclosure requirements which prohibIt false and misleading advertisIng by lenders, requires the posting of rates charged and authorizes the Director, FlO to require that charges are disclosed fully and clearly to prevent misund&rstanding by borrowers. The law prohibits prepayment penalties and the sale of certain insurance. There are no restrictions on Interest rates and fees and the Act authorj~es lenders to make loans under other laws including Money, Interest and Usury 56-6-1 9t seq. Interest rate limitations were abolished by the Legislature in 1981. Lenders licensed under the Small Loan Aot may make loans to consumers at coniracted rates and fees. Money, Interest and Usury, NMSA 1978, 56-81 through 56-8-21- This law limits the Intarest due on contracts not specifying a rate to 15%, limits the Interest rate on Judgments to 8.75% to 15% depending upon defendant's conduot In theabsenca of a written contractand limits the amount loan brokers can charge for negotiating or procuring a loan to between 6% and 2% plus $20 depending upon the loan amount and whether the broker Is a registrant with FlO. Before repeal In 1961 this Act contained limits on interest rates. Motor Vehicle Salss Finance Act, NMSA 1976,58-191 through 56-19-14- This Act contains disclosure provisions and prohibits fraudulent representations for car loans. Before repeal in 1981 5819-8 set limits on oar loan Interest rates. Residential Home Loan Act, NMSA 1978, 56-8-22 through 56-8-30 This Act provides that prepayment penaltles In home loans are not enforceable. This prohibition Is preempted by Federal taw with respect to non- standard ""alternatlve" home loans. RetaIl Installment Sales, NMSA 1978, 56-1-1 through 561-16- ContaIns disclosure requirements, however provides tliat creditor compliance with Federal Truth in Lending disclosure is deemed compliance with New Mexico law. This Act also prohibIts certain lendIng practices Including aoceleratlon of contract maturity In the absence of default, confession of Judgment and wage assignment, waivers of rights for illegal coUeatlon actiVities and agreements prohibiting the buyer from asserting claims and defenses arisIng from the sale. Previously, this law contained restrictions on Interest rates and fees before these limitations were repealed In 1981. Bank Installment loan Act, NMSA 1978,58-7-1 through 58-79- ProhIbits lenders from making roans to borrowers with an Installment loan under the Small Loan Act unless that loan Is paid and Exhibit 2 - p. 7

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released. Previously, 1he Law limited the amount of interest creditors could charge before limitations were repealed in 1961.

Pawnbrokers Act, NMSA 1978, 56121 through 56-12-16- This law contains special disclosure provisions for Pawn transactions, prohibits certain lender practices against borrowers inclUding those that could result In the pawning of stolen property. Pawn loans are limited to $2000. This .law also limits 1he pawn service charge to the greater of 10% of the pawn loan or $7.50 for the fIrst loan month. Succeeding months are limited 10 a maximum of 4% per month. deceptive lending practices as well as omission of materlallnformalion to consumers. Unfair, deceptive and unconscionable trade practioes are prohibJled. There are no New Mexico appellate deoislons dealing with the Issue of "unconscionable" in the context of consumer lending.

Unfair Practices Act, NMSA 1978, 57-12-11hrough 57-1222 This Act prohibits misleadIng and

Banking Act, NMSA 1978,58~1-1 through 58-1-80 This Act regulates allstate chartered banks.

There are presently .26 Stale chartered banks. The emphasis of bank regUlation Is on safety and soundness of these Institutions that hold and manage the public's money. Although the Act does not contain special consumer disclosure requIrements or specific consumer lending prohibited practices, all banks are subJecl to all Federal consumer disclosure and protectIon laws. Compliance with these laws Is monitored by the FDIC, FRS and other Federal Government agencies.

Consumer Credit Bank Act, NMSA 1978, 581a-1 through581a-8 This Act regUlates Credit CardBanks loca1ed in New Mexico of which there are none at this time. The Act does not contain any speolflc disclosure reqUirements, prohibited consumer lending practices or restrictions on Interest rates and fees. Any New Mexico credit card bank would be SUbject to all Federal consumer disclosure and protection Jaws.

Savings and Loan Act, NMSA 1978, 58101 through 581011- This Act regulates state chartered. SaVings and Loan associations of which there Is one at present. There are no specifiC consumer lending or disclosure provisions In this Act. The Financial Institutions Division (FlO) is responsible for the Safe and Sound operation of this Institution. Savings and Loan Assocla11ons are subject to all Federal consumer disclosure and protecllon laws. The FDIC and Office of Thrift Instllu.lions (OTS) and other Federal Agencies monitor compliance with all Federal Consumer disclosure and protection laws.

Credit Union Regulatory Aot, NMSA 1978, 58111 through 5811-65- This Act regUlates state chartered credit unions of which there are 26 at present. New Mexico's FlO Is the primary .regulator ensuring the Safe and sound operatIon of all State chartered credit unions. There are no specific consumer lending or disclosure provisions In this Act. The NCUA and other Federal agencies monitor compliance with Federal consumer disclosure and protection laws.

Regulatory Environment RevIewThe Financial Institutions Division (FID) within the Regulation and LIcensing Department of New Mexico licenses and regulates more than 1600 lending operations and depository Institutions Including their delivery locations and branches throughout New Mexico. The Regulatory EnVironment and the responsibility or lhe Division have grown SUbstantially over the past four years. The reality is that the Division's workload has dramatically Increased while the budgetary and human resouroes of the Division have been static or reduced. The DivIsion has met these challenges with higher efficiency and productivity. Management restructure. staff cross training and new technology have been the main strategies utilized to achieve these improvements. Significant facts are as follows:

Exhibit 2 - p. 8

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The Division's workload, activity and responsibility have increased by approximately 60% over the past four years Orvlslon revenues increased 46% over the past four years Division expenditures have been flat over the, past four years Division Staff (FTE) has declined 14% over the past four years. DIvision efllcleney and productivity has increased 50% over the past four years Although the number of depository and trust Institutions (banks, oredlt unions, S&L's and trust companies) has remained relatively flat ovar the past four years, the number of consumer financial services lIcensees has Increased by approximately 80% ' Every sniallloan company licensed and regulated by FlO is annually examined, In 199B, the Division examined 420 small loan companies and more than 4200 consumer loan flies. The principal focus of the examination is the review of consumer loan files and documents to determine among other things, if Federal Truth in Lending disclosures have been prOVided and that they are accurate. In New Mexico, .Ienders comply with federal Truth in lending disclosure reqUirements. During the examination process, If any Irregularities are discovered, they are Included In the examination report, new documents are drawn and provided for the consumer, the lender Is required to correct the process that led to the error and If applicable, consumers receive refunds on any over payment or charge relative to the Truth in lending Disclosure. It is the experIence of FlO that most Truth in Lending Disclosure errors are minor in nature and usually involve a new lender whose programs or processes In calculating the annual percentage rate (APR) are flawed. The lender makes corrections in the system and the problem is solved. Rarely, does the problem re-occur in subsequent examInations. As previously stated, the Division has been able to Increase Its productivity and efficiency to keep pace with it's increased responsibilities through management and staff restructurlng, intensified training, c~oss training and employment of new tochnology. The DivIsion has maximized lis productivity and efficienoy. Future growth in licensing and regulatory activity due to Industry expansion or new regulatory reqUirements will require additional resources.

Consumer Complaint ReviewIt was Inilially determined that an analysIs of consumer complaints from all readily available sources would be valuable for all working groups In order to Identify, quantify and understand relevant consumer issues. Requests for InformatIon were sent to consumer advocacy groups who had demonstrated an interest in this issue. However, in the end, the only complaint sources responding with speoiflc complaint data InCluded a written report from the Office of the Attorney General, FlO, and Information prOVided to the DIrector by the Better Business Bureau of New Mexico and Consumer Credit Counseling Services of the Southwest. The fIndings are presented as follows: Office of the Attorney General A brief summary and analysis of oomplaints Included within the Assistant Attorney's report, as received . and analyzed covering the period January 1,1999 through August 10,1999 revealed the following information: . 1. More than 400 complaints Involving credit practices were received of which 39 Involved the focus of House Memorial 36. Complaints deemed outside of th9 focus of the project by the AssistantExhibit 2 - p. 9

9

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Attorney General included unsolicited credit card offers, harassment by collection agencies, advance fee loan schemes, credit card billing disputes, credit reporting errors, retail installment contracts and mortgage company/broker complaints. . 2. Thirty NIne (39) complaints Involved direct extensions of credit by finance companies, car tille loan companies and payday lenders. The industry breakdown and description of complaints follows: A. Car Titre loans- Sixteen (16) complaInts- Consumers complained that Interest rates were 100 high and that they could not pay them off. They also complained that lenders misrepresented loan terms and failed to disclose interest rates. Consumers also complained about repossession praotlces, destruction or theft of property and in one case alleged assault.

B. Small Loan companies ("A" lenders - generally Installment loans above $1,000)- Most of thefourteen (14) complaints against these companies Involved mortgage loans. Other complaints were collection harassment and high origination fees. C. Small Loan Companies ("B" lenders~ generally Installment loans below$1 ,OOO)~ Five (5) complaints were received and they Involved substantial origination tees for re-flnanced loans and debt oollection harassment.

.D. Payday lenders (generally, loans $250 or less with maturity 2 weeks or less) Four (4) complaints received. Three (3) complaInts were about multiple l'rollovers".The Assistant Attorney General's report also included opinions and recommendatlons regarding the debt collection practices of lenders, loan renewals or "rellovers", consumer disclosure, closing "loopholes" in the Small Loan Act, limiting the cost of credit, a cooling off period for high cost loans, reporting good credit and the "Exportallon" of Interest rates by National banks located in deregulated states. The Financial InstitutIons DlvlslonFlO licenses and regUlates market funded and depository lending Institutions in New Mexico. Part of this regulato/)' responsibility involves the handling and reaolutlon of consumer complaints. During the five (5) year period ended 12/31/98, FlO receIved, processed and resolved 1225 consumer complaInts. The majority of these complaints were against lenders. It Is Important to note that only 127 complaints were against small loan companies and none of those complaints involved high rates of Interest or loan charges. Through October 1999, FlO had received 224 complaints of which 21 were against small loan companIes and~only two of those complaints involved high rates or fees. Clearly, 1he quantity of formal consumer complaints against small loan companies for high rates and/or fees Is not substantial. However, the complaint analysis has revealed a substantial and consistent trend of consumer complaints related to mortgage lending activity in New Mexico. In 1998, 118 out of 249 consumer complaints received by FlO were against registered and exempt mortgage companies. Through October 1999, 93 of the 224 comp.lalnts received were against mortgage companies. Further analysis of complaints against small loan companies and other lenders reveals that a substantial portion of those complaints involve mortgage lending and selVlclng activities. Given the relative importance and size of home mortgages for New Mexico homeowners when compared to other types of consumer loans, this complaint trend Is disturbing and Indicates the need for further study.

Better Business Bureau of New Mexico-

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Exhibit 2 - p. 10

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The Better Business Bureau of New Mexico receives 7,500 to 10,000 oonsumer complaint telephone calls per year, of which approximately 2500 result in formal written complaints. Relatively few of these complaints involve lending practices. The Bureau received 25 formal lending related complaints for the three (3) year period ending September 9,1999. These 25 complaints Involved seiling practices, service Issues, credltlbHllng Issues and refund practices. None of these comptalntslnvolved high rates of tees.

Consumer Credit Counseling Services of the SouthwestThe Consumer Credit CounseJJng Services of the Southwest (CCCS) provides counseling services to consumers having financial problems. The CCCS does not receive, process or resolve oomplalnts; however, a recent survey of its consumer clients In New Mexloo and Arizona reveals Important Information about consumers in financial distress.A breakdown of CCCS's most recent annual survey of 28,475 referred consumer clients brought to light the follOWing reasons for referral:

11,646 9.482 2,850 2;744 . 2,078

292242

Poor money management/excessive spending Reduced Income/unemployment MedicaVaccldentldisablllty Poor bUdget and credit advice DlvorcelfaiTIlly situations/personal conflict Death of family member Substance Abuse

Consumer Complaint ConclusionThe analysis. of formal consumer complaints does not reveal a high number of Interest rateffee complaints against smaUloan companies in relationship to the farge volume of loans made throughout the state. The stUdy committee did not conduct a consumer attitude survey and dId not receive any specific New MeXico complaint information from consumer advocacy groups.

Most Favored Lender Doctrine & Rate ExportationThis section of the report briefly describes a very important Issue and Interstate market development, the "Most Favored Lender Doctrine" and" Rate Exportation". Much of this summary has been drawn from a report sUbmitted by Stephen Schaller, eNG, Inc. and discussions during the Committee's meetings and deliberations. . . Two f.ederallaws, The National Bank Act and the DeregUlation and Monetary Control Act, treat National and State chartered banks as well as other financial Institutions acceptIng federally insured deposits as "most favored lenders". This designation permits these Institutions to charge Interest rates equal to the HIGHER of the Interest allowed to lenders In the state where the bank I InstItution Is domIciled or 1% above the discount rate on commercial paper In the bank's Fed.eral Reserve District. A bank's "most favored lender" status is "exportable" acfoss state lines. This permits the Institution to charge interest rates as allowed In It's "home" state to borrowing customers located in other states regardless of the Interest rate law In the borrower's state. So, the "home" state law of the bank with respect to interest rate limitation, If any, preempts the law of the borrower's state. . Just as many banks today Offer credit cards through the mall from their "home" states" to customers across the country at rates permitted by 1helr home state regardless of rate limitations in the consumers state, so to, can they export the Interest rates permitted In their home state for other consumer loan products including crosed end consumer loans such as Payday" and "Car Title" loans. Banks and other FDIC Insured depository Institutions which issue credIt cards and/or make closed end consumer loans are locating their institutions in home states with no rate limitations and are offering their credit cards and/or closed end oonsumer loans (l'payday"/"car title") across state JInes nationally without rate restriction.U

11

Exhibit 2 - p. 11

State laws limiting rates in the borrower's state of domicile are thereby preempted. Banks and other FDIC insured depository InstItutIons wishing to Issue and market credit cards nationally are doing it directly from their home office located in their unrestrioted home state. In order to originate closed end consumer loans without rate limitation into any and all other states, they simply establish strategic partnerships with national check cashing companies, payday lenders, car title lenders and other originating entitles with offices In any and all states in which they wish to lend. Such partnerships eliminate the need for the institutIon to create expensive branch offica loan production offices In foreign jurisdictions while still being able to fund closed end consumer loans ("Payday'rcar title") without Interest rate limitation. Courts have approved this practlcaln a series of reoent casas enumerated In Mr. Schaller's report. Thls.report also Identifies and describes a number of specific operating strategic partnerships that are presently originating and funding closed end consumer loans on an interstate basis without interest rate limitation. This illustrates "real world" examples of how banks and other "most favored lenders" could circumvent prospectively any New Mexico law(s) attempting to limIt or cap Interest rates. The futility of individual state attempts to limit intersst rates within their borders given the reality of the present Interstate lending legal environment Is demonstrated within the report. It would appear that any effective legal attempt to limit Interest rates on a national basis and I or restore legislative self determination to the states wlII require changes to Federal law, Given the reality of the present Interstate legal landing environment described, What would be the potentlal.consequenceof New Mexico Imposition of interest rate cap limitations? Would the rate limit be so low that New Mexico based and locally owned small loan lenders could not Offer the loans on a profitable basis, thereby eliminating these lenders and I or their products? In thIs scenario, would the only lenders offering higher cost very small closed end and other consumer loans In New Mexico, at rates exc8edlng New Mexico law, be those nationwide chain lenders that have strategic partnerships with "most favored lenders" based In states without Interest rate limitations? Would such reduced competition actually result in higher cost "monopoly II pricing of consumer loan products to New Mexico consumers? What economic benefit or enhanced regUlatory control would be derived in New Mexico by driving locally owned and operated small loan oompanles and their employees out of business and/or Into unemployment? In short, what benefits would New Mexico derive from driving It's small loan Industry out of state to "most favored lenders" with their strategic national originator network partners offering consumer loan products at Interest rates exceeding New Mexico laW? These are some of the questions that would undoubtedly be considered In potential future legislative deliberatIon considering Interest rate cap limitations.

Important Information & FindingsA large, diverse, growlng and highly competitive lending industry is delivering a full spectrum of consumer loans and services In New Mexico.

2

The price for foan products and services In New Mexloo Is determined by the cost of business and strong competitive market conditions. There Is no evidence of monopoly control of pricing. New Mexico consumers benefit by receiving low cost products and services. An analysis of formal complaints recelved by FlO, the New Mexico Office of the Attorney General, the Better Business Bureau of New Mexico and Consumer Credit Counseling Services of the Southwest, reveals a relatively low number of consumer complaints against lenders given the magnitude of consumer lending activity In the state.

3

Exhibit 2 - p. 12

12

"

However, this finding does not measure or quantify overall consumer satisfaction or dissatisfaction with loan products and/or services, since only tormal complaints were analyzed. Also, an emerging, persistent and disturbing trend In consumer complaints InvolVIng mortgage lending activity Is evIdent. .,)

4

There Is a great need to Improve consumer awareness and education in lhe selection of the le8st costly and most beneficial loan products and services. Consumer financial literacy must be raised so borrowers may make informed decisions necessary for their financial well-being. Lenders are providing appropriate formal consumer loan dIsclosures. AU formal written Federal Truth in Lending and other applicable consumer disclosures appear to be consistently provided to New Mexloo loan customers. The Federal Truth in Lending Annual Percentage Rate caloulatlon and disclosure by Itself may be inadequate and misleading as the sole disclosure for the aotual cost of very small, short-term, closed-end loan products. More explicit oonsumer disclosure and Information regarding the nature and oost for very small, shortterm, closed-end loan products may be desirable to make sure that the consumer understands the transaction and the cost. The fastest growing segments otconsumer lendIng are In mortgage lending and very small short term loan products Including "car title" and "payday" loans. The cost, as expressed In federally required annual percentage rates, for very small shorlterm loans is higher than longer tenn Installment credIt. However. when a thorough analysIs Is made. a number of clear economIc facts emerge which dictate the pricing of these very small loans with . maturities of thirty-one (31) days or less. . The fixed and variable costs of these extremely small short term loans must be recovered in order for them to be economically viable. These loans are not designed to be outstanding for a year or longer.. They are emergency, short, small. convenient oash flow transaotlons. Disclosure rate comparison based upon a simplistic expression of the federal Truth in Lending annual percentage rate is misleading for these loaos.

5

6

78

9

In 1981 the New MeXico legislature virtually eliminated limits on Interest rates. Rates and fees are determined by the written contract between the borrower and the lender. Lendlng'regulatlon presently focuses on federally required consumer disclosure. the mediation of consumer complaInts, lender licensing and Jender regUlation. Consumer complaint analysis reveals the fact that In some Instances consumers are signing loan documents without reading and/or understanding what they have signed.

10

11

Ultimately the cost of lending and the competitive loan market determines the availability of and the price of credit Artificial limitations on Interest rates and fees below market reality oan only reduce or even eliminate availability of credit. The growth of very small, short term closed-end lending is a relatively neW loan product phenomenon In New Mexloo and throughout the country. These loans have apparently caught the attention Of consumers seeking an alternative to tradilionallongterm loans. Very small, loans such as thoso offered by payday, oar tltlo, and installment lenders usually are secured for a short term need such as a family cash flow shortage or emergency purpose. In most Instances, consumers view these loans as a quick and convenIent source of funds to bridge "shortterm" needs.

12

Exhibit 2 - p. 13

13

.,

Industry surveys indicate that the demographic profile of small loan borrowers have combined household Incomes In excess of $30,000, average 35 years of age, average four or more years at the same residence, average four or more years with current employer and more than 30 percent own their homes.13

There Is a strong sentiment among several committee members to re-wrlte the Small Loan Act to keep small lenders able to operate and be regulated exclusively within that act. The Idea would be to centralize New Mexico statutes relating to the small loan business within a singular act. Additionally, the Mortgage Loan Company and Loan Broker Act requires revision. The potential hIgh cost of very small. short-term, closed-end loan renewals or rollovers beyond the original term could be mitigated through limitations and/or repayment of principal. Lender qualification and financIal requirements In the Small Loan Act need to be reviewed a(ld strengthened. . , It was determined that the Director has sulficient statutory authority within The Small Loan Act to promulgate additional, reasonable regulations and orders for the administration and enforcement ot the aot. Consumer education 'and training must be Increased. The "Focus on the Future" program described in the Consumer Group Report must be expanded beyond New Mexico High Schools and should be available to other consumer groups and the general population. Other existing training programs and new programs should be designed and implemented. The goal Is to raIse the financial Iiteraoyof the consuming public so that It may make Informed and wise financial decisions. Several consumer group Interested parties have recommended that the Division conduot a separate stUdy of "payday loans" or "deferred deposit tranIt8ctlons". The state of Indiana has conducted a special study encompassing 47 licensees. 5,350 files and over 5,400 loans. The findings InclUded a high number of loans/renewals per customer per year and some extremely high APR's. The resources of the Division do not accommodate such a special study and the recommendations put forward by the Director should address the underlyIng issues. Federal law enabUng Most Favored Lender Doctrine & Rate Exportation, permit banks and other depository institutions whose deposits are federally Insured (FDIC) to Issue credit cards and make loans based upon the Interest rate limitation, it any, In their home State of DomIcile which significantly impacts our lendIng environment. Congress Is presenlly reviewing Ihls issue and it appears that only new. Federal law can clarify the situation and/or return Interest rate limitation authority to the states.

14

1516

17

18

19

ConclusionThe short term. small closedend loan has demonstrated Its ability to function In the lending marketplace and Is successful when appropriately used as a short- term prodUCt. These loans are not designed for nor should be used for long-term purposes and cannot sucoessfully be used to address long term family bUdgeting and credit needs. An Industry report proposes the analogy of using these loans as one would use a taXi. It would make sense to hire a taxi to go across town but not to travel across the country. Several members of both the Lender work grol!p and the Consumer work group Identified oertaln lender and consumer concerns and best practices for lenders, particularly In the very small. closed end segment of the business. Some lenders suggested further considerations and recommendations for Improvements Including "best lending practices".

14

Exhibit 2 - p. 14

Some of the Ideas expressed Included additional consumer disclosure, rollover/renewaillmitatlon, advertising improvements and consumer store signage, consumer education and information dIsseminatIon, improved employee educatfon, consumer rIght to cancel transaction, adoption of Industry code 01 conduct, elimination of loan splitting, enhanced lender financial requirements for licensure and other Ideas to "Improve" the consumer lending environment. FollowIng considerable discussion and deliberation, It was determined that further universally accepted improvements could only be implemented through additional research, possible promulgation of regUlations and statutory changes.

Recommends'llonsThe Director shall continue the revIew and study of "very small, shortterm, closed end lending" issues and give conslderatfon to promulgating regulations In the following areas:

.1. AddressIng the renewallrollover of very small. short term, closed-end loans so as to eliminate the potential of borrowers having such higher cost loans outstanding for an extended perIod of time Is worthy of consideration2. Addressing the practice of "loan splitting" amongst affiliates or subsidiaries of specIalty lenders to the same borrowing consumer. 3. Implementing a "free" consumer twenty-four (24) hour right of rescission for very small short-term closed-end loans and/or a "cooling oft" period preceding dIsbursement of funds. 4. Special written disclosures to consumers for very small, short. term; closedend loans clearly describing 1he nature of the loan, the flnanoe charges or cost for the loan durIng the initial term of the loan and expressly stating the potential hIgh cost of renewing the loan. Such disclosure would be provided to the applicant and signed before the Initial loan or renewal Is processed. 5. Prominent display of slgnage posted In each lending location that offers very small, short term, olosed-end loans that Includes easily understood InformatIon describing the loan product, the costs, the repayment reqUirements, and consequences of not repaying the loan. 6. Development of an Information piece by companies for consumer's in financial need describing the very small, shortterm, closed-end loan products and 1helr appropriate use. 7. The redesign and implementation of the new and/or renewal licensing process for small loan lenders. The new process could include Identification and authorization the specific loan products to be offered.

0'

8. Requiring small loan licensees to have an employee education and training program inCluding its policies and procedures regarding employee Interaction with and dIsclosures provided to all applicants. . . . 9. Addressing affiliated car title lenders and payday lenders that operate within close physical prOXimity to one another.

On the statutory front the DIrector sugges1s to the following statutory changes: Exhibit 2 - p. 15

15

1. Rs-writing The Small Loan aot to consolidate all New Mexico statutes relating to the Small Loan business within one act and to keep all small loan operations within that act. Additionally, having the act amended to Identify different small lending segmenls and address potentially different statutory and regulatory treatment for each segment.2. Revising The Mortgage Loan Company and Loan Broker Act. The financial qualification entry bar

should be raised along with the demonstrated experience and lor competency of the licensee. Olher recommendations: 1. A general recommendation is to a9dress the statewide need for educating and training the "borrowing public", While youth are being introduced to programs for personal financial management like "Focus on the Future", It would be constructive to expand suoh education to adults. 2. The Director recommends that the legislature provide surticlent budget resources to Flq so that the DIvision can continue to fulfill expanding regulatory mission.

Report Conclusion.This consumer lending study has been a highly ihforma1lve, challenging and rewarding experience. The Committee was composed of a large and diverse group of professionals.representing New Mexico's lending Industry, its consumercitIzens and State government. Through our meetings, discussions, debates, research and analysis. we all learned a great deal about consumer lending In the state, . Important lending Industry facts and economic realities, important consumer Issues and concerns, the legal environment and the regulatory environment. It is hoped that the legislature will benefit from the Information provided. Although there was no universal consensus, indeed there was no consensus within committee working groups on certain controversIal issues such as interest ratelfee cap limitations, the Introduction of a separate new staie disclosure for certain loans, the prohibition of certain lending