Volume 5, Number 14, Page 4

Congressional Highlights

Compiled by Alfonso Trujillo from Cámara de Diputados press releases

Note: Both houses of the Mexican Congress are currently in recess. During the recess period, which began April 30, 1998, the Permanent Commission was installed, consisting of 34 representatives from both house. This commission has conducted the daily operations of the Congress during this recess period, including the release of press bulletins. The Inter-American Trade Report will give notice as to when the Congress is scheduled to reconvene. —AT

FROM THE EDITOR

Interest Rate On Consumer Loans Limited in Nuevo León

A consumer group (known as “El Barzón”) has succeeded in having legislation approved by the state legislature of Nuevo León limiting interest rate charges on consumer credit purchases. The new legislation limits the rate of interest a private lender or merchant may charge on goods sold on credit, such as used cars. The interest rate will be set according to the Average Percentage Cost (CPP) published by Mexico’s Central Bank. The rate is currently 17.24 percent. In the event that no interest rate is established in the sale contract, a maximum rate of nine percent will apply.

The Nuevo León Criminal Code now considers an interest rate to be usurious if set by merchants or private lenders at a rate superior to the CPP. Under the new provisions, usury may be punished by a prison term ranging from six months to eight years and a fine of up to twice the amount paid as a result of the excessive interest rate.

Current interest rates in Monterrey, the capital of Nuevo León, differ from business to business. Elektra, a nation-wide retail store, currently offers consumer loans with interest rates of up to 140 percent a year. Sears credit charges amount to interest rates of about 47 percent, and used car sales typically involve loans with interest rates that range from 70 to 97 percent.

The new law has not gone unnoticed and has given rise to considerable controversy. Juan Carlos Pérez, President of the National Chamber of Commerce (Canaco), does not believe that the law will affect commercial activities. Pérez maintains that the language of the provision restricts its application to transactions between private parties. Others believe that the new law also applies to merchants. If so, companies like Wal-Mart will not be affected because their consumer loans are made through banks. Even though the changes were passed unanimously by the state legislatures, legislators from the PRI and PAN parties do not agree on the extent to which the new law will affect consumer loans. The PRI leader in the Legislature, Oscar Adame, has stated that the amendments would apply to merchants that sell with credit options and to private parties. On the other hand, Fanny Arellanes Cervantes, a PAN legislator, has indicated that the amendments will only apply to private parties and not to merchants, who are subject to special commercial rules in México.

I believe that the provision will benefit the consumers in the short term; however, over time, consumers will be adversely affected because their ability to buy goods on credit will be limited. Since the interest rate restrictions do not apply to banks, merchants will have to borrow from banks at interest rates of approximately 28 percent. Merchants will not be able to lend to consumers for very long if they are limited to selling their products on credit at a maximum 17.24 percent interest rate.

While reducing consumer interest rates will generally benefit the economy, the way that reduction is achieved is critical. There are other more effective means to address high interest rates. In order to promote lending and lower interest rates, the risks that consumer lenders face must be reduced. The Mexican legal framework does not adequately support a modern secured financing system, nor does it provide sufficient protection to a lender. Typically, Mexican lenders use two different mechanisms to secure their loans. The first is through a real property mortgage. This does not apply to merchants, for different reasons. The second mechanism, and the most common among merchants, is the issuance of promissory notes. The buyer/borrower signs a promissory note to the seller/lender. In the event of non-payment, the lender must sue in a civil court and try to seize any property securing the debt from the borrower.

In order to create a financial system that would promote lower interest rates, Mexican laws should be amended to give more protection to lenders and develop better means to secure loans based on personal property. Reducing risks to lenders will encourage more lending and foster more competition among lenders. Mexican consumers will ultimately benefit through lower interest rates.

—Lic. José Felipe García