A look at Initiated Measure 21, 36% payday lender cap

9995759I have completed my posts about the constitutional amendments and referred laws as I look at the ballot questions in the 2016 South Dakota election. Now it is time to look at the initiated measure, of which there are three. First up is Initiated Measure 21 (IM 21). IM 21 would set a 36% interest rate cape on payday loans.

This post will look at some of the basics of IM 21. There may be more posts about IM 21 coming in the future; but this post should be a good starting point for anyone trying to research IM 21.

Origins of Initiated Measure 21

To look at the origins of Initiated Measure 21 it is worth looking at HB 1255 (SoDakLiberty Posts) from the 2014 South Dakota legislative session. Steve Hickey, who at that time was a State Representative for District 9, brought forth HB 1255 to increase the regulation of payday loans. 1255 was a long bill aimed at creating a comprehensive regulatory environment for short-term lenders. The payday industry fought hard against HB 1255. House Commerce and Energy soundly defeated the bill 11-2.

Later that year Hickey decided to move ahead with another plan to regulate the payday lending industry. He met up with Democrat insider Steve Hildebrand and came up with a plan to let the voters of South Dakota decide. Even the Argus Leader had to note this was an odd couple to work together:

Hickey is a pastor who has drawn national attention for comments criticizing same-sex marriage and homosexuality. Hildebrand, a former Tom Daschle and Barack Obama aide, is openly gay and was offended by Hickey’s remarks.

But when the two sat down for coffee to talk over their disagreements, they discovered a lot of things they agreed on. At the top of the list: shared opposition to payday lending.

In that same Argus article here is what Hickey had to say about the payday lending industry:

“They can tell us all that this is just about helping people, but it’s an intentionally crafted defective financial product that is marketed to the financially unsophisticated,” said Hickey, a Sioux Falls Republican. “They’re bilking billions of dollars out of poor neighborhoods, and the taxpayers get to clean up the mess. I want to get them out of the middle, and let society help these people in other ways.”

The petition circulated by Hickey and his coalition of supporters was much simpler than the regulatory bill brought forth previously. Probably most interesting during the petition drive process was the payday lending industry doing what many would consider dirty tricks to confuse would-be petition signers. The payday lending industry brought forth Amendment U (SoDakLiberty Posts) as a decoy hoping to draw support away from the 36% cap being circulated. Even worse the payday loan industry tried to negatively impact Hildebrand’s business in Sioux Falls. During the 2016 legislative session there were a number of bills brought forth to deal with the dirty deeds of the payday industry petition circulators.

On December 28, 2015, the petition circulated by Hickey’s group was certified by the SD Secretary of State office and officially became Initiated Measure 21.  But that doesn’t mean the payday lending industry wasn’t going to fight. Shortly after being certified the payday lending industry tried to challenge the petitions. That effort failed so the payday lending industry decided to go after two of the petitions sponsors, Steve Hickey and Reynold Nesiba, because they no longer lived where the petition says they did. This was another effort that lead to nothing for the payday lending industry. One of the more interesting tactics used by the payday lending industry was  to say the Attorney General explanation of IM 21 was incorrect. The payday lending industry tried to say the petition circulated for the 36% cap was invalid because the AG failed to note in his explanation that the new cap would drive the payday lending industry out of business if it was passed in South Dakota. This attempt also failed. There were some other dirty tricks and legal tactics tried by the payday lending industry, but I think the above examples give a good idea of the fight being put up by the payday lending industry.

I almost forgot about a legislative attempt to take on IM 21 by the payday lending industry. Here is part of what I had to say in my post about Constitutional Amendment U:

Another attempt to override IM21 came during the 2016 legislative session. HB 1161 (SoDakLiberty Posts) was brought forth by Rep Kris Langer (R, Dist 25)  as an attempt to create a new section of law to regulate payday lenders. That move in where the payday lending law resides would have prevented the payday lenders from being impacted by IM21 if it were to pass into law. The bill failed on the House floor.

Ironically I believe the payday lending industries many attempt to thwart IM 21 have actually backfired and created more supporters of IM 21. From a political geek standpoint it will be interesting to see what the payday loan industry tries over the next few months.

Text of Initiated Measure 21

The full text of IM 21 can be read in this post or on the original petition filed in the SOS office. Here are what I would consider the three key areas of IM 21:

  1. “Installment loan licensee” is removed from the definition of “Regulated lenders” as set forth in SDCL 54-3-14
  2. SDCL 54-4-44 would be amendment to cap finance charges at 36%. A violation of this would be a Class 1 misdemeanor.
  3. A new section of code would be added to ensure payday lenders didn’t try to disguise payday loans as something else in order to get around the new cap.

AG’s Explanation

The Attorney General’s office has provided this explanation for Initiated Measure 21:

Title: An initiated measure to set maximum finance charge for certain licensed money lenders

Explanation:
The initiated measure prohibits certain State-licensed money lenders from making a loan that imposes total interest, fees and charges at an annual percentage rate greater than 36%. The measure also prohibits these money lenders from evading this rate limitation by indirect means. A violation of this measure is a misdemeanor crime. In addition, a loan made in violation of this measure is void, and any principal, fee, interest, or charge is uncollectible.

The measure’s prohibitions apply to all money lenders licensed under South Dakota Codified Laws chapter 54-4. These licensed lenders make commercial and personal loans, including installment, automobile, short-term consumer, payday, and title loans. The measure does not apply to state and national banks, bank holding companies, other federally insured financial institutions, and state chartered trust companies. The measure also does not apply to businesses that provide financing for goods and services that they sell.

Pros of Initiated Measure 21

The ballot question committee South Dakotans for Responsible Lending is leading the effort to pass IM 21. On the groups CapTheRate website  is includes this passage in their mission:

South Dakotans for Responsible Lending is a bi-partisan coalition that seeks to cap payday, car title, and installment loans at an annual interest rate of 36%. That number was carefully chosen. In 2006 Congress determined that 36% was the maximum interest rate a person could dig out from on his or her own. As a result, Congress capped payday and title loans to active duty military personnel at 36%. The fear was that higher rates undermined our nation’s military readiness. A similar cap is already in place in 15 states and the District of Columbia. Other states, such as Vermont and Georgia, simply prohibit payday lending entirely. If these high interest rate loans are bad for our soldiers, and are prohibited or capped in many other locations, then they are also bad for vulnerable South Dakota citizens. It is time to cap the rate!

I think the above is interesting because I have had many readers of this blog ask where the 36% number came from, because it still sounds too high to a lot of people. It also shows other states have taken such moves.

On their main page the group focuses on who this new cap would protect:

These lenders offer a defective financial product intentionally designed to be a debt trap. The average payday loan borrower repays about $800 on a $300 loan because most borrowers simply cannot repay these short-term loans on time. As a result, borrowers are forced to take out another loan (and then another) just to pay the interest on their original loan. We believe families, seniors, and others who are economically vulnerable should be protected from greedy lenders charging 574% interest rate (or more).

As the election gets closer  I would expect the groups Facebook page will be filled with reasons to support IM 21. Some interesting posts already there look at alternatives for people who would usually take out payday loans:

Such an approach might work better than others I’ve seen for ballot questions.

Cons of Initiated Measure 21

The payday loan industry is certainly spending tons of money fighting against IM 21. A ballot question committee called Give Us Credit South Dakota has burned though a lot of money trying to defeat IM 21. I would expect that to continue.

The best argument against IM 21 does not come from the payday loan industry itself. Instead it comes from John Tsitrian in the Rapid City Journal:

Voters should consider the measure’s aftereffects before condemning this business to oblivion. The fact is, there are a lot of folks in our communities who simply have no options for getting relatively small sums of cash to tide them over as necessary, either from time to time, or chronically. I understand that the way their fees and charges are structured, the true interest rate on many of these loans, can run to several hundred percent when annualized.

 …

In other words, the absence of payday lenders causes consumers to jump out of one frying pan and into another fire. My bank charges $39 per overdraft. You can annualize that for yourself, but if the bounced check is on a typical household bill of a few hundred bucks or less, I’d say conventional bankers will see a windfall if Initiative 21 passes. The same goes for pawnshops and entities like credit cards that stick consumers with late fees.

Read the whole thing here.

Proponents of IM 21 have not hidden the fact they want to drive the payday loan industry out of business. There is a very good chance IM 21 would do just that. People currently seeking payday loans will still have a need for short-terms loans, which will be hard for people with bad or overextended credit. Before passing IM 21 the people of South Dakota have to decide whether it is right to drive an industry out of business simply because that industry is seen as ‘bad’.

My initial thoughts of how to vote

I am going to vote NO on IM 21; and on the payday industries proposal in Amendment U. Many people don’t like the payday loan industry. But the payday loan industry fills a need in the market that unfortunately many people must utilize. I myself was caught in the payday loan trap for a long stretch some years ago. And yes, it was a trap. Yet at the time I had no other real option if I wanted to stay gainfully employed and make my vehicle payment. At the same time I wish the payday lending industry would stop with the dirty tricks in fighting against IM 21. It makes it hard to defend a position of No on 21 when the payday lending industry is making itself look just as bad, if not worse, than the cliché evil corporations many would portray payday loan executives as.

2 thoughts on “A look at Initiated Measure 21, 36% payday lender cap”

  1. If have a loan with a place and now can they still charge same or do they have to change the rates

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