South Dakota, Pioneer of High-Cost Lending, Considers Payday Ban

The state that brought high-cost consumer loans to the rest of the country may finally be ready to reverse course.

More than three decades ago, South Dakota repealed its interest rate caps in an effort to lure Citigroup's credit card operations to the prairie. Judged solely in terms of employment, the move was hugely successful. Sioux Falls became a card industry hub. Today South Dakota is home to more than 17,000 financial industry jobs.

But the looser lending laws also had an unintended side effect. Payday lenders flocked to South Dakota, which is now one of only seven states without any rate cap. For South Dakotans, borrowing $300 for five months costs an average of $660, one of the highest prices in the country, according to the Pew Charitable Trusts. Critics argue that the lax rules enable exploitation of the poor.

Today, the short-term loan industry in South Dakota faces an uncertain future, as its opponents lay the groundwork for a fight at the ballot box in November 2016. Given the state's history as a pioneer of high-cost lending, it's a battle freighted with symbolism, a referendum on South Dakota's precedent-setting decision to deregulate the cost of borrowing.

Payday industry foes are turning to the state's voters after their prior legislative efforts failed.

"I've brought five years of bills to regulate the industry. I decided I was not going to do an exercise in futility again," said state Rep. Steve Hickey, a Sioux Falls Republican and a longtime opponent of high-cost loans, in an interview.

He is blunt in his criticism of payday lending.

"It's the financial equivalent of giving a starving person rotten meat," Hickey said. "It's a blight, and I'm tired of it."

Hickey, a pastor and a social conservative, is teaming up with Steve Hildebrand, a Sioux Falls-based political operative who served as deputy campaign manager to Barack Obama in 2008. They hope to impose a 36% annual percentage rate cap on the payday business. Both sides of the debate agree that the interest rate cap would drive the industry out of the state.

Hickey expressed confidence that his side will have better luck with South Dakota voters than it has had at the state capitol, where payday lobbyists wield considerable clout. He said that early polling looks favorable, and pointed to the results of a 2010 initiative in neighboring Montana, when voters banned payday lending by a 72%-28% margin.

But the language of the South Dakota ballot measure has yet to be finalized, and that's where the issue gets tricky. Since 1981, when high-cost consumer lending was legalized in South Dakota, many thousands of jobs have been created in the state, because numerous banks have based their credit card operations in the state and exported its comparatively lax rules to the rest of the country.

So the backers of the forthcoming ballot measure will need to convince the state's voters that they can hang onto what they like about the current rules while discarding the less popular parts. Threading that needle could be a challenge, since short-term lenders have often adapted to regulatory schemes that were intended to put them out of business.

While most of South Dakota's credit card-issuing banks likely would not be affected by an across-the-board 36% rate cap, some subprime issuers might be, especially during a time of higher interest rates. So Hickey is promising that his ballot measure will exempt banks, which could easily move to another state if tighter rules were enacted.

"Our state is really not willing to buck the credit card industry," Hickey said.

South Dakota bankers plan to oppose the rate cap initiative anyway, despite the fact that they'll be exempted.

"We have concerns about the government getting in the business of setting the price of borrowing money, no matter what the product is," said Curt Everson, president of the South Dakota Bankers Association. "We just believe the marketplace is the place to set those prices."

Everson recalled that credit card jobs were only part of the reason that South Dakota changed its lending rules in 1981. The high interest rates of that era, which were being used to fight inflation, along with strict interest rate caps in South Dakota, had made it difficult for banks to make loans, and that was threatening the state's economy.

He expressed concern that the upcoming ballot measure targeting the payday industry could pave the way for future efforts to regulate banks. "I think there's legitimate reason for concerns about slippery slopes," Everson said.

The ballot measure's supporters have yet to start gathering signatures from South Dakota voters, and payday lenders say it's too early to gear up for a campaign.

"Our focus continues to be via discussions with the legislature, who are elected to make the laws of the state," said Jamie Fulmer, senior vice president of public affairs for Advance America, a multi-state payday chain that has stores in South Dakota.

Still, the battle lines are being drawn.

Charles Brennan, the owner of Dollar Loan Center, a short-term lender with 11 stores in South Dakota, argued that a ban on payday lending will lead to an increase in bad checks and theft.

"What the people need to know in South Dakota is that there's a fine line between someone being financially strapped and being desperate," he said. "We are that fine line."

Hickey said that he's tried to work with the payday industry, but the industry has balked at even relatively modest reforms, and now he's fed up.

"They're bilking millions of dollars out of our poorest neighborhoods," Hickey said. "And it's predatory."