A fierce battle is underway in South Dakota that has managed to unite conservative Republicans and liberal Democrats against out-of-state payday lenders that want to block efforts to cap interest rates on payday, installment and auto title loans.
Depending on the outcome of the election, the fight over two conflicting state ballot initiatives could provide a road map for the embattled payday lending industry or consumer activists seeking bans in other states.
In one corner is Measure 21, an initiative that would prevent payday, installment and auto title lenders from making loans with annual percentage rates greater than 36%.
In another is a provision known as Constitutional Amendment U, which nominally appears to be restricting payday lending by saying interest rates cannot exceed 18%. But critics argue the initiative, which is backed by Rod Aycox, the president of LoanMax Ttitle Loans, is deliberating misleading because it would allow higher rates if a borrower agreed and includes language that says there can be "no law fixing a rate of interest or return for the loan."
"It's a beast of evil genius," said Reynold Nesiba, a professor of economics at Augustana University who is running unopposed for a state Senate seat and backs Measure 21. "It's a prohibition against rate caps that is masquerading as an 18% rate cap."
South Dakotans have been barraged with TV ads supporting Amendment U while grassroots efforts such as a prayer walk on Sunday at East Side Lutheran Church in Sioux Falls are trying to bring out support for Measure 21.
Even many Republicans, including South Dakota Gov. Dennis Daugaard, are opposing Amendment U, though he has not yet backed Measure 21.
"I am very concerned about big out-of-state groups attempting to experiment in South Dakota through constitutional amendments," Daugaard wrote in a web site posting Nov. 3. "I'm considering voting for 21. The fact that it is an initiated measure means that even if it has problems, the legislature is able to address them later."
South Dakota famously repealed interest rate caps three decades ago, paving the way for Sioux Falls to become a credit card industry hub and pioneer of high-cost lending.
But that has changed dramatically in recent years.
Aycox, the man behind the constitutional amendment, did not respond to repeated requests seeking comment. The American Financial Services Association, a trade group of installment lenders, said they did not work on the initiative.
Supporters of Measure 21 are working to convince voters that a 36% cap makes sense.
"The sky doesn't fall" if the state enacts a rate cap, said former state Rep. Steve Hickey, a Sioux Falls Republican, pastor and longtime opponent of high-cost loans. "The only people who will be hurt by a 36% rate cap are the lenders themselves. Capping the rate on payday lending is an issue that has very strong bipartisan support in our state. We have the political left and the political right working closely together to cap interest rates."
The average interest rate on a payday loan in South Dakota is 574%, and proponents believe that if Measure 21 is enacted, it will drive payday lenders out of South Dakota. Currently, 14 states and the District of Columbia have interest rate caps on payday loans of 36% or less, and payday loan stores do not operate in those jurisdictions.
"Our efforts of working across the party lines is a breath of fresh air," Hickey said. "The bigger problem is that it's an intentionally defective financial product marketed to unsophisticated borrowers who the payday lenders know cannot pay [the loans] back."
The debate in South Dakota comes as the Consumer Financial Protection Bureau weighs its own proposal to restrict short-term loans. But Measure 21 would go further than the agency's efforts because the CFPB has no power to directly set interest rates.
Nick Bourke, director of the Pew Charitable Trusts' small-dollar loan project, said he expects Measure 21 to pass.
"Every time there has been a ballot initiative to set an interest rate cap on payday loans, it has succeeded," he said, referring to initiatives in Arizona and Montana. "What the payday lenders have tried to do is prevent such measures from getting on the ballot."
But no state has a constitutional amendment limiting rate caps, Bourke said, which is what makes Constitutional Amendment U so unusual.
Opponents of payday lending are touting that the amendment stands for "usury," and would take away the legislature's authority to regulate interest rates.
Bob Mercer, a newspaper reporter at the Aberdeen American News, said the number of payday lending shops grew after video lottery was adopted in South Dakota about 25 years ago.
"These quick-credit operations proliferated in part because of what we in South Dakota call video lottery," Mercer said. "There are video gambling machines in almost every bar and restaurant with an alcohol license, and these cover many convenience stores and gas stations [and] people lose more than $100 million annually on this type of gambling."