South Dakota regulations hit storefront lenders where it hurts

Inside Subprime: April 25, 2018

By Kerry Reid

In late 2016, South Dakota voters overwhelmingly passed a ballot measure (Initiated Measure 21, or IM21) that took aim at high-interest payday loans in the state by capping the annual percentage rate at 36 percent (which is also the APR cap proposed by the federal Consumer Financial Protection Bureau under the Obama administration). The measure also capped the loan amount to $500 and limited the number of times a loan can be renewed to four.

76 percent of voters supported the initiative, while a competing constitutional amendment put forward by the payday loan industry that would have allowed for unlimited interest rates failed.

But since IM21 has passed, many brick-and-mortar storefront lending operations in South Dakota have closed. According to an article by Bart Pfankuch of South Dakota News Watch, the South Dakota Division of Banking showed that just six weeks after the vote, 111 of the state’s 441 licensed lenders of all types didn’t renew their annual licenses.

An article by the Associated Press that ran in the Capital Journal of Pierre right after the measure passed noted that at least three major payday lending chains with nearly 30 stores among them ceased offering new loans to South Dakotans. Chuck Brennan, owner of the Dollar Loan Center stores, has closed all of his operations in the state, citing the new law.

However, Joe Sneve of the Argus Leader reported in September that the South Dakota Division of Banking had also revoked licenses for Dollar Loan Centers in Sioux Falls and Rapid City for violating the new law.

It’s difficult to find hard numbers on where South Dakotans who need cash are going now. Pfankuch attributes this to payday borrowers not wanting to go on the record “due to embarrassment or privacy concerns.” According to Pfankuch, some are turning to pawn shop loans, which require them to put up something of value as collateral and generally don’t extend contracts for more than 30 or 40 days. Or they are going online, where it’s easy for lenders to dodge state licensing requirements and regulations.

Advocates of IM21 hoped that passage of the measure would encourage people needing emergency cash to consider lower-interest loan options, such as family members or credit unions. The latter doesn’t appear to have happened, according to Jeff Olson, CEO of the Credit Union Association of the Dakotas, which represents 75 credit unions in both North and South Dakota. As quoted by Pfankuch, Olson says “They haven’t come knocking on the door of credit unions for small loans.”

During the debate over IM21, backers of the measure raised $25,000 and contracted with the nonprofit GROW South Dakota, which focuses on community lending and development, to run an emergency loan program as an alternative to the payday lenders. However, as Pfankuch reported, GROW South Dakota CEO Lori Finnesand says that they haven’t made any loans to date through the fund.

In a 2004 report, the Consumer Federation of America outlined how hard it is to regulate online payday lenders. South Dakota borrowers who go to the internet for emergency cash may find themselves in even worse shape, with fewer options for regulators to go after unscrupulous lenders.

Over the northern border, things are different. In Pfankuch’s article, Olson notes that payday lenders in North Dakota are mostly run locally, since national firms don’t feel they can make enough money under the state’s restrictions. These include a requirement that all borrower information be compiled in a statewide database, which all lenders must check and update each time they make a loan. This limits the possibility that someone who is already overextended can obtain another high-interest loan.

Whether or not the crash of the payday loan industry in South Dakota in the wake of IM21 will cause lawmakers in the state to take another look at regulations – perhaps by taking a page from their neighbors to the north – remains to be seen.

To learn more about payday loans in the midwest, check out these related pages and articles from OppLoans:

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