Opponents of the payday lending industry will ask voters to ban high-interest loans in 2016 after the defeat Wednesday of compromise legislation.
Rep. Steve Hickey, R-Sioux Falls, was preparing to bring an initiated measure banning high-interest loans to the 2014 ballot when payday lending companies reached out to him to propose a deal: instead of banning their industry outright, they would work together on new regulations for payday loans. But the industry came out against Hickey’s compromise Wednesday, saying it was flawed.
"I keep my word," Hickey said after lawmakers sided with the lenders and rejected his measure. "I’m going to the ballot."
Hickey’s proposal, to ban interest rates higher than 36 percent per year, would effectively put payday, title and signature loans out of business. The fee structure those businesses use reflect interest rates of 300 percent, 500 percent or more over a full year — though the companies say a yearly interest rate isn’t a good way to describe their short-term loans.
Representatives of Advance America, Dollar Loan Center and Direct Check all testified against the bill, saying the restrictions on the industry would hurt business and might drive customers to unregulated online lenders.
"There’s such a thing as using regulations to strangle an industry. I think that might be the case here," said Harry Christianson, a lobbyist for North American Title Loans.
Though Hickey’s original intention was to eliminate payday lending, he said he was offering a genuine “meet in the middle” compromise with his legislation. Fourteen other states have passed similar regulations, including Florida, and in all those states he said payday and similar lending models are profitable.
Carol Stewart, a senior vice president for Advance America, said her they “live with” and “work under” similar regulations to Hickey’s proposal. But while they may be tolerable, Stewart said they’re not desirable.
"None of this we feel is necessary for the way we operate in this state," Stewart said.
The bill defeated Wednesday morning would have allowed all borrowers to change their mind and cancel the loan within 24 hours. It would have created a state-run database to enforce existing laws limiting how many loans a consumer can have, and set aside money for credit counseling and financial education.
Also opposed to the reforms was the state division of banking, which said Hickey’s reforms would require a lot of work to administer — a change of pace for one of the smallest state banking regulators in the country.
Division director Bret Afdahl said he has only two full-time workers overseeing 400 different moneylenders, not enough to handle extra work of managing a database and cracking down more heavily on violations.
Afdahl also expressed philosophical resistance to tightening regulation of payday lenders.
"It would be a large intrusion by the government into the private sector," Afdahl said. "Maybe with good goals in mind, but it would be a big change for our state."
Though lawmakers didn’t focus on the logistical difficulties raised by Afdahl in their statements before voting to kill the bill, Hickey said opposition from Gov. Dennis Daugaard’s administration was crucial.
"If the administration of the banking division is for it, there it gives everybody here a lot of comfort," Hickey said. "We rarely see somebody bucking the administration."
Stewart also highlighted the state’s opposition.
"I work around the country with numerous policymakers on how best to regulate this industry and to allow access to credit," said Stewart. "I’ve never in any state… passed major regulation like this without the regulator being at the table and having some say in how the industry would be regulated."
Lawmakers on Wednesday largely sided with the lending industry’s arguments that they are already regulated and provide a needed service to people with little money and poor credit.
"These businesses provide a service to the people… who can’t go to the bank and get a short-term loan," said Rep. Tim Rounds, R-Pierre.
Rep. Kristin Conzet, R-Rapid City, said that “although this industry does turn some people’s stomach, it’s necessary.”
And Rep. Stace Nelson, R-Fulton, said “the free market can regulate” payday lending, and “has.”
Hickey said his conversations with the payday lending industry started to go wrong in early January.
"When I came to Pierre (this year), you could start to feel it," Hickey said. "All of a sudden they take issue, ‘I don’t know, we’re a long way from supporting it.’ I’m like, ‘A long way? You gave me the bill.’"
Jamie Fulmer, another executive with Advance America, said his company wasn’t necessarily opposed to any particular aspect of Hickey’s bill. Instead, it was the “bill in its totality” that he objected to.
Mike Hanna has followed payday loan reforms in multiple states for his company Veritec Solutions, which runs databases of payday loans such as Hickey’s bill called for. He had another explanation for why the industry opposed the South Dakota measure but worked with lawmakers in states like Kentucky.
"They knew they had the votes where they didn’t need to come to the table (in South Dakota)," Hanna said. "When the pressure is on them enough, they come to the table."
Fulmer said it “certainly wasn’t our intent” to deceive Hickey, and hoped to continue negotiations. Lawmakers voting to kill the bill said the same thing.
"I hope the sponsor doesn’t get disheartened and he’ll keep working on this," said Rep. Jim Stalzer, R-Sioux Falls.
But Hickey said he’s done negotiating.
"This is a bunch of games. These people expressly told me to put this stuff in the bill, and now they’re here opposing it," Hickey said. "They should have been in here supporting the bill. But instead they’re going to face a rate cap."