Voters Regulate Payday Lending

In South Dakota, where payday loan interest rates average a whopping 652 percent and are among the highest in the nation, voters have struck back by approving a 36 percent rate cap.

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Voters Regulate Payday Lending

By Liz Farmer, Governing.com

With more than half of precincts reporting Tuesday night, results showed voters approved the move to regulate the industry by a margin of three to one. More than a dozen other states have enacted a similar cap on loan interest rates.

Critics of the payday industry say lenders prey upon low-income borrowers who are unable to access financing from mainstream banks. These borrowers, they claim, easily get trapped in a cycle of debt. Payday lenders, however, argue that they fill a critical hole in the economy by allowing people with poor credit to get emergency loans.

The push for the rate cap was led by South Dakotans for Responsible Lending, which also fended off a rival measure placed on the ballot more recently and backed by the payday lending industry. That measure proposed an 18 percent cap -- unless the borrower agreed to a higher rate. Opponents said the measure was intentionally misleading and would have essentially legalized sky-high interest rates for payday borrowers in South Dakota.

"When a borrower walks into a payday lending store, if they want that loan, the lender's going to force them to sign the waiver and then charge a 500, 600 percent [annual interest rate]," said Steve Hildebrand, a political strategist and the organizer behind the 36-percent measure.

South Dakotans for Fair Lending, which backed the 18-percent measure, argued it would have protected consumers' rights to choose what best meets their needs.

Payday loans are, as the name suggests, due on the next payday, and are made with little, if any, regard to a borrower’s ability to repay that loan and meet other obligations. The Consumer Financial Protection Bureau alleges that payday lenders trap borrowers in a cycle of debt by encouraging them to take out new loans to pay off old debts, piling on fees and interest. The practice led HBO's John Oliver to quip, "payday loans are the Lays potato chips of finance. You can't have just one, and they're terrible for you."

Recently proposed federal regulation would make some headway in curbing the industry. It would require lenders to ensure borrowers can pay the money back and also calls for restrictions on loan churning -- that is, when borrowers take out new loans to cover old ones.

Loan churning accounts for roughly two-thirds of the $3.4 billion in fees that lenders charge each year, according to a 2011 report from the Center for Responsible Lending, a North Carolina advocate for reform. Research from a number of groups has shown that the typical payday borrower is indebted for more than 200 days a year.

But the proposed federal regulation doesn't address interest rates.

South Dakota’s referendum brings it in line with 14 other states that have rate caps. Without one, the average payday loan comes with an annual interest rate of anywhere between 154 percent in Oregon and 677 percent in Ohio.


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