Payday Lender Calls 36% Rate Cap Impossible

PIERRE, S.D. (CN) - A payday lender sued South Dakota, claiming a ballot initiative capping interest rates at 36 percent is "so low that this form of consumer credit will simply disappear."

Erin Ageton, vice president of Select Management Resources, sued Attorney General Marty Jackley on June 5 in Hughes County Court.

She claims the ballot statement misleads the public into believing that short-term lending could continue in South Dakota if the rate is capped at 36 percent.

"The measure's purpose, effect and legal consequence is to set a 'maximum' interest rate so low that this form of consumer credit will simply disappear," Ageton says in her request for Writ of Certiorari.

"The law does not actually result in a cap on loan rates; instead, it eliminates loans altogether. No lender and no borrower will ever enter into a 36 percent short-term loan in the real world, just as no bank and borrower would ever enter into a home loan for a miniscule amount of interest that fails to cover the cost of making the loan, and no insurer would ever underwrite a policy for a small fraction of the actuary's expected payout on claims."

Ageton claims that the state must revise its ballot statement to comply with 2010 legislation on voter initiatives. The law requires the attorney general to "educate" the public about the initiative's consequences, a task that used to "be left to the rough and tumble of newspapers, issue ads, and politics," Ageton says.

She claims that the ballot statement as written falls short because it "mechanically paraphrases the statutory text the measure's proponents artfully crafted to conceal their true policy goals."

She asks the court to order the state to insert this sentence into the ballot statement: "The initiated measure, if adopted, will eliminate short-term loans in South Dakota.

Ageton's attorney Sara Frankenstein told Courthouse News that "the current language does not clearly illustrate the very real and harmful effects this initiative will have should it be passed."

"South Dakotans have the right to know the true effect of what they're signing when it comes to this measure - that when times get tough, there won't be a place they can go to easily borrow money to make ends meet, or that this measure will directly lead to the loss of thousands of jobs across our state."

Ageton's petition cites a 2011 study from the University of Washington, which claimed that most short-term lenders went out of business in states that enacted similar measures.

The study reported that because short-term lenders have such short repayment schedules - often just 14 days - it may be "problematic" to calculate their interest rates by year.

Traditional lenders, such as banks, offer much longer repayment periods, and so earn more over the life of a loan even at low interest rates, the study says.

Annual interest rates of 350-500 percent are common on 14-day loans, the study adds, comparing the high rates to taxi fare: "It can be argued that as long as loans are paid back within their terms, and are not carried over in the long-run, high interest rates may be justified for payday loans - much the same way the price per mile for a taxi is extremely expensive, but justified when compared to a buying a car, which is more expensive overall. Under this logic, if they are paid back at the end of their terms, access to payday loans might actually improve an individual's ability to cope with financial hardship, improving financial security overall."

Because South Dakota limits short-term loans to $500, Ageton said, a lender will earn just $6.90 on a loan paid off within 14 days. She says that is not enough to cover overhead.

Critics of payday lenders say that such loans are often rolled over, so that calculating presumed profits over 14 days does not present a true picture of the damage they cause.

Steve Hildebrand, a Democratic strategist and proponent of the measure, said the interest cap is needed because payday lenders "prey on poor people." Citing payday loans that are rolled over, sometimes for years, Hildebrand told a South Dakota CBS affiliate that such loans can trap people in a cycle of debt.

But Ageton says in her petition: "The measure's proponents are, of course, still free to claim that they only seek to 'cap' rates, but this should be their political argument - not the position of the constitutional officers of South Dakota."

The Attorney General's Office did not respond to requests for comment.

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