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Payday Loan Rate Cap Qualifies for S.D. Ballot

PIERRE, S.D. (CN) - Despite payday lenders' complaints that it will put them out of business, a voter initiative capping interest rates at 36 percent will be on South Dakota's ballot in 2016.

Payday lending in South Dakota is unregulated today, leading to annual interest rates of up to 574 percent, among the highest in the nation according to a 2014 study by the Pew Charitable Trusts.

South Dakotans for Responsible Lending, which led the initiative campaign, said the law will curb "predatory lending."

"These lenders offer a defective financial product intentionally designed to be a debt trap," the group says on its web page. "The average payday loan borrower repays about $800 on a $300 loan because most borrowers simply cannot repay these short-term loans on time. As a result, borrowers are forced to take out another loan (and then another) just to pay the interest on their original loan. ... We find it unconscionable these types of lenders have targeted those least able to pay their exorbitant fees and interest, namely those with low-incomes, the elderly, veterans, and others living on fixed incomes."

Opponents say the measure is meant to put short-term lenders out of business . They say that a $500 loan paid off in two weeks would earn just $6.90 at a 36 percent interest rate, which is not enough to cover the risk of the loan. A state judge in June rejected payday lenders' demand that the ballot language be rewritten.

Most payday lenders do not recover payment on time, and high interest rates add up quickly.

The controversy led to the formation of South Dakotans for Fair Lending, which circulated a competing ballot initiative, capping interest rates at 18 percent, unless the borrower agreed to a higher rate in writing.

Yet that proposal appears to be self-negating, as it includes language prohibiting loan caps at all: "No law fixing a rate of interest or return for the loan or use of money, or fixing the service or any other charge that may be made or imposed for the loan or use of money, for any particular group or class engaged in lending money is valid."

The alternative measure is pending. Secretary of State Chantel Krebs announced Monday that the 36 percent cap had qualified for the ballot.

Neither representatives from South Dakotans for Responsible Lending nor South Dakotans for Fair Lending responded to email requests for comment sent Tuesday morning.

The 36 percent cap may indeed kill payday lending in South Dakota. The 2014 Pew report states: "In the 15 states that prohibit payday lending or interest rates higher than 36 percent, there are no payday lending stores."

Half of Colorado's payday lending stores closed after the state capped interest rates on short-term loans at 45 percent , but the business is booming in states such as Nevada and Wisconsin that have no rate caps.

Some states, including Rhode Island, Vermont and Massachusetts, outlaw payday lending altogether, according to paydayloaninfo.org, which groups short-term loans under "small loans" laws that typically have interest rates in the low teens.

If the South Dakota initiative passes, any loans that violate it will be legally unrecoverable by the lender.

It is probably not a coincidence that as the vote approaches, South Dakota-based Dollar Loan Center tycoon Chuck Brennan is going into a new line of work. He opened Badlands Pawn over Thanksgiving weekend, which he promises will be the "Disneyland of Pawn Shops," with a shooting range and concert stage.

Pawn shop loans in South Dakota are unregulated by the state and are left under municipal jurisdiction.

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