This is a repost from a 2015 article I wrote at at one of my other blogs, now dormant.
Every gold rush winds down sooner or later. That day has come for the poverty profiteers who bilk millions from South Dakota’s poor and elderly through high-interest predatory lending.
It’s called the poverty industry; payday and title loan shops, casinos, pawn shops and the subprime credit card industry. It’s the backside of our Great Faces and Great Places. Those who grew up here may not see it, but the rest certainly do. As Augustana economics professor Reynold Nesiba says; there are far better ways to help the poor than to give them the financial equivalent of rotten meat.
Small dollar high interest predatory lenders only thrive because they make misleading claims about how their products are designed. They offer an intentionally defective financial product intended to be a debt trap and market it to the financially unsophisticated barely surviving on the margins of our economy. They fool the rest of us to tolerate them by saying they offer a needed one-time fix for ordinary people in a financial crunch. However, if all they were offering were a one-time fix, no one would take issue with them.
Their business model only thrives because they quickly lock people into multiple successive loans on the same money borrowed. $1000 turns into $2600 in a matter of a few months. Lutheran Social Services Consumer Credit Counseling in South Dakota reports people coming in with ten different loans. Responsible lending is based on what people are able to pay back.
Their own annual reports and CEO’s state their profitability kicks in on these successive loans. An annual report to investors of one of the largest payday lenders, Advance America, shows the company made eight loans a year on average to their customers. The average payday loan is flipped eight times.
ACE Cash Express, a South Dakota lender, was brazen enough to put a graphic in their employee training manual explaining how to keep distressed borrowers in a debt cycle. The Department of Defense determined payday loans “undermine military readiness.” As such Congress unanimously enacted and President G.W. Bush signed into law a 36% rate cap on loans to active duty soldiers and their families. A 36% rate cap has been deemed the percentage rate a person can dig out of on their own. If high-interest loans aren’t good for our service women and men, they certainly aren’t good for our state’s poor and elderly.
Predatory Lenders point out their rates only seem high because we require them to disclose them as an annual percentage rate, seemingly unfair for a two-week loan. They say an overdraft fee at the bank is more costly. Again, what they aren’t telling us is the model isn’t based on one short-term loan that is quickly paid off.
Payday industry executives admitted last year South Dakota is the wild west when it comes to high-interest lending. In the early 1980’s, Governor Janklow repealed our interest rate cap to bring in 400 Citibank jobs. He later said he was after 400 jobs and certainly not 20% interest rates, which he called unhealthy.
Today interest rates of 300%-600+% are common here. The average payday loan interest rate in South Dakota is 574%. Last year the Sioux Falls Business Journal reported 56 payday/title loan shops in our city. If these places were helping the poor as they assert, why are half the students in our school still on free and reduced lunch? Truth is, predatory lenders leave people worse off than before and the taxpayers clean up the mess. Time to get the poverty profiteers out of the middle.
In the legislature I’ve drafted reasonable regulations and the industry resists every one. Our Republican-dominated legislature has a free-market approach to this industry. Somehow it’s free-market for our state government to be quick to financially help businesses come into our state but it’s dubbed anti-free-market for us to discourage some to stay out. It’s an irony.
Montana recently voted for a 36% rate cap and the sky didn’t fall. There was no discernable uptick in internet lending– it’s growing in every state requiring a Federal fix. You may hear the poor will have nowhere to turn. They managed somehow twenty years ago before we had loan sharks and today there are various creative alternatives. It’s not the case that payday loans help build your credit. These loans aren’t reported to the credit bureau.
A coalition has formed called South Dakotans for Responsible Lending. The partners include major groups in our state and cross party lines. Find us on Facebook. Shortly we will announce a signature drive to put a 36% rate cap on the November 2016 ballot.