Simply capping payday loan rates was not enough.
The group of lawmakers who drafted the language for South Dakota’s current restrictions on payday loans, which cap interest rates at 36%, knew the industry would try to find ways around the rule.
So they included additional protections in the law, using language intended to prevent nonbank lenders from using any “device, subterfuge, or pretense” to circumvent the state’s rate cap.
Lenders have found a way to do just that, teaming up with banks to circumvent similar protections in other states.
Now, payday lenders appear to have help from federal regulators, and state officials are concerned about South Dakota’s law enforcement.
“We expected there to be some erosion,” said State Sen. Reynold Nesiba, D-Sioux Falls. “It’s such a profitable product for them.”
The new rule being considered by the Office of the Comptroller of the United States Currency would continue to untangle the legal precedent that prevents banks from assigning or transferring loans to non-bank lenders.
As a result, payday loan shops and online lenders are getting a buffer usually given only to national banks that would allow them to dodge state-imposed interest rate limits.
Changes to the rules were first proposed by the federal government in November, with more expected this fall, along with support for a similar measure from the Federal Deposit Insurance Corporation. The OCC is currently welcoming public comments on its latest proposal until September 3.
It’s something that members of South Dakotans for Responsible Lending have been tracking for months. The group, including Nesiba, helped draft the 2016 ballot measure that imposed the cap on payday loan rates after receiving the support of 76% of voters.
Steve Hickey, a former state legislator, also helped regulate payday lenders in South Dakota. He backed a rate cap after efforts to bring lenders into the decision-making process backfired in the Legislature, with payday loan companies pushing a bill they helped write.
“They come back in fine print and nobody missed them, which is the funny thing,” Hickey said.
In this case, the loophole used by the lenders uses what is commonly referred to as a “rent-a-bank” practice, in which online or payday lenders sell high-interest loans to them. issued by a bank. This bank doesn’t have to meet state limits on interest rates, and neither does the loan. And since the payday lender has documentation to show that the loan is actually made by the bank, neither does the payday lender.
National banks are eligible for preemption of state lending restrictions under federal law.
The result: Any payday loan operator could set up shop in South Dakota with a deal with a national bank and sell loans with an interest rate as high as 150 or 200 percent, Nesiba said.
Some of the only legal protection against such practices comes in the form of a 2015 decision by the United States Court of Appeals for the Second Circuit, which declared that non-banks are not eligible for interest rate ceiling pre-emptions.
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The OCC’s proposed measure, called the “true lender” rule, would ensure that the bank is considered the lender, even if the loan is sold by a third party, as long as the bank is named as such.
But the caps are good for individual consumers who can easily get stuck in a debt trap, and for South Dakota, as many residents who depend on government subsidies such as welfare, food assistance and l rent assistance were also trying to repay a payday loan. debt, Nesiba said.
“What they want is they want to put you in a cycle where you’re paying $50 a month forever,” he said.