Legislators eye short-term lending: Payday loan companies might see limits
January 15, 2006 - Pierre, South Dakota
As the first week of South Dakota's 81st Legislative Session wound to a close, the state's short-term lending industry posed a quandary in many legislators' minds.
No legislation has been proposed yet, but it's a topic of discussion among lawmakers.
If a person is willing to pay what seem to be exorbitant interest charges for small amounts of money, should state government intervene to regulate the practice? What if that small loan of $100 turns into a $400 loan as a result of rollover fees, late penalties and interest?
The state's uncapping of interest rates in the early 1980s helped bring firms such as Citibank and Wells Fargo to the state, creating thousands of jobs and diversifying what had been a largely agricultural and manufacturing-based economy.
But short-term lenders came too - offering quick cash for a short term, with high interest charges and late fees as part of the deal.
The key, lawmakers said last week, will be finding a way to strike a balance that will put some limits on lenders without driving them out of the state.
"Something in my heart tells me that it isn't possible, or it would have been done already," said Sen. Gil Koetzle, D-Sioux Falls. "The bottom line is this isn't good for our citizens."
Recent public discussion about the short-term lending industry has piqued the interest of even those who traditionally don't believe in strict government regulation of business, such as Sen. Bill Napoli, R-Rapid City.
Napoli says the issue is one of his main concerns for the session.
"We've failed miserably in the past, and we're failing miserably again this year," Napoli said last week.
Napoli said he plans to gather a group of senators Tuesday to discuss potential legislation. Napoli and Koetzle agreed that the issue is one that isn't limited to either party.
"It's not a partisan issue," Napoli said. "It's a people issue."
Jeremiah Murphy, a Sioux Falls lawyer and lobbyist for Citibank, said he expects to see legislation arise later in the session. It's an issue the company is watching carefully, he said.
Roger Novotny, director of the state's Division of Banking, discussed short-term lenders as part of a Senate commerce committee hearing last week. Novotny said the banking division, which licenses money lenders and examines their financial information, has not received any complaints from the public regarding short-term lenders.
"I'm not aware of anybody breaking the law," Novotny said. "I think they're operating within the laws, by and large."
South Dakota does mandate that money lenders may not mislead, harass or abuse customers or engage in unfair practices. Payday loans are limited to a $500 maximum and four extensions. The banking division is conducting a study of the industry's effect on consumers.
"I don't know how you legislate smarter consumerism," Novotny said. "If I had a magic wand, I'd fix all this."
Rep. Mary Glenski, D-Sioux Falls, said she has asked the nonpartisan Legislative Research Council to compile information about lending regulations in other states in preparation to possibly drafting some sort of legislation.
Other states have set maximum loan amounts, placed caps on interest rates and limited rollovers.
"I'd like to get some control, particularly on the expenses beyond the loans - whether it's fees or whatever," Glenski said. "Of course, the secret is to find something that doesn't affect the interest rates, because we have our credit card industry, and to allay fears to banks that it might be something that is tied to them."
Retired banker Sen. Mike Broderick, R-Canton, said he sympathizes with people who use the services of short-term lenders and who end up paying more in the end than what was borrowed, but he thinks the industry is being adequately regulated now.
As traditional, smaller banks have abandoned the practice of making small loans in favor of offering credit cards, short-term lenders have filled a niche in the market, he said.
"A bank has to make loans and recover the costs of putting those loans on the books, and whether a loan is a $500 loan or a $500,000 loan, it basically costs the same amount of money to put it on the books," Broderick said. "And if the banks would charge that minimum or flat rate that it costs to put a loan like that on the books, it would be considered usurious by the people who are looking at the critical end of the payday loan companies."
Argus Leader, Megan Myers, Staff Reporter
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