A rate cap on payday loans was not enough.
The group of lawmakers who drafted the wording of South Dakota’s current restrictions on payday loans, which limit interest rates to 36%, knew the industry would try to find ways around the rule.
They therefore included additional protections in the law, using language intended to prevent non-bank lenders from using any “device, subterfuge or pretext” to circumvent the state rate cap.
Lenders have found a way to do just that, partnering with banks to bypass similar protections in other states.
Now payday lenders appear to have help from federal regulators, and state officials are concerned about how South Dakota’s law will hold.
“We expected there to be some erosion,” said State Senator Reynold Nesiba, D-Sioux Falls. “It’s such a profitable product for them.”
The new rule being considered by the US Office of the Comptroller of the Currency would continue to eliminate legal precedents that prevent banks from granting or transferring loans to non-bank lenders.
As a result, payday loan stores and online lenders benefit from a buffer typically only granted to domestic banks that would allow them to avoid state-imposed interest rate limits.
Rule changes were first proposed by the federal government in November, with more slated for 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.
This is something the members of South Dakotans for Responsible Lending have been following for months. The group, including Nesiba, participated in the drafting of the 2016 electoral measure which imposed the cap on the rate of payday loans after receiving the support of 76% of voters.
Steve Hickey, a former state lawmaker, also helped regulate payday lenders in South Dakota. He backed a rate cap after efforts to involve lenders in the decision-making process backfired against the Legislature, with payday lending companies activating a bill they helped draft .
“They’re coming back in fine print and no one has missed them, that’s the funny thing,” Hickey said.
In this case, the loophole used by lenders uses what is commonly referred to as a “rent-a-bank” practice, in which online or payday lenders sell high interest rate loans to them. assigned by a bank. This bank doesn’t have to follow state limits on interest rates, and neither does the loan. And since the payday lender has documents to show that the loan is actually made by the bank, neither does the payday lender.
National banks are eligible for pre-emption of state lending restrictions under federal law.
The result: Any payday loan operator could move to South Dakota with a deal with a national bank and sell loans with an interest rate of up to 150 or 200 percent, Nesiba said.
Some of the only legal protections against such practices come in the form of a 2015 decision of the United States Second Circuit Court of Appeals, which declared that non-banks are not eligible for pre-emptions from the United States. interest rate caps.
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The measure proposed by the OCC, 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 designated 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 grants such as social assistance, food aid and l Renters were also trying to pay off a payday loan. debt, Nesiba said.
“What they want is that they want to put you in a cycle where you pay $ 50 a month forever,” he said.