Voters to be final jurors in payday lending fight

It's a fight pitting free-market ideals against perceptions of fairness.

South Dakota's high-stakes battle over payday lending is heading toward a resolution next week, when voters will decide on a pair of conflicting ballot questions that could outlaw high-interest, short-term loans or solidify them in the state's constitution.

The $46 billion a year industry, including at least 138 licensed lenders in South Dakota, says it won't be able to operate in the state if voters approve a 36-percent interest rate cap. Average annual interest rates on payday loans in South Dakota exceed 500 percent, according to a 2014 Pew Charitable Trusts report.

Payday loan defenders argue they serve as an essential financial lifeline for thousands of low-income South Dakotans, and that banning the products will push people toward shadowy online or black market lenders. A Federal Reserve survey this year found 47 percent of Americans couldn't afford an unexpected $400 expense, and many lack the credit or collateral to rely on conventional banks.

But an unlikely alliance of progressive activists and religious groups are pushing back against that narrative, arguing that the loans are anchors, not lifelines, more likely to trap borrowers in a cycle of poverty.

The 47 percent

Kristi McLaughlin's husband T.J. got sick and missed a couple of days of work last year. Unsure if he could pay his family's bills with a smaller paycheck, he signed an auto title loan for $1,200.

He agreed to pay $322 a month for a year, but when wounds on his leg got infected and his sickness persisted, he lost his manufacturing job and was unable to make the payments.

His wife worked to bring down the interest rates and negotiated a lower-cost plan but ultimately couldn't continue paying it as medical bills piled up.

"I thought, 'I’m not doing this,' so I quit paying it," Kristi McLaughlin said.

About eight months after taking out the loan, the company repossessed their car on Thanksgiving Day last year. Now, living in a travel trailer in Sioux Falls with her husband, McLaughlin says she'll likely have to file bankruptcy.

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Kristi McLaughlin shares her frustration with her payday loan experience.Dana Ferguson - Argus Leader Media

McLaughlin wants South Dakotans to support the 36 percent rate cap so others don't face the same high rates her family did.

"They are exploiting very vulnerable people. I don’t think people get it if they’ve never been that vulnerable," she said. “They don’t understand what it’s like to not have anything else but a payday loan."

Others are willing to accept the high prices if that's their only option to put food on the table.

Henry Okotie of Sioux Falls recently borrowed $400 from Dollar Loan Center to send to family in Nigeria.

It was a simple transaction that cost him $84 in interest, he said, and he paid it all back within three weeks.

Without a payday loan, Okotie, 34, said he isn't sure how we would have come up with the money.

He was quick to cite the company’s motto, “When you’re broke you go," Okotie quipped. “And I didn’t want to be broke so I went,”

A customer leaves the North American Title Loans agencyBuy Photo

A customer leaves the North American Title Loans agency off of E. 10th St. in Sioux Falls on Wed., Oct. 26, 2016.  (Photo: Jay Pickthorn/Argus Leader)

The players

For years, former Republican state lawmaker Steve Hickey tried and failed to convince legislators in Pierre to reform the payday lending industry.

Hickey, a culturally conservative former Sioux Falls pastor, found himself in an unlikely alliance after Steve Hildebrand, an openly gay former campaign advisor to President Barack Obama, approached Hickey to vent about his comments condemning homosexuality. The two men found common ground through their distaste for payday lending, which had put Hildebrand's employees and Hickey's parishioners in financial distress.

And as they built a campaign against the payday lending industry, religious groups and social service organizations across the state joined the coalition to cap rates.

Meanwhile, money and protesters from across the country poured in to boycott their efforts.

Payday loan titan Rod Aycox, who owns North American Title Loans, organized professional protesters posing as missionaries to congest Hildebrand's business, Josiah's Coffeehouse and Cafe, during the summer of 2015.

Steve Hickey, former state legislator and pastor atBuy Photo

Steve Hickey, former state legislator and pastor at Church at the Gate, is an outspoken opponent of payday lending in South Dakota.  (Photo: Elisha Page / Argus Leader)

More recently, the Atlanta businessman through his management firm has pumped in more than $2.6 million into South Dakota groups opposing interest rate caps.

The industry's response also included its own ballot measure, Amendment U, a potentially confusing question to voters that asks whether to establish an 18 percent rate cap with a loophole that would let lenders opt out of the rule.

South Dakotans for Fair Lending, a group backed by Aycox, also challenged the signatures used to put the 36-percent rate cap question on the ballot, appealing to the state's highest court.

"While all of that was happening, and they spent nearly $3 million to do that, we kept our focus on the November 8 ballot," Hildebrand said.

Hildebrand said the rate cap wouldn't mean doom for lenders in the state if they are willing to abide by the new limit.

"They're going to have to decide whether they're willing to set aside their greed," he said.

Steve Hildebrand, owner of Josiah's Coffeehouse & CafŽBuy Photo

Steve Hildebrand, owner of Josiah's Coffeehouse & CafŽ and a leader of a ballot initiative to cap the fees and interest rates on payday and title loans speaks during a press conference last July.  (Photo: Elisha Page / Argus Leader)

Jamie Fulmer, senior vice president of public affairs at Advance America, said blocking the measure isn't about promoting greed, but about protecting the option for South Dakotans who need cash in a pinch.

“It is indisputable that if you take away a supply that the demand doesn’t go away,” Fulmer said.

According to the Consumer Federation of America, 18 states and Washington, D.C. prohibit payday lending, or impose rate caps that effectively outlaw the practice. South Dakota is among eight states that set no cap on interest rates for the industry, along with Delaware, Idaho, Nevada, Ohio, Texas, Utah and Wisconsin.

In Montana, the industry evaporated after voters approved a 36-percent rate cap in 2010, making way for unlicensed lenders to fill part of the void.

Tom Jacobson, CEO of the Montana financial counseling group Rural Dynamics Inc. and one of the leaders of a similar rate cap measure there, said that while reports of online lending scams had been reported in the state, predictions of black markets forming to fill the void hadn't materialized.

"That was a bunch of bologna," he said. "There was no apocalypse."

Badlands Pawn founder Chuck Brennan, a Washington High School graduate who made his fortune in payday lending and collection, has been quiet through much of the debate. He has not spent money opposing the measure but said he didn't think his customers would want to eliminate the industry.

"If the voters want the government to choose if they want a loan or not," Brennan said, "then that's what they'll do."

Follow Dana Ferguson on Twitter @bydanaferguson, call (605) 370-2493 or email dferguson@argusleader.com

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