In South Dakota, two seemingly identical initiatives in November would have vastly different outcomes for consumers' interest rates.
Annual interest rates on payday loans in South Dakota are among the highest in the nation -- a whopping 652 percent on average. Yet the business is booming there with nearly 100 stores across the sparsely populated state.
Critics of the industry say lenders prey upon low-income borrowers who are unable to access financing from mainstream banks. These borrowers, they claim, easily get trapped into a cycle of debt. Payday lenders, however, argue that they fill a critical hole in the economy by allowing people with poor credit to get emergency loans.
South Dakota voters have the chance to regulate the industry in November. But two seemingly identical proposals that would have vastly different outcomes are complicating the effort to rein in high interest rates.
One of the ballot measures, proposed by South Dakotans for Responsible Lending, seeks to set a 36 percent cap on the annual interest rate charged to payday loans. More than a dozen other states have enacted similar caps.
But a rival measure, placed on the ballot more recently and backed by the payday lending industry, proposes an 18 percent cap -- unless the borrower agrees to a higher rate. Opponents say the measure would essentially legalize sky-high interest rates for payday borrowers in South Dakota.
"When a borrower walks into a payday lending store, if they want that loan, the lender's going to force them to sign the waiver and then charge a 500, 600 percent [annual interest rate]," said Steve Hildebrand, a political strategist and the organizer behind the 36-percent measure. "It's not going to do anything to cap interest rates in South Dakota."
But Lisa Furlong, chair of the near-identically named group South Dakotans for Fair Lending that backs the 18-percent measure, told a local newspaper last year that the measure would protect consumers' rights to choose what best meets their needs.
Payday loans are, as the name suggests, due on the next payday, and are made with little, if any, regard to a borrower’s ability to repay that loan and meet other obligations. The Consumer Financial Protection Bureau alleges that payday lenders trap borrowers in a cycle of debt by encouraging them to take out new loans to pay off old debts, piling on fees and interest. The practice led HBO's John Oliver to quip, "payday loans are the Lays potato chips of finance. You can't have just one, and they're terrible for you."
Recently proposed federal regulation would make some headway in curbing the industry. It would require lenders to ensure borrowers can pay the money back and also calls for restrictions on loan churning -- that is, when borrowers take out new loans to cover old ones.
Loan churning accounts for roughly two-thirds of the $3.4 billion in fees that lenders charge each year, according to a 2011 report from the Center for Responsible Lending, a North Carolina advocate for reform. Research from a number of groups has shown that the typical payday borrower is indebted for more than 200 days a year.
But the proposed federal regulation doesn't address interest rates.
South Dakota’s proposal would bring it in line with 14 other states that have rate caps. Without one, the average payday loan comes with an annual interest rate of anywhere between 154 percent in Oregon and 677 percent in Ohio.
Voters have generally approved ballot measures that limit interest rates. But because South Dakota's two ballot measures have similar names and appear to propose rate caps, Hildebrand is worried voters will simply approve the measure that seems to call for the lowest rate.
Clear messaging from his campaign will be key, but Hildebrand faces an uphill battle. The group pushing the industry-backed measure is well-financed; it spent more than $1.5 million circulating petitions to get the measure on the November ballot. Hildebrand’s campaign has spent less than $20,000.
“The burden is on us to make sure voters are clear," said Hildebrand. If they want to cap interest rates, he said, the only option is to choose the higher ceiling -- as counterintuitive as it may seem.
Read all of our coverage on 2016 ballot measures at governing.com/ballotmeasures.