Vultures 2, Angels 0

Today I managed to profoundly offend our state's payday and title loan shop owners. It was brought to my attention that they have feelings too and so I offer my sincere apologies. I'm referring to my statements in the House Commerce Committee this morning which were as follows:

Those who profit from predatory lending would like us to believe, and no doubt they have themselves convinced, that they are financial angels who are a God-send. However, the stories of the people they “help” are everywhere to be told and in those testimonies, these lenders more resemble vultures than angels as they circle those who struggle to get by. I would suggest however that those of you on this committee have the opportunity to be the true angels here and I encourage you to vote yes on HB-1223.

It was very apparent that my designation - vultures - upset these lenders. In any case, as I sought to indicate in the title of this post, both my payday and title loan bills failed in committee today.

Too bad South Dakota Dollar Loan King Pin Charles Brennan was not able to come testify. Dan Henderson, Rapid City president of Money Central, Inc. (owns 14 payday loan shops in SD) and founder of SD's Short-term Loan Association told the committee the bad economy is also hurting the dollar loan shops as people are tightening their belts and not borrowing as much right now. Henderson was countering my point that economic woes spell opportunity for expansion and exploitation for those in the flourishing poverty industry.  The KELO article on Brennan (linked above) backs up my point: "Just last year he talked about how his payday loan business was booming because people were having trouble getting loans from the banks."

Because I am going to make an effort to communicate here some of the rationale behind my bills and votes, I'll paste here my opening comments on HB-1224 which would have set a 36% annual interest rate cap on short term lenders in South Dakota.

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Thank you Mr. Chair and members of this committee. Again, I’m Rep. Steve Hickey from District 9 and the prime sponsor of HB-1224. This bill, HB-1224, has one objective:  It is an act to provide a 36% maximum finance charge for short-term loans. Obviously much of the testimony we presented for HB-1223 could be repeated here. I won’t repeat myself however I do want to share some pertinent history before I briefly address the rationale behind this proposed 36% maximum annual percentage rate cap.

As you know, in SD, when it comes to interest rates…. anything goes – 400%, 500%, 5000%.  It wasn’t always this way in our state. Our usury laws were changed in 1980. In 2004 PBS interviewed Governor Janklow who now has mixed feelings about repealing our state usury laws to entice Citibank jobs.

It was 1980, South Dakota's economy was a mess. Janklow said: "We were in the poor house. To me, this wasn't a credit card deal, it was a jobs deal. It was an economic opportunity for the state.” Citibank called saying “if we would change our law to invite them to come to South Dakota… they would guarantee South Dakota 400 Citibank jobs. A guarantee was 400 jobs. People throw around other numbers, but it was 400. He was clear, the intent was 400 jobs not 400% interest.

With bipartisan support and backing from South Dakota's banking association, Janklow proposed a special "emergency" bill. "Citibank actually drafted the legislation," he said. "Literally we introduced it, and it passed our legislature in one day.”  Looking back, Janklow said:

“Well, I can't make the guilt trip too big. I'll accept my responsibility as one of the performers, OK? I didn't think of any of this when it happened, and I still like what we did, and I still think it was a huge opportunity for my state… Now, all the human side of it aside, if we're talking about the industry and 18, 19, 20-plus percent interest, do I think that's a healthy thing for human beings? The answer is no, I don't think that's healthy at all. And to the extent I played a role in that, I understand that.”

If there was ever a case of unintended consequences this is that. So if 18%, 19% and 20% interest is unhealthy, why do we in the bill seek to cap it at 36%?

In 2007, the US Dept of Defense did something about the fact that payday lenders were targeting military bases - they deemed predatory lending a threat to national defense and national security.  The Defense Department and military officers cited concerns that payday lending ruined low-paid enlisted men and women's finances, jeopardized their security clearances, and even interfered with deployment schedules to Iraq.  President Bush signed into law and act of Congress stating that Payday loans to service members are limited to 36% annual interest.

Mr. Chair and honorable members of this committee, if anything greater than 36% is deemed destructive to military families and there was justification to set up protections for our service men and women, it most certainly is destructive to South Dakota’s working poor and consumer protections are long overdue.

Why 36%?  It has been deemed that 36% is the number that springs the debt trap. Anything more and people can’t get free.

A 36% cap costs taxpayers nothing, but a 36% cap protects worker earnings and benefits. States that enforce two-digit interest rate caps save their citizens nearly $2 billion per year collectively. It protects the earnings and government benefits of American households, thereby allowing these families to save, spend, and recover from their financial shortfalls in the long term. I’ll conclude with that and ask for your favorable support of HB-1224. I’ll stand by for questions.

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You can hear my introduction to the earlier Payday lending bill (HB-1223) here, the other proponent and opponent testimony is there as well.