There's A Huge Loophole In A Ballot Initiative To Cap Interest Rates

Voters will decide whether to cap interest rates on loans.

A broad base of Republicans and Democrats wants to regulate payday loans in South Dakota, establishing interest rate caps on short-term loans that can lock borrowers into brutal cycles of debt, incurring fees on the way. There are two measures on the ballot Tuesday that would regulate interest rates on payday loans, but critics say one funded by the industry is not designed to protect people from high interest loans.

One ballot measure, Initiated Measure 21, would impose a hard cap on interest rates at 36%. The other, Constitutional Amendment U, funded by the lending industry, would cap rates at 18% — unless a borrower agrees to higher rates in writing, that is.

Under Amendment U — which has an out of state lender as it's sole major supporter— "There is no limit on the amount of interest a lender may charge for a loan of money if the interest rate is agreed to in writing by the borrower," the South Dakota ballot pamphlet said. It would effectively eliminate the ability of South Dakota lawmakers to set their own interest rate caps, as it would be part of the state constitution.

While the ballots affect the roughly 100 payday loan storefronts in South Dakota, where payday loan rates average 574%, a hard cap on interest rates in the state "could provide a roadmap for consumer activists in other states," Isaac Boltanksy, an analyst at Compass Point, wrote in a note last week. In poll conducted last month 24% supported Amendment U and 39% supported Measure 21.

Proponents of the hard cap in Initiated Measure 21 include a former Obama campaign staffer named Steve Hildebrand and a former South Dakota state legislator who was also minister named Steve Hickey. "They agree about almost nothing, but they agree on this issue," Stephen Minister, a professor at Augustana University in Sioux Falls and advocate for Measure 21, told BuzzFeed News.

Hildebrand and other Amendment U critics have blasted descriptions of Amendment U as being "far more stringent" and taking "a balanced approach to protecting poor and middle-class people from predatory lending." Such descriptions are misleading, they argued, because the amendment allows for very high rates as long as the borrower signs, which is the case in nearly all consumer loans anyway.

"While Payday Lenders say this will cap interest rates at 18%, the loophole they wrote into the proposed law allows the lender to force a borrower to sign away their rights to an 18% loan and charge them whatever high interest rate the lender wants," Hildebrand said in the pamphlet, which includes statements for and against the proposed amendments.

Hildebrand did not return a request for comment.

Based on campaign finance records, by far the biggest donor in the initiative fight is a company called Select Management Resources, which is the only listed donor to two groups that oppose the more strict payday lending cap and support the looser one. Select Management Resources gave $1.9 million to South Dakotans for Fair Lending, which supports Amendment U and $1.2 million Give Us Credit South Dakota, which opposes Initiated Measure 21.

Last year, Select Management Resources also sued the state Attorney General over how Initiated Measure 21 would be worded, arguing that the state should say that it would "eliminate short-term loans in South Dakota."

The company is run by Rod Aycox, a prolific political donor who oversees a chain of companies that give out high-interest loans, including risky title loans. Reuters reported in 2012 that Aycox, his companies, and his family had given almost $1 million to state lawmakers from 2004 to 2012.

Aycox has long been involved in interest-rate legislation. In 2006, referring to an Iowa bill, he told USA Today that a 36% cap would "force our company out of the business and thereby eliminate a needed credit option for hundreds of thousands of consumers."

The political battle over interest-rates has even trickled into South Dakota's cafes. Last year, Hildebrand accused a man named Floyd Pickett of bringing in dozens of homeless people into his Sioux Fall coffee shop, called Josiah's, in order to disrupt business on behalf of Aycox.

Aycox said in a statement to Keloland, a South Dakota news station, "Pickett is not an employee of my company and I am not controlling his efforts to feed the homeless in Sioux Falls." Yet three years earlier, a Peoria Journal Star story identified Pickett as a contract employee of Select Management Resources who had arranged a $25,000 donation to a community center. Aycox had told Keloland that he had "met Mr. Pickett and he has requested my support for various charitable organizations."

This is not the first time Aycox has been heavily involved in an election — he gave several thousand dollars to Ted Cruz in 2012 and $200,00 to Restore Our Future, the Super PAC that supported Mitt Romney.

Select Management Resources, Give Us Credit SD, and South Dakotans for Fair Lending did not respond to requests for comment. BuzzFeed News was not able to reach Pickett.

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