Alert

March 14, 2017

South Dakota Enacts Legislation Limiting "All-In" 36% Rate Cap

In the past three days, the South Dakota governor has signed into law two significant pieces of legislation, limiting the 36% rate cap approved by South Dakota voters as part of Initiated Measure 21 last November.

Initiated Measure 21, which was expressly intended to curb alleged abuses against consumers by payday and title lenders, prohibited certain state-licensed money lenders from making a loan that imposed total interest, fees, and charges at an all-in annual percentage rate greater than 36%.

As adopted, however, the rate cap applied not only to payday and title loans to consumers, but also to traditional installment loans, including commercial loans to small businesses. Also, under a tortured interpretation, the South Dakota Division of Banking took the position that the rate cap, along with other substantive provisions of the Money Lending Licenses Act ("MLLA"), applied to retail installment sales of vehicles and other goods and services. The Division of Banking also took a very broad view of what fees must be included in the rate cap, including fees that are charged equally in cash and credit transactions (e.g., sales tax and title fees), as well as fees charged only after a consumer's default (e.g., late fees, return check fees and attorney's fees), making it difficult for traditional installment lenders to continue to do business in South Dakota.

To correct these unintended consequences, the South Dakota legislature enacted legislation, effective July 1, 2017, that establishes the following:

  • Carve-Out for Retail Installment Sales Transactions. House Bill 1090 amends the rate cap to clarify that it applies only to licensees contracting for or receiving finance charges "pursuant to a loan," and adds a provision making clear that "loan" does not include an "installment sales contract," as defined under South Dakota's Consumer Installment Sales Contracts Act. This amendment makes clear that retail installment sales transactions are not subject to the rate cap or any other substantive provisions of the MLLA.
  • Definition of Fees to be Included in Rate Calculation. For money lender licensees making loans under the MLLA, House Bill 1090 adds a provision limiting what fees must be included in the rate calculation for purposes of determining compliance with the 36% rate cap. For all loans, the following fees are not "incident to the extension of credit" and are excluded from the rate calculation: late fees, return check fees, and attorney's fees incurred upon consumer default. Also, for vehicle purchase loans, the following fees are excluded: fees for optional maintenance agreements and extended service contracts, official fees and taxes, sales tax, title fees, lien registration fees, and dealer documentary fees.
  • Carve-Out for Certain Commercial-Purpose Transactions. Senate Bill 166 amends the rate cap to clarify that it does not apply to licensees making commercial-purpose loans of $5,000 or more, provided that the loan (a) is not secured by a nonpurchase money security interest in a motor vehicle, and (b) is to a borrower with a federal employer identification number.

Links:

HB 1090, SB 166

Prior Alerts:

November 9, 2016 - South Dakota Approves 36% Rate Cap for Certain Licensed Money Lenders
November 23, 2016 - South Dakota Division of Banking Issues Memo to State-Licensed Money Lenders Regarding IM 21