Insights

Under current South Dakota law, retail sellers and creditors are generally prohibited from charging a fee for debt cancellation and debt suspension contracts in connection with consumer retail installment sales transactions. There is a narrow exception from this prohibition for sellers and creditors that offer debt cancellation or debt suspension contracts of a depository institution and the contracts are sold directly by the depository institution or a retailer acting as an agent for the depository institution. In a recent amendment to the South Dakota Consumer Installment Sales Contracts Act, the South Dakota legislature has expanded the authority of licensed money lenders to allow them to offer and charge a fee for their own debt cancellation and debt suspension contracts in connection with retail installment transactions. This new grant of authority represents a sea change regarding a money lender’s ability to sell debt cancellation and debt suspension products in South Dakota.

Because South Dakota’s CISCA imposes severe liability for charging excessive fees (loss of principal, interest, and all other charges), money lenders and other retail sellers and creditors have previously sought to avoid offering or selling their own debt cancellation or debt suspension products. Under the new law, licensed money lenders will no longer need to avoid this issue.

Effective July 1, 2012, South Dakota Senate Bill 65 amends South Dakota’s CISCA, the Money Lending Licenses Act, and the Insurance Code to allow for this new authority. As amended, the CISCA expressly permits charges for debt cancellation and debt suspension contracts if the contract is a contract of a money lender licensee and the contract is sold directly by the money lender licensee or a retailer acting as an agent for the licensee. As under current law, any such charges must be disclosed and explained to the consumer prior to signing any agreement to repay the credit obligation and must be separately agreed to in writing and separately signed by the consumer.

The MLLA has been amended to contain a new provision authorizing money lender licensees to enter into debt cancellation and debt suspension contracts and charge a fee for those contracts in connection with any extension of credit that the licensee makes, purchases, or of which it accepts assignment. For purposes of this new authority, the MLLA defines “debt cancellation contract” or “debt suspension contract” to mean a term of an extension of credit or a contractual arrangement modifying terms of an extension of credit under which a licensee agrees to cancel or suspend all or part of a customer’s obligation to repay an extension of credit from the licensee upon the occurrence of a specified event. The contract may be separate from or a part of other extension of credit documents. The term does not include installment payment deferral arrangements in which the triggering event is the customer’s unilateral election to defer repayment or the licensee’s unilateral decision to allow a deferral of repayment.

Significantly, S.B. 65 also amends South Dakota’s Insurance Code to expressly exempt debt cancellation and debt suspension contracts offered by money lender licensees from regulation by the Department of Insurance.

In light of these changes, licensed money lenders can look forward to July 1, 2012, when they will, for the first time, have the legal authority to offer and sell their own debt cancellation and debt suspension contracts in connection with consumer retail installment sales transactions in South Dakota.

Catharine S. Andricos is an associate in the Washington, D.C., office of Hudson Cook, LLP. She can be reached at 202.327.9706 or by email at candricos@hudco.com.