PIERRE - A bill to cap annual interest on payday loans to 36 percent was rejected Monday by a legislative committee 10-2.

However, the bill's co-sponsors include a majority in the state House and Senate, so it could be forced out of committee.

Rep. Joni Cutler, R-Sioux Falls, who sponsored the legislation, said HB1297 would prevent "predatory" payday loans with annual interest rates of 500 percent or more. Payday loans typically are for two weeks, for amounts of $500 or less.

"No one is helped by uncapped usury rates as high as 500, 700 or a 1,000 percent," she said. "The harm that is done outweighs the good."

Ann Van Loan, executive director of Western Resources for dis-Abled Independence in Rapid City, said five of her nonprofit's 30 clients got into financial trouble with high-interest, short-term loans.

"These people have nothing, and they're hornswoggled into it," Van Loan told the House Commerce Committee during a hearing Monday.

However, Roger Novotny of the state Division of Banking told the committee that Gov. Mike Rounds' administration opposes the measure. Novotny said the legislation could affect many kinds of lenders -- ranging from nonprofits such as the city of Sturgis and the Lutheran Church Extension Fund to GMAC and Credit Suisse.

Supporters of the bill challenged that claim, saying the bill focused on high-interest, short-term loans.

But opponents of the bill argued that payday loans offered consumers choices.

Rapid City attorney Rex Hagg, a lobbyist for the South Dakota Short-Term Lending Association, said, without payday loans, some borrowers might take a chance writing a bad check. Instead of paying $18 interest on a two-week loan of $100, the borrower could end up paying $40 or more in bank fees for an insufficient-funds check.

Rapid City attorney Harry Christianson, a lobbyist for North American Title Loans, acknowledged the industry's past abuses.

"When we first started out in this industry, it was like the Wild West," he said. "You got a license, you did whatever you wanted."

Over the past five years, the state has "significantly regulated" the industry, he said.

Christianson cited a Federal Reserve Bank study of Georgia and North Carolina, which found bad-check and bankruptcy rates increased after payday loans were outlawed.

Caitlin Collier of the South Dakota Advocacy Network for Women opposed the bill.

Collier said she knew people who had more than $6,000 in outstanding payday and title insurance loans.

"Many people in South Dakota live paycheck to paycheck," she said. "They have more month than money. They are in a perpetual cycle in which they cannot catch up."

Collier said a 36 percent cap on interest was "not unreasonable," and Cutler pointed out that Congress approved that limit for loans to military personnel.

Hagg said 36 percent a year would return just $1.50 on a two-week loan of $100.

"That's why nobody's going to be in this business," he said.

Christianson said, "It will put the payday industry out of South Dakota."

State Rep. Gordon Pederson, R-Wall, who is on the House Commerce Committee, reminded lawmakers that South Dakota eliminated caps on interest in the early 1980s. "South Dakota has really prospered because of it," he said.

The House Commerce Committee voted to send HB1297 to the 36th legislative day, which, in a 35-day session, kills it, unless a majority of lawmakers in a chamber send it back to committee.

Contact Bill Harlan in Pierre during the legislative session at 605-224-2018 or at bill.harlan@rapidcityjournal.com