Davenport Evans lawyer Douglas J. Hajek was interviewed by Keloland Television regarding the impact of Initiated Measure (IM) 21 on a nearly 40-year-old South Dakota law that exempted financial institutions including banks, savings and loans, and credit unions from usury laws, or interest rate caps. The following is the transcript from www.keloland.com.

Come Wednesday, certain interest rates will be capped in South Dakota.  Initiated Measure 21 not only impacts short-term lending rates, but also changes an old state law.

Nearly 40 years ago, the country was facing some tough economic times.  South Dakota banks were facing ruin because they were limited in how much interest they could charge on loans. That is until then-Governor Bill Janklow signed legislation that lifted the cap on interest rates. The result was a positive economic ripple effect across the state. A banker-turned-business attorney explains the process and the impact of the state’s new short-term lending law.

By 1980, things weren’t looking very prosperous in South Dakota.  Doug Hajek says a new law eventually helped grow the economy.

“The legislation in 1980 made it possible for banks to make loans to farmers and ranchers and small business people.  Interest costs were so high then, the banks would lose money every time they made a loan,” Hajek said.

The state legislature crafted a bill that exempted financial institutions including banks, savings and loans, and credit unions from usury laws, or interest rate caps.  Janklow signed it two days before the legislative session ended.

“Nobody was happy interest rates were as high as they were, but at least it allowed commerce to go on.  And then it kind of, out of the blue, the Citibank thing came in,” Hajek said.

Hajek says the law attracted Citibank and other big banks to the state.  By 1982, the law was revised slightly and the definition of who was exempt from usury included short-term lenders.  Which brings us back to IM 21.  Even though Hajek says the law has seen a few adjustments over the years, this may be one of the more substantial updates to it.

“From a historical standpoint, it is a big change for a certain line of business, and I guess time will tell what it really means,” Hajek said.

Hajek does not expect IM 21 to have an impact on bank loans.

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Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.