Lenders Sue To Block Colorado’s Interest Rate ‘Opt-Out’ Law – Financial Services

On March 25, a coalition of trade groups filed suit in the United States District Court
for the District of Colorado, challenging a Colorado law which would have opted the state
Section 521 of the Depository Institutions Deregulation and
Monetary Control Act of 1980 (“DIDMCA”), a federal law
enacted to create competitive equality between state-chartered
banks and national banks. The law, set to take effect on July 1,
2024, would have subject out-of-state lenders to the state’s
rate cap.

The DIDMCA permits state-chartered banks to lend nationally at
the rates allowed in their home states. Out-of-state bank
depository institutions, particularly those in bank partnership
arrangements, have used the law to make loans to Colorado consumers
at rates, in some cases, in excess of the state’s rate cap law.
The Colorado bill invokes a rarely utilized federal opt-out
provision to allow the state to exclude Colorado from the reach of
the DIDMCA, subjecting out-of-state lenders to the state’s rate
cap.

The trade groups’ complaint alleges that the Colorado law
exceeds the state’s authority and conflicts with the U.S.
Constitution’s supremacy and commerce clauses. Moreover, the
trade groups argue that the law could restrict the availability of
credit to Colorado consumers, particularly those individuals who
have difficulty obtaining credit, and cause fintech lenders to flee
the state. This would consequently lead to national banks, who are
not subject to the state’s rate cap, to charge higher
rates.

Putting it into Practice: Trade groups have not
hesitated in resorting to litigation to slow the spread of
financial regulations. While these efforts have been so-far
successful against the CFPB, it will be interesting to see how this
litigation develops. Moreover, the state of Colorado has a track
record of contesting the loan fees levied by out-of-state banking
institutions, especially within bank partnership programs. In
recent years, Colorado among other states have launched numerous
lawsuits against such programs (previously discussed here, here and here).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.