On June 19, 2024, the U.S. District Court for the District of Colorado preliminarily enjoined the enforcement of a Colorado law that would have applied Colorado interest-rates caps to loans made by state-chartered banks—including banks located outside of Colorado—to Colorado consumers for certain credit products. The ruling, which decided an issue of first impression, specifically prevents Colorado from applying its interest-rate caps to state-chartered banks that are located and perform key loan-making functions outside of Colorado. The decision will have significant implications for states attempting to export their interest-rate caps to banks located outside of their borders.

BACKGROUND

Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) provides that a state-chartered bank may lend nationwide at rates up to the higher of (i) its home state’s interest-rate caps, or (ii) 1% above the Federal Reserve discount rate.[1] Section 521 expressly preempts any lower state interest-rate caps. Under Section 525 of DIDMCA, states may “opt out” of Section 521’s preemption provision “with respect to loans made in” the opting-out state.[2]

On June 5, 2023, Colorado enacted a law that purported to “opt out” of DIDMCA Section 521 with respect to all consumer credit transactions—such as personal loans and credit cards—involving consumers located in Colorado.[3] The law, which was slated to take effect on July 1, 2024, would have prevented any state-chartered bank that makes loans to Colorado consumers, including banks located outside Colorado, from charging interest above Colorado’s interest-rate cap.

On March 25, 2024, the National Association of Industrial Bankers, the American Financial Services Association, and the American Fintech Council sued the Colorado officials charged with enforcing the “opt out” law. S&C represents the American Fintech Council.

Plaintiffs moved for a preliminary injunction preventing Colorado from applying its interest-rate cap to Plaintiffs’ members located outside the State. Plaintiffs argued, among other things, that Colorado’s “opt out” was preempted by DIDMCA because state-chartered banks located outside Colorado do not “make” loans in Colorado for purposes of DIDMCA’s opt-out provision, even when extending credit to Colorado borrowers. Colorado contended that loans are “made” under DIDMCA wherever the lender or borrower is located and that Colorado’s “opt out” was therefore consistent with DIDMCA. Contradicting its long-standing positions that the determination of where loans are made is determined by where the bank’s primary loan making functions take place, the Federal Deposit Insurance Corporation (FDIC) filed an amicus brief in support of Colorado and participated in oral argument.

THE COURT’S DECISION

On June 19, 2024, the district court (Domenico, J.) granted a preliminary injunction. In particular, the court held that the Plaintiffs had made a strong showing that they were likely to succeed on the merits of their preemption claim. The court therefore enjoined Colorado from applying its “opt out” to loans extended by Plaintiffs’ members that are located and perform key loan-making functions outside of Colorado.

In arriving at this decision, the district court reasoned that “where a loan is ‘made’ ” under DIDMCA’s opt-out provision “does not depend on the location of the borrower,” but instead “depends on where the bank is located and performs its loan-making functions.”[4] The court rejected Colorado and the FDIC’s borrower-focused approach to defining where a loan is “made” in favor of a lender-focused approach.

IMPLICATIONS

The decision will improve consumer access to credit. Colorado’s law, if enforced to its fullest extent, would have prevented many state-chartered financial institutions from offering mainstream credit products to Colorado consumers, including those most in need of credit. Moreover, nationally chartered banks, which are unaffected by Colorado’s DIDMCA opt-out, could always extend their loan products to Colorado residents at interest rates in excess of Colorado’s caps. Colorado’s law puts state-chartered and nationally chartered banks on similar footing.

The outcome of this case may have implications well beyond Colorado. Several other states and the District of Columbia are considering enacting DIDMCA “opt-outs” that attempt to export their chosen interest-rate caps to state-chartered banks located outside their borders. This issue will likely continue to be developed in this and other litigation.

ENDNOTES

[1]           Pub. L. No. 96-221, 94 Stat. 132, 164-65 (1980) (DIDMCA).

[2]           DIDMCA § 525, 94 Stat. 167.

[3]           H.B. 23-1229 § 3, 74th Gen. Assemb., Reg. Sess. (Col. 2023) (amending Colo. Rev. Stat. § 5-2-214).

[4]           Nat’l Ass’n of Industrial Bankers v. Weiser, No. 24-812 (D. Col. June 18, 2024), Dkt. No. 69 at 23.

This post comes to us from Sullivan & Cromwell LLP. It is based on the firm’s memorandum, “Federal Court Preliminarily Enjoins Colorado’s Imposition of Its Interest-Rate Cap on Out-of-State Banks,” dated June 20, 2024, and available here.