Colorado’s Attempt to Prevent State Banks From Exporting Home State Interest Rates May Fail

Financial Services Law

In March, the Colorado legislature proposed HB 23-1229, which would, among other things, opt the state out of Sections 521 to 523 of the Depository Institutions Deregulation and Monetary Control Act (“DIDMCA” or the “Act”), thereby seeking to prevent federally insured state-chartered banks from lending in Colorado at the rates permitted by their home states. The bill purports to make all consumer credit transactions “in” the state subject to the interest rate caps established in the state’s Consumer Credit Code. However, that outcome is far from certain.

DIDMCA was passed in 1980 to establish parity between national and state banks by affording federally insured state banks the same interest rate exportation privileges as national banks are afforded under the National Bank Act. However, Section 525 of DIDMCA permitted states to opt out of the provisions of the Act by passing a law or constitutional provision indicating that the state wishes the provisions of the Act not to apply with respect to loans “made in” the state. Several jurisdictions (including Colorado) took advantage of this opt-out provision. However, all of those jurisdictions but Iowa and Puerto Rico either rescinded their respective opt-out statutes or allowed them to expire.

Colorado now proposes to opt out from the Act once again. In light of the proliferation of online lending, this proposed opt-out has ignited a debate over where a loan is “made” for purposes of DIDMCA, which was passed when lending was generally conducted from physical branches located in the borrower’s state. Some believe that the opt-out will prevent out-of-state banks from charging the rates permitted by their home state when lending to Colorado borrowers, thus reducing the availability of credit to Colorado borrowers. Under this view, embraced by the Iowa Attorney General in a recent Assurance of Discontinuance with Transportation Alliance Bank, the location of the borrower is dispositive in determining where a loan is “made.”

However, a contrary view (and, in our opinion, the superior view), supported by federal authorities, indicates that loans can be “made” in a bank’s home state even when the borrower is a Colorado resident. For example, a 1988 FDIC Interpretive Letter indicates that the state where a loan is made “is not necessarily the State in which the bank is located; nor is it necessarily the State in which the borrower is located.” A 1998 FDIC General Counsel Opinion further suggests that where a loan is made depends on the choice of law stated in the loan documents and also where three “non-ministerial functions” – approval of the extension of credit, extension of the credit, and disbursal of the loan proceeds – occur. Under this view, even if HB 23-1229 is signed into law, out-of-state banks will still, in certain circumstances, be permitted to charge their home state rates to Colorado borrowers.

While our view is that the opt-out should not prevent banks lending across state lines from charging their home state rates to Colorado borrowers, the true impact of the opt-out, if passed, will likely not be determined until the issue is fully and finally litigated. Thus, while the superior view based on federal authorities is that state banks can still export their home state rates to Colorado borrowers, the legal uncertainty created by an opt-out likely will cause some banks to reduce or cease their lending to Colorado borrowers, reducing credit availability in the state.

If you have any questions, please contact any of the authors or the Manatt professional with whom you work.



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