RATE OPT-OUT LAW
National Association of Industrial Bankers v. Weiser
Date: March 25, 2024
Issue: Whether Colorado’s “rate opt-out law” exceeds the states authority and violates the U.S. Constitution.
Case Summary: The National Association of Industrial Bankers, American Financial Services Association and American Fintech Council (the trades) sued Colorado Attorney General Philip Weiser and Colorado consumer credit regulator Martha Fulford (collectively Colorado) to block the state from enforcing its rate opt-out law.
In 2023, Colorado passed House Bill 23-1229 to opt out of the federal interest exportation right granted to federally insured, state-chartered banks under the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). According to DIDMCA Section 521, a state-chartered-bank may lend nationwide at either its home state’s interest-rate caps, or a federal interest-rate cap, dependent on which is higher. The federal interest rate cap is one percent above a specific Federal discount rate. The opt-out law seeks to limit federal interest rate preemption only for consumer credit transactions made in Colorado. The law is scheduled to take effect on July 1, 2024.
The trades sued Colorado in the United States District Court for the District of Colorado, arguing its attempt to opt out of DIDMCA exceeds the states authority and violates the U.S. Constitution. In the complaint, the trades explained Congress authorized states to opt out of DIDMCA Section 521 and impose their own interest-rate caps. But according to the trades, Congress limited that opt-out right to loans “made in” the opting-out state. The trades explained that under federal law, a loan is only “made in” a state other than the state where a bank is chartered “when all the key functions associated with originating the loan occur in that other state.” These key functions include the bank’s decision to lend, communication of the loan approval decision, and disbursal of loan proceeds. According to the trades, Colorado ignored the federal definition of where a loan is deemed to be made. In the trades’ view, Colorado seeks to impose its state interest-rate caps on any “consumer credit transaction” in the state. In effect, the trades claim Colorado’s law is “invalid on its face.”
The trades also assert the National Bank Act preempts the opt-out law. Like DIDMCA, Section 85 of the NBA provides that national banks may charge interest at the rate allowed by the laws of the state where the bank is located, or at a rate one percent higher than the federal discount, whichever is greater. In Marquette v. First of Omaha Services Corp. the U.S. Supreme Court ruled NBA preemption extends beyond “numerical” interest rates to other fees and charges, such as late fees. The trade emphasized under Section 85, interest-rate limits and fee restrictions contained in Colorado’s laws do not apply to loans issued by national banks that are not chartered in Colorado. Additionally, the trades explained DIDMCA extends preemption of state interest-rate limits to state-chartered banks.
The trades also claimed that the H.B. 23-1299 violate the U.S. Constitution’s Supremacy Clause. Under the Supremacy Clause, “state laws that interfere with or are contrary to the laws of Congress made in pursuance of the constitution have no force or effect.” The trades emphasized that by purporting to opt out with respect to any consumer credit transaction involving a Colorado consumer, Colorado: disregards the plain terms of DIDMCA; usurps federal authority to define where a loan is made for purposes of DIDMCA; and intrudes on the ability of other state to regulate loans made within their borders. Therefore, the trades emphasized that Colorado’s opt out violates the Supremacy Clause and is preempted.
Additionally, the trades asserted the law violates Sections 521 and 525 of DIDMCA. According to the trades, Section 525 only authorizes states to opt out from DIDMCA’s preemption provision “with respect to loans made in such State.” The trades explained Section 521 expressly preempts any state constitution or statute that purports to limit the ability of state-chartered banks to lend at their home state ranks with respect to loans not covered by the Section 525 opt out.” The trades stressed that Section 525 permits states to opt out with respect to loans “made in” a state, not as each state may independently choose to define that term. The trades emphasized that Colorado’s opt out is simply not what Section 525 permits.
Finally, the trades claimed the opt-out law violates the U.S. Constitution’s Commerce Clause. The trades alleged Section 3 of the opt-out law violates the Dormant Commerce Clause because Colorado’s interpretation of where a loan is made subjects out-of-state banks to inconsistent obligations across states and impedes the flow of commerce. The trades asserted the application of Colorado’s interest-rate laws to loans that are “made in” other states is unconstitutional.
Bottom Line: Massachusetts, Maine, Nebraska, North Carolina and Wisconsin initially exercised this opt-out power then opted back in. Only Iowa and Puerto Rico have stayed opted out.
Documents: Complaint
