A federal court erred when it left in place a Colorado law capping interest rates and fees on loans to state residents, with the decision likely to inject uncertainty into the national banking system if it stands, the FDIC and Office of the Comptroller of the Currency said this week.
In 2024, three financial technology sector associations sued Colorado after the state legislature passed a law opting out of the federal Depository Institutions Deregulation and Monetary Control Act, or DIDMCA, allowing the state to establish restrictions on loans made by state-chartered banks. Colorado argues that its restrictions on rates and fees apply not only to banks chartered in the state but also to those chartered in other states, which the plaintiffs contest.
A district court issued a preliminary injunction against the enforcement of the law. However, the Tenth Circuit Court of Appeals recently reversed the ruling, with the majority arguing the plaintiffs were unlikely to succeed on the merits. The FDIC had previously sided with Colorado during the Biden administration, but in two new amicus briefs, the FDIC and OCC said the Tenth Circuit erred in its decision by misinterpreting DIDMCA.
The Tenth Circuit ruling imposes “significant financial and operational consequences” on state-chartered banks located outside Colorado that seek to offer loans to consumers in the state, the FDIC said. “If the panel decision is allowed to stand, it may encourage more states to opt out, resulting in the opt-out exception swallowing the general rule of parity and threatening the ability of state-chartered banks to offer loans to consumers in other states and the integrity of the dual banking system.”
The OCC raised similar concerns, saying the decision “fundamentally alters the application of this federal interest-rate framework for state banks.”
ABA, state associations ask court to reconsider
The American Bankers Association yesterday joined 52 state bankers associations and the Bank Policy Institute in an amicus brief in support of the plaintiff’s motion to have the Tenth Circuit rehear the case. The associations warned that the decision to uphold the law would create “administrative quagmire” for state banks in trying to figure out which rates should apply.
“It will require state banks (but not national banks) to apply a multitude of varying interest rates to borrowers from opt-out states who travel to non-opt-out states, or to borrowers from non-opt-out states who travel to opt-out states, and use their credit cards or obtain online loans when they travel,” the associations said.
“The banks would have to develop systems to determine where the borrower was located when an advance was requested and approved under a credit card, or where the borrower was located when an online loan was requested and approved/funded,” they added. “Interest rates would have to be determined at the transaction level, rather than account level, so a single credit card statement could have many different rate plans.”
