In a significant decision for bank partnership arrangements, the United States Court of Appeals held that Colorado may apply its state interest rate caps to loans made by out-of-state banks under the Depository Institutions Deregulation and Monetary Control Act (DIDMCA). The ruling reversed an earlier district court decision holding Colorado could not do so.
Under DIDMCA, state-chartered banks are allowed to charge the same interest rates as national banks, i.e., the higher of (i) 1% above the discount rate on ninety-day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District where the bank is located and (ii) the rate allowed by the laws of the state where the bank is located. The law places state banks at the same level as national banks (which can export their rates and fees nationwide) and allows state-chartered banks to charge interest as allowed in the state they are located and preempt conflicting state laws allowing exporting of those rates to other states.
But states can opt out of this federal preemption making out-of-state banks subject to the state’s interest rate limits. Colorado did, making it one of three states (including Iowa and Puerto Rico), to do so.
In March 2024, three trade associations brought suit in federal district court seeking a declaratory judgment that the law was void (previously discussed here). The court agreed, granting a preliminary injunction and holding that the loans are “made” where the lender is located and not where the borrower resides. Colorado immediately appealed the case to the Tenth Circuit Court of Appeals.
In a 2-1 decision, the Tenth Circuit reversed the district court, holding that DIDMCA’s opt-out provision allows states to apply their interest rate caps to borrowers in their state, regardless of where the state-chartered bank making the loan is located. Accordingly, a Utah-based bank is subject to Colorado’s interest rate caps, the same as a Colorado in-state banks. The dissent took a sharply different view, arguing that “loans made in such State” must be interpreted in light of the DIDMCA’s purpose of ensuring parity between state and national banks, which has historically tied interest rate authority to where the bank is located or performs key lending functions.
The Tenth Circuit’s decision marks the first federal appellate decision to interpret the Act’s opt-out clause. Industry plaintiffs are expected to seek further review, either before an en banc panel of the Tenth Circuit or directly to the Supreme Court.
Putting It Into Practice: With other states considering similar measures, the ruling has national implications for rate exportation, parity between state and national banks, and the stability of interstate lending models, particularly with respect bank-fintech partnership models. The competing federalism and uniformity concerns heighten the potential for eventual Supreme Court review. Banks and fintech service providers should evaluate their current structures, monitor activity in DIDMCA opt-out states like Colorado, and prepare for further shifts in the balance between federal authority and state level interest rate regulation.