Rhode Island, Minnesota, and Nevada have joined the list of jurisdictions considering proposals to legislatively opt out of federal interest rate preemption established under the federal Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). Although the legal effect remains unclear, the apparent objective of these proposed laws is to prevent interest rate “exportation” by state-chartered financial institutions.
As discussed in earlier blogs here and here, Sections 521 through 523 of DIDMCA were enacted to enhance competitive equality for FDIC-insured, state-chartered banks and credit unions by affording them the same interest rate authority as national banks. However, DIDMCA Section 525 gives states authority to opt out of Sections 521 through 523 “with respect to loans made in such State.” A handful of states enacted opt-out legislation shortly after DIDMCA went into effect. With the exception of Puerto Rico and Iowa, these states have all since repealed their original opt-out legislation, or allowed it to expire.
Now, over 40 years later, revived interest in the concept of DIDMCA opt-out is developing in an increasing number of jurisdictions. In 2023, Colorado enacted a law effective July 1, 2024 countermanding federal interest rate authority otherwise available to state-chartered banks and credit unions with respect to consumer credit transactions. In November 2023, District of Columbia Council Bill B 25-0609, which would opt out of DIDMCA Sections 521 through 523 with respect to loans made in Washington D.C., was introduced and referred to the Council’s Committee on Business and Economic Development, where it remains under consideration and is scheduled for public hearing on March 13, 2024.
S 2275, introduced in the Rhode Island Senate on February 12, 2024, would also opt-out of DIDMCA Sections 521 through 523, although credit extended pursuant to credit cards appears to be carved out of the rate limitations set forth in the referenced statutes. If adopted as proposed, S 2275 would be effective August 1, 2024.
H.F.3680, introduced in the Minnesota House of Representatives on February 13, 2024, would amend Minnesota law by opting out of sections 521 through 523 of DIDMCA with respect to consumer loans made in the state. Proposed language included in the bill apparently would allow out-of-state banks and credit unions to charge the rate allowed by their respective home states for open-end credit pursuant to a credit card. As proposed, H.F. 3680 would be effective August 1, 2024.
In Nevada, a newly formed non-profit corporation, “Stop Predatory Lending NV,” is seeking to opt-out of federal interest preemption and impose an all-in APR cap of 36% on certain consumer loans and similar transactions through a statewide ballot initiative. The proposed APR calculation would exclude fees charged in connection with “network-branded” credit cards if such fees “collectively each year” do not exceed 15% of the credit line. Should a sufficient number of signatures be obtained in 2024, the Nevada legislature would have the opportunity to adopt the amendments set forth in the ballot initiative in 2025. If the legislature fails to pass the proposed amendments, they would be presented to Nevada voters in 2026.
The legislation proposed in Washington, D.C. and the ballot initiative proposed in Nevada also would include additional provisions designed to prevent “evasion” of state usury laws, similar to laws recently adopted by other states, as noted in earlier blogs.
We will continue to follow and report on the status of these latest proposals. As we have explained in past blogs, the legal effect of a state’s opt-out is uncertain. In our view, loans by out-of-state financial institutions should be deemed to be “made in” the main office or branch location where core lending functions are performed. Consequently, a state’s opt-out should only impact institutions that are physically located in the state that has opted out, but it remains to be seen how these laws will be applied in the courts.
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