The industry group plaintiffs in NAIB et al. v. Weiser et al., the lawsuit challenging Colorado’s opt-out legislation, have filed their reply to the brief filed by the Colorado Attorney General and Colorado Uniform Consumer Credit Code Administrator in opposition to the plaintiffs’ motion for preliminary injunction.  In their reply, the plaintiffs also respond to the amicus brief filed by the FDIC supporting Colorado’s position.

The law at issue is the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA).  Section 521 of DIDMCA applies to insured state banks and tracks Section 85 of the National Bank Act, the statute establishing interest rate authority for national banks, generally allowing banks to charge interest at the rate allowed in the state of their location or a floating rate based on a prevailing Federal Reserve discount rate, whichever is higher.  In Marquette, a unanimous decision issued just 15 months prior to DIDMCA’s enactment, the U.S. Supreme Court held that Section 85 allows national banks to “export” the rate authorized in states where they are located on loans made to borrowers in other states.  Subsequent case law has construed DIDMCA Section 521 in pari materia with Section 85, thereby granting insured state banks the same rate exportation authority as national banks. 

Section 525 of DIDMCA allows states to enact laws opting out of Section 521’s preemptive effect with respect to loans “made in” the enacting state.  At issue in the litigation is where a loan is made in the case of loans to Colorado residents by insured state banks located in other states.  The industry groups contend that, for purposes of Section 525, loans to Colorado residents by insured state banks located in other states should be deemed “made in” the bank’s home state or the state where key lending functions occur.  In its brief, Colorado argues that, for purposes of Section 525, a loan is “made in” the borrower’s state.  The FDIC, in its brief, argues that, for purposes of Section 525, a loan is “made in” the state where both the borrower and the lender are located. 

In addition to countering Colorado’s argument that the plaintiffs lack standing, their claims are not ripe, and they have no private right of action, the industry groups make the following arguments in their reply brief:

• The reference to where a loan is made in Section 525 necessarily focuses on the party that “makes” the loan, i.e., the loan originator.  A bank “makes” a loan where the bank conducts one or more of the core functions associated with loan creation, not where the borrower receives or uses the loan funds. This usage of “make” is not unique to Section 525.  Throughout Title 12 of the U.S. Code (which governs banking), banks “make” loans and borrowers “receive” or “obtain” loans.  Congress could have chosen to expand Section 525 to “loans made or received in any State” but did not do so.  Colorado’s and the FDIC’s interpretations conflate making a loan and making a contract for a loan.  While state law could provide that making a contract includes such acts as executing, signing, or delivering the contract, DIDMCA refers only to loans, not loan contracts.  The FDIC cannot explain why federal law would impose a shifting standard for “made” that turns on state law about where contracts are generally deemed “made” rather than a uniform federal standard.
• Colorado and the FDIC argue that under principles of statutory construction, there must be a distinction between where a loan is “made” under Section 525 and where a bank is “located” under Section 521 and that this distinction must reflect differences in congressional intent.  This argument fails because Section 521 does not only use the word “located” when describing which state’s interest rate limits apply for preemption purposes but also uses the word “made.”  (Section 521 states that a bank may “charge on any loan…made” interest pursuant to the limits where the bank is “located.”)  As courts and regulators have indicated, determining where a bank is “located” under Section 521 turns on where the bank performed key loan creation functions when it “made” the loan in question.  Colorado and the FDIC have not explained why the analysis of where a loan is “made” should ignore the borrower’s location under Section 521 but depend on the borrower’s location for Section 525.  Principles of statutory construction create a presumption that the relevant definition of where a loan is “made” by a bank should be the same under both Section 521 and Section 525, which means the borrower’s location has no bearing on where a loan is “made.”
• Colorado and the FDIC rely on Dormant Commerce Clause cases to support their interpretation of where a loan is “made” for purposes of Section 525.  Quick Payday and the other cases they cite address only the question whether activity affects a given state sufficiently to allow that state to regulate the conduct within the bounds of the Constitution.  While it may generally be true that, for purposes of the constitutional minimum for due process, both states have an interest in regulating the terms and performance of  a contract when an offer is made one state and accepted in another, that says nothing about the meaning of “made in” for purposes of Section 525 or the scope of federal preemption for loans by state-chartered banks.
• Federal regulators have consistently followed a function approach in determining where a bank makes a loan in connection with the preemption of state interest rate limits.  They have never, until this case, equated where a loan is “made” for preemption purposes with where the borrower resides.  In attempting to distinguish itself from its Opinion 11 in which it examined the three non-ministerial loan-making functions to determine where a loan was “made” for purposes of Section 521, the FDIC now claims that it merely used “made” colloquially and did not mean to suggest that a loan is actually or exclusively made in the state where the three functions are performed.  Even if credited, the FDIC’s explanation only serves to highlight that the ordinary meaning of where a loan is made refers to the place where the bank performs the functions to create the loan.  While the FDIC points to statements in Advisory Opinion 88-45 which provided that “located” in Section 521 must mean something different than “made” in Section 525, the FDIC disavows other language in that opinion which addressed factors to consider when determining where a loan is “made” for purposes of Section 525.  The FDIC also ignored that the opinion specifically referenced Marquette in stating that “an analysis of all the facts surrounding a transaction must be used in determining where a loan is ‘made.’”  The FDIC now argues that Marquette should have no bearing on how “made in” is interpreted for purposes of Section 525.  The FDIC’s inability to articulate statutory definitions that comport with the statutory text, relevant case law, and its own pronouncements underscore the lack of deference that the court should give to the FDIC’ current views.
• Plaintiffs’ interpretation better accords with the principles of federalism animating DIDMCA.  While Congress granted states a limited right to opt out of DIDMCA and cap the rates their own state-chartered banks could charge, Section 525 does not authorize states to regulate national banks and allows opt-out states to regulate other states’ banks only to the extent those banks actually perform key loan making functions in the opt-out state.  This structure balances the federal government’s interest in regulating national banks with states’ interest in regulating their own chartered banks.  Colorado is contending that Section 525 empowers it to override other states’ interest-rate regimes and impose its own regulations on all state banks that extend credit to borrowers who are physically located in Colorado even if, under federal law, the bank is located in and makes the loan in a different state.  Congress’s goal in enacting DIDMCA was  to ensure that during a time of high inflation and high federal interest rates, state banks would be on par with national banks and could lend in their own states or elsewhere at the greater of the federal discount rate (plus 1%) or their own states’ interest rate caps.  Thus, the Section 525 opt-out was intended to restore states’ ability to control the rates at which their own state banks loaned money by removing their ability to lend at the federal rate and was not intended as a tool to allow opting out states to reach into other states to regulate the interest rates charged by those states’ banks.

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