Colorado has passed a law that amends the Colorado Uniform Consumer Credit Code (UCCC) to extend state interest rate limits on certain consumer loans made by out-of-state state-chartered banks, which caps rates at a maximum of 36 percent, depending on the loan balance. The law, HB23-1229, attempts to exercise a provision in the federal Depository Institutions Deregulation and Monetary Control Act (DIDA), permitting states to opt out of the preemption of the states’ interest rate caps on loans made in the state. The provisions of the law related to DIDA opt-out take effect July 1, 2024, and will apply only to consumer credit transactions, as defined by the UCCC, made or renewed on or after July 1, 2024. Yet, questions remain about whether the measure will be enforceable.

Sections 521 through 523 of DIDA preempt state law with respect to loans made by a state-chartered bank and allow the state-chartered bank to charge the interest rate allowed by the state where the bank is located. This is referred to as the “exportation” of interest rates. However, DIDA, in section 525, also allowed states to opt out of preemption. National banks are not covered by the opt-out and should not be affected by the change in Colorado.

Uncertainty for Bank Partnerships

With the enactment of HB23-1229, bank partnerships involving state-charted banks may find Colorado a more unattractive state to lend in because of the existing interest rate cap. The UCCC caps interest rates on consumer loans at 36 percent per year for loans of $1,000 or less and at lower rates for loans with higher balances. If a state-chartered bank was previously lending to Colorado residents at a rate that exceeded 36 percent, application of the 36 percent rate cap might make those loans no longer economically viable.

Moreover, HB23-1229 represents an uncertain lending environment in Colorado. As discussed further below, there is an argument that the preemption opt-out may be ineffective, either because section 525 of DIDA had been repealed or because a state-chartered bank could structure its lending program so that loans to Colorado residents are arguably made outside of Colorado, thus avoiding the application of Colorado law. Nonetheless, even if there were a growing consensus that section 525 had been repealed or if the loans truly could be said to be made outside of Colorado, a bank may not want to take the risk that comes with the uncertainty of how HB23-1229 and how the opt-out will be enforced. Indeed, Colorado regulators have shown that they are willing to extend the restrictions of the UCCC over lenders or their service providers.

The History Behind Congress Allowing State-Charted Banks to Export Interest Rates

In 1980, Congress passed DIDA in response to economic conditions in the country and a Supreme Court decision that allowed national banks to export interest rates under the National Bank Act. Under section 85 of the National Bank Act, national banks are allowed to charge “interest at the rate allowed by the laws of the State, Territory, or District where the bank is located.” What was unclear, though, was whether this meant that national banks could charge those interest rates even if the national bank was lending in another state that had a stricter, lower maximum interest rate. The Supreme Court, interpreting section 85, then held in Marquette National Bank of Minneapolis v. First of Omaha Service Corp. that national banks are permitted to charge the interest rates allowed by the state where the bank is located, even when lending to borrowers in another state that does not allow those rates to be charged.

Congress, fearing that state-chartered banks would be at a competitive disadvantage if they did not have the same ability to export interest rates, passed DIDA to give state-chartered banks parity with national banks. Just as with national banks, under section 521 of DIDA, state banks may charge interest “at the rate allowed by the laws of the State, territory, or district where the bank is located,” preempting state law, if state law would not otherwise allow the state-charted bank to charge those rates. But Congress, motivated by federalism principles, was also concerned about states that wanted to preserve their consumer protection laws. Accordingly, Congress added section 525 to DIDA (codified as a note to 12 U.S.C. § 1831d), which allowed states to avoid application of section 521 with respect to loans made in those states. The legislative history of DIDA has been detailed in Greenwood Trust Co. v. Commonwealth of Massachusetts, reversed on other grounds.

When DIDA was initially passed, a number of states opted out of the preemption under section 525 and did not allow state-chartered banks to export interest rates. However, many of those states have since opted into DIDA, leaving only Iowa and Puerto Rico, until recently, as the only two jurisdictions that remain opted out of DIDA.

Colorado’s Attempt to Opt Out—Effective?

Colorado’s HB23-1229 adds a new section to the UCCC, section 5-13-106, declaring that “the State of Colorado does not want the [DIDA], prescribing interest rates and preempting state interest rates to apply to consumer credit transactions in this state.” Consumer credit transaction, as defined by the UCCC, is fairly broad, and it includes loans of up to $75,000. HB23-1229 was enacted to “ensure[] that out-of-state banks must adhere to Colorado’s consumer protection laws when providing loans to Colorado consumers,” as described by a sponsor of the law.

Yet, there is some friction between the newly passed Colorado law and Colorado case law previously examining section 525 of DIDA. Stoorman v. Greenwood Trust Co., a case from the Colorado Court of Appeals decided in 1994, held that section 525 was repealed, meaning that states cannot opt out of the preemption on interest rate caps provided in sections 521 to 523 of DIDA. According to the Stoorman court, Congress repealed the opt-out provision in DIDA when it passed the Financial Institutions Reform, Recovery, and Enforcement Act in 1989.

Nonetheless, the Federal Deposit Insurance Corporation (FDIC) continues to recognize the validity of section 525. In a recent rulemaking, the FDIC stated that, “pursuant to section 525 of [DIDA], States may opt out of the coverage of section 27 [of the Federal Deposit Insurance Act],” which contains the preemption and interest rate exportation provision from section 521 of DIDA. The FDIC made no mention of Stoorman or that section 525 had been limited or repealed.

Another question is whether the section 525 opt-out and the UCCC necessarily apply to all loans made by an out-of-state state-chartered bank to a Colorado resident. Section 525 only allows a state to avoid the preemption by sections 521 through 523 on interest rate caps with respect to “loans made in [the] State.” The UCCC defines when a loan is made in the state for purposes of the UCCC, and it includes when a “consumer who is a resident of this state enters into the transaction with a creditor who has solicited or advertised in this state by any means,” unless the consumer is physically present in another state.

DIDA is federal law, however, and whether a loan is made in a state for purposes of section 525 may be a question left to courts and federal regulators. An early interpretation from the FDIC regarding sections 521 and 525 determined that a loan is not necessarily made where the borrower is located. Instead, where a loan is made could depend on a factual examination of the loan transaction under tradition conflict-of-laws analysis. FDIC Letter 88-45 (June 29, 1988). A later FDIC interpretation stated that where a loan is made depends on where the non‑ministerial functions related to the loan take place. In particular, the FDIC identified three non‑ministerial functions: (1) the decision to extend credit, (2) the extension of credit itself, and (3) the disbursal of the proceeds of a loan. The former Office of Thrift Supervision came to the same conclusion, as confirmed by a September 29, 1994 opinion, as did the Office of the Comptroller of the Currency in Interpretive Letter #822, when looking at section 85 of the National Bank Act. Thus, if these interpretations of DIDA continue to be recognized by regulators or are accepted by courts, a state-chartered bank would still be able to make loans to Colorado residents, using the rates permitted by the bank’s home state, as long as the non‑ministerial functions related to the loans are performed in the bank’s home state.

In addition to the opt-out, HB23-1229 places additional, unrelated restrictions on consumer loans regulated by the UCCC.

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Conventional wisdom is that an attempt to exercise the opt-out—purportedly resulting in the interest rate of loans by state-chartered banks doing business in Colorado being capped at 36 percent—will result in litigation, because the provision of federal law allowing the opt-out was repealed. Lenders and service providers should continue to monitor developments related to Colorado consumer lending.