District of Columbia Council Bill B 25-0609, which would opt out of Section 27 of the Federal Deposit Insurance Act (“FDIA”) with respect to loans made in the District of Columbia, was introduced in the District of Columbia Council on November 30, 2023, and referred to the Council’s Committee on Business and Economic Development on December 5, 2023. In addition to the opt-out, Council Bill B 25-0609 (the “D.C. Bill”) would add “anti-evasion” and territorial application provisions to the D.C. Official Code.
If the D.C. Bill is adopted, Washington D.C. would join Iowa, Puerto Rico, and (effective July 1, 2024) Colorado in opting out of Section 27 pursuant to Section 525 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (“DIDMCA”) .
In addition to its DIDMCA opt-out, the D.C. Bill includes extremely broad “anti-evasion” provisions similar to those recently adopted or introduced in other states, and territorial application language defining when a loan is “made in” D.C.
The territorial application section purports to establish that any loan made to a person who is a D.C. resident at the time the lender receives either a signed writing evidencing the loan, or a written or oral offer of the debtor to enter into the loan transaction, is “made in” D.C.
The anti-evasion provisions would codify elements of “true lender” theory, stating that the definition of a “lender” includes any person that offers, makes, arranges, or facilitates a loan, or acts as an agent for a third party in making or servicing a loan, “including any person engaged in a transaction that is in substance a disguised loan or a subterfuge for the purpose of avoiding this chapter, regardless of whether or not the entity or person is subject to licensing”, and that (a) holds “directly or indirectly, the whole, predominant, or partial economic interest, risk or reward” in a loan, (b) markets or brokers the loan and has a right to acquire an interest in the loan, or, (c) based on the “totality of the circumstances”, should be considered a lender. It is noteworthy that, unlike most other state anti-evasion laws that include “predominant” economic interest as one element that may identify a loan marketer or servicer as a “true lender”, the D.C. Bill appears to contemplate that any economic interest in a loan held by a servicer would contribute to true lender recharacterization.
As explained in the cover letter from the D.C. Councilmember who introduced the D.C. Bill, the goal of the proposed three-pronged legislation is to “prevent out-of-state lenders” from partnering with out-of-state, state chartered banks to make loans with rates in excess of D.C.’s usury cap (generally 24% for written agreements, with some other limits specific to certain types of loans).
In our earlier blogs addressing Colorado’s opt-out, we explain FDIA Section 27, added to the FDIA by Section 521 of DIDMCA (and codified at 12 U.S.C. §1813d), allows state-chartered insured depository institutions to charge interest rates and fees permitted by their respective home states on a nationwide basis (“rate exportation”), in the same manner as national banks. DIDMCA Section 521 explains that Congress gave state banks this authority “to prevent discrimination against State-chartered insured banks . . . with respect to interest rates.” Nevertheless, in DIDMCA Section 525, Congress also gave states (including the District of Columbia, see DIDMCA Section 527) authority to legislatively opt out of Sections 521through 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 (including Colorado) all since repealed their original opt-out legislation, or allowed it to expire. Colorado recently adopted new DIDMCA opt-out legislation that is set to take effect July 1, 2024.
As discussed in our earlier blogs, there is some debate about the effect of a state’s DIDMCA opt-out on loans by out-of-state banks, since an opt-out applies only to loans “made in” the opt-out state. Federal interpretations of DIDMCA Section 521 establish where a loan is “made” for rate exportation purposes based on elements such as the parties’ contractual choice-of-law and the location where certain non-ministerial lending functions are performed, including where the credit decision is made, where the decision to grant credit is communicated from, and where the funds are disbursed. See FDIC General Counsel Opinion No. 11, 63 Fed. Reg. 27282 (May 18, 1998). Under these federal interpretations, banks can establish controls to assure that interstate loans are “made in” the state where the bank is located rather than in the borrower’s state, thus enabling exportation of rates and fees permitted by the bank’s home state. Since an opt-out under Section 525 of DIDMCA countermands Section 521’s rate exportation authority only with respect to loans “made in” the opt-out state, the question arises as to whether these federal law interpretations apply for purposes of determining whether or not a loan is “made in” the bank’s home state, or an opt-out state, for purposes of determining the effect of the opt-out. We believe the correct conclusion is that these federal standards do apply to determine where a loan is “made” for purposes of an opt-out, given that the opt-out right is established by federal law, and that if application of these standards results in a determination that an interstate loan is “made in” the bank’s home state, the usury laws of the bank’s home state, not those of the opt-out state, would control. Still, it is possible that a court in an opt-out state could determine that, contrary to these federal interpretations, such loans instead were “made in” the opt-out state and, therefore, its usury laws apply.
The DIDMCA Section 525 opt-out has no effect on loans by national banks, whose rate exportation powers derive from Section 85 of the National Bank Act.
If enacted, the D.C. Bill as currently proposed would take effect “following approval by the Mayor (or in the event of veto by the Mayor, action by the Council to override the veto), a 30-day period of congressional review as provided in section 602(c)(1) of the District of Columbia Home Rule Act, approved December 24, 1973 (87 Stat. 813; D.C. Official Code § 1-206.02(c)(1)), and publication in the District of Columbia Register.” Accordingly, pursuant to the District of Columbia Home Rule Act, the D.C. Bill, if enacted by the District of Columbia Council and approved by the D.C. Mayor, must be submitted for review by both houses of the U.S. Congress, and may be overturned by a joint congressional resolution of disapproval. Congress has invalidated proposed D.C. laws via this procedure only four times since the passage of the District of Columbia Home Rule Act in the early 1970s; if the D.C. Bill is enacted, it is very unlikely to be overturned by Congress.
We will continue to track the D.C. Bill for our readers as we have tracked the Colorado opt-out legislation. As we have stated previously, we anticipate that similar bills will be introduced in other states. While, as stated above, we are dubious that the D.C. opt-out provision will legally accomplish the sponsors’ objective of preventing out-of-state state-chartered banks from exporting to D.C. residents interest rates allowed by such banks’ home states, a contrary result likely would reduce competition as such state banks withdraw from the D.C. market. That, in turn, will enable out-of-state national banks to charge higher interest rates and result in less credit availability for D.C. residents, particularly those who are less creditworthy.
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