Yesterday, three trade organizations filed a complaint in Colorado federal court challenging H.B. 1229, Colorado’s effort to limit interest charges by out-of-state financial institutions, which is set to take effect on July 1, 2024. As discussed here, in June 2023, Colorado passed H.B. 1229, limiting certain charges on consumer loans and simultaneously opting Colorado out of §§ 521-523 of the Depository Institutions Deregulation and Monetary Control Act (DIDMCA). Sections 521-523 of DIDMCA empower state banks, insured state and federal savings associations and state credit unions to charge the interest allowed by the state where they are located, regardless of where the borrower is located and regardless of conflicting state law (i.e., “export” their home state’s interest-rate authority). However, § 525 of DIDMCA enables states to opt out of this rate authority with respect to loans made in the opt-out state.

The trade organizations argue that, under federal law, a loan is only “made in” a state other than the state where a bank is chartered when all the key functions associated with originating the loan — including the bank’s decision to lend, communication of the loan approval decision, and disbursal of loan proceeds — occur in that other state. However, H.B. 1229 seeks to sweep within its interest rate cap a much broader class of loans to Colorado consumers by any state-chartered bank that advertises on the internet in Colorado. This, the trade organizations assert, impermissibly conflicts with the federal definition of where a loan is “made.”

The trade organizations also argue that the Colorado law violates the Commerce Clause because it will impede the flow of interstate commerce and subject state-chartered banks to inconsistent obligations across states.

Beyond their legal challenges, the trade groups assert that Colorado’s overbroad opt-out attempt will not accomplish its goals, to combat high-cost lending. They maintain that their members offer a variety of beneficial credit products with a range of rates and fees, some of which are above Colorado’s caps. Under the new law, these products will no longer be available to Colorado consumers, while national banks will continue to offer them under the shield of the National Bank Act.

According to the trade groups: “The net result is that Coloradans will continue to be offered the same products at interest rates above Colorado’s rate caps but will have far less choice in what products they can select … Shrinking credit availability combined with rising rates will most acutely affect Colorado consumers who, because of their credit risk profiles or thin credit history, have less access to credit generally. Perversely, these are the very consumers Colorado insists it is trying to protect with the opt out.”