- Key insight: The court's decision could have a big impact on the future of the dual banking system.
- What's at stake: If Colorado wins, states will have the power to enforce their own usury laws on out-of-state, state-chartered banks. Banks argue that such a ruling would fracture uniformity in interstate banking.
- Expert quote: "This is an existential threat to the dual banking system." — Frank Pignanelli, executive director of the National Association of Industrial Banks and a partner at the law firm Foxley & Pignanelli
This is a breaking-news story. It will be updated.
A federal appeals court heard oral arguments on Tuesday in a pivotal lawsuit challenging Colorado's efforts to enforce state interest rate caps.
A three-year-old Colorado law is part of a long-running push by some states to eliminate efforts by high-cost lenders — both banks and nonbanks — to get around the rate caps.
A ruling in Colorado's favor would allow states to cap interest rates on loans extended to the state's residents by state-chartered banks — an outcome that banks sharply oppose.
At issue is the wording of a 1980 federal law, the Depository Institutions Deregulation and Monetary Control Act, which allows state-chartered, federally insured banks to "export" the interest rates permitted in their home state to borrowers located in other states. One goal of DIDMCA was to maintain uniform, national credit markets that did not favor national banks over state-chartered ones.
But the law also includes a provision allowing states to opt out, which Colorado believes gives it the authority to enforce its own interest rate caps on loans extended to its residents by state-chartered banks. The precise meaning of the opt-out provision is at issue in the case heard Tuesday by the 10th Circuit Court of Appeals.
Colorado became one of the few states to exercise the opt-out right when it passed its 2023 law. Colorado officials claim DIDMCA was designed to protect consumers from predatory interest rates.
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But bank trade groups assert that allowing states to opt out and override federal standards is not just an overreach but contrary to the language of the statute. Banks maintain that the opt-out provision would force lenders to identify the location of both the consumer and the lender; determine if they have opted-out of DIDMCA; and finally, determine whether the law applies.
The case involves the language used by Congress regarding whether a loan was made in a state that opted out of DIDMCA.
A banking trade group, the National Association of Industrial Bankers, sued to stop the Colorado law's implementation. It won a favorable ruling in federal district court, which issued a preliminary injunction that impeded the state law's implementation. But then a three-judge panel of the 10th Circuit overturned the lower court's ruling. Later, the full 10th Circuit reinstated the preliminary injunction and scheduled Tuesday's hearing on the state law.
If Colorado is successful before the 10th Circuit, it would be able to impose its 21% usury cap on loans made by all state-chartered banks, whether they're based in Colorado or not. But it would not be able to impose the cap on national banks.
The banking sector has rallied against Colorado's law with a joint
"This is an existential threat to the dual banking system," said Frank Pignanelli, executive director of the National Association of Industrial Banks and a partner at the law firm Foxley & Pignanelli.
He said a core problem with states seeking to cap interest rates is that "they are limiting the ability of their state-chartered banks to compete against national banks in other states."
Currently, Colorado, Iowa and Puerto Rico maintain active statutory opt-outs that restrict out-of-state interest rate exportation. When DIDMCA was passed in 1980, roughly seven states chose to opt out, but nearly all of them, including Massachusetts, North Carolina, and Wisconsin, subsequently repealed their opt-outs in an effort to maintain competitive lending markets, experts said.
"Allowing individual states to export their local rate caps to out-of-state institutions undermines the federal framework designed to ensure fair, equal access to credit across state lines," the banking trade groups said in a joint statement.
Currently 42 states civil usury statutes, while eight do not. The interest rate caps vary significantly.
