- Key insight: A federal appeals court has found that Colorado has the authority to apply its own interest rate caps to state-chartered banks from the other 49 states when they make loans to Coloradans.
- What's at stake: The ruling has big implications for bank-fintech partnerships, which frequently involve state-chartered banks making loans at rates that wouldn't be allowed under the laws of states where the borrowers reside.
- Forward look: National banks, which are not subject to state interest rate caps, could become a more popular choice for fintechs that use bank partnerships to make consumer loans.
An appeals court decision that prompted an outcry from industry groups this week will initially have an impact only on loans made to the residents of a single state, Colorado.
But advocates on both sides of the debate over high-cost consumer lending say the ruling's ripple effects could eventually be felt across the country.
Phil Goldfeder, CEO of the American Fintech Council, expressed disappointment in the landmark ruling, saying in a statement: "If allowed to stand, it will only perpetuate a patchwork of state regulations that limits access to affordable, innovative credit products."
Andrew Kushner, senior policy counsel at the Center for Responsible Lending, which applauded the decision by judges on the 10th Circuit Court of Appeals, said: "I think you will see other states take an interest in this and go down the same path that Colorado has."
The 2-1 decision marks the first time that a federal appeals court has interpreted
The 1980 law enables states to opt out of statutory language that gave state-chartered banks the same authority with respect to setting interest rates that national banks already had. In states that don't opt out, the law effectively gives state-chartered banks from the other 49 states the ability to get around interest rate caps.
In 2023, Colorado legislators
The question that soon arose in court was whether the new Centennial State law binds only Colorado-chartered banks, or whether it means that state-chartered banks from elsewhere must also abide by Colorado's interest rate caps when they're making loans to Coloradans.
The case hinged on the meaning of the term "made in" — does a loan by an out-of-state bank to a Colorado resident count as having been "made in" Colorado?
The appeals court judges concluded that it does, stating that "a loan is 'made in' the opt-out state if either the borrower or the lender is located in that state."
The judges wrote that Colorado exercised its opt-out right because of "proliferating 'rent-a-bank' arrangements."
Under such arrangements, they wrote, "nonbank lenders partner with banks chartered in states that have high or even no interest-rate caps," and the nonbank lender thereby "exports high interest rates to states that would otherwise bar those rates under their own laws."
The judges also stated that "the public interest counsels against enjoining a valid enacted law from a democratically elected state legislature."
The 10th Circuit's decision, which is likely to be appealed, is theoretically binding in Oklahoma, Kansas, New Mexico, Wyoming and Utah. But because those five states haven't exercised their opt-out rights under the 1980 federal law, it will have no practical implications in those jurisdictions, at least right now.
Still, the decision could embolden other states to follow Colorado's lead.
"I think it should give states confidence that they can opt out, and it will be meaningful," said Lauren Saunders, associate director at the National Consumer Law Center, an advocacy group that supports states' efforts to restrict interest rates.
Lawmakers in Rhode Island and Minnesota have considered opt-out legislation in recent years. And earlier this year in Oregon, an opt-out bill passed the House of Representatives before stalling out in the state Senate.
Kushner, of the Center for Responsible Lending, said that he expects Oregon lawmakers will revisit the issue soon. "I think it's going to be on the agenda in the near term," he said.
"What has given this added interest is really driven by how egregious some of this evasive, out-of-state lending has gotten," Kushner said.
Industry groups cast the appeals court's ruling in a less flattering light.
The National Association of Industrial Bankers, one of the trade groups that sued over the Colorado law, said the decision threatens to fragment U.S. financial and credit markets.
"The Tenth Circuit's ruling opens the door to a confusing patchwork of state laws that will make credit costlier and less available across the country," the group's executive director, Frank Pignanelli, said in a written statement.
Consumer-lending-focused fintechs have typically partnered with state-chartered banks, but that could change if the 10th Circuit's reasoning holds up. In that scenario, national banks, which are not subject to state interest rate caps, could become a more popular choice.
