Congress needs to stabilize the foundation of interstate bank lending

• Key insight: The current debate over interstate lending threatens to upend the foundation of modern banking, undermining any effort to secure consumers' financial futures.
• What's at stake: A fragmented market doesn't protect consumers, it pushes them toward the riskiest, costliest corners of the financial system.
• Forward look: Fixing the Depository Institutions Deregulation and Monetary Control Act is the rare Washington project that is bipartisan, low-cost and high-impact. The cost of leaving it broken only grows.

American households and businesses are getting squeezed. Inflation is rising at its fastest pace in three years. Credit card delinquencies are at a 15-year high.

When that pressure dominates the Washington conversation, the focus is often on big-picture solutions and financial innovations — faster payment rails, open banking and digital assets. Many of these could genuinely help people who need a financial system that works better than what we have.

But what the policy establishment is missing right now is a debate over interstate lending that threatens to upend the foundation of modern banking, undermining any effort to secure consumers' financial futures. That foundation is a 1980 federal law with an unglamorous name: the Depository Institutions Deregulation and Monetary Control Act, or DIDMCA. 

The principle behind DIDMCA is simple: State-chartered banks should compete on a level playing field with national banks, lending across state lines under one set of rules instead of 50. When a bank chartered in one state lends online to a borrower in another, somebody has to answer a basic question: Whose rate rules apply? For state-chartered banks, DIDMCA was the answer, letting them rely on the law of the state where the bank sits, just as nationally chartered banks can.

Right now, the foundation DIDMCA provides is unstable. Earlier this year, Oregon passed a bill attempting to "opt out" of DIDMCA, adopting Colorado's novel interpretation of provisions within the law that stand in opposition to decades of precedent. This opt-out trend and conflicting court rulings about what these legislative moves mean have thrown the basic fairness DIDMCA established into doubt. They have destabilized the rules that have made the U.S. banking system the envy of the world. 

The clearest sign of strain is in the courts. A federal appeals panel recently read the law to let a borrower's state set the terms, only for the full appellate court to vacate the ruling. This flip-flopping raises one of the most basic questions in lending: Whose rules apply when a loan crosses a state line? The settled answer we've all relied on for 46 years is at risk of collapse.

Let's be plain: The national lending market for state-chartered banks is broken. And before we build the next era of financial innovation, we have to stabilize the ground it will stand on. The fintech app that offers competitive small-business loans in all 50 states, or the deposit account a stablecoin settles into — these ultimately depend on state-chartered banks operating under one clear national rulebook. 

Fixing DIDMCA is the rare Washington project that is bipartisan, low-cost and high-impact. The cost of leaving it broken only grows.

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Restoring this foundation preserves every state's authority over institutions chartered within its borders. It recognizes interstate lending is a national market whose rules should be established by Congress. Congress agreed in 1980, deciding that community banks should have the same rights as national banks. Protecting parity prevents Wall Street banks from having an unfair advantage. A fragmented market doesn't protect consumers, it pushes them toward the riskiest, costliest corners of the financial system.

The case for acting now rests on three truths. 

The first is certainty. Banks, borrowers and investors cannot build a national market on a rule that is being relitigated in real time. Courts can't provide clear rules for a market spanning 50 states. Only Congress can. The FDIC has warned that legal ambiguity in this area creates confusion for courts and increases risk for state banks.

The second is fairness. DIDMCA was meant to keep state-chartered banks on equal footing with national banks, which operate under a federal statute. If that parity breaks, the result is not a tidy return to local control. It is an uneven field favoring the institutions with access to a national charter or the biggest compliance budgets, and disadvantaging the small local banks least able to absorb 50-state complexity.

The third is access. Community banks make an outsize share of small-business, commercial real-estate and agricultural loans. When those banks face greater legal burdens, the people who feel it first are small businesses, local borrowers and rural communities — at a moment when credit is already tightening. A broken rulebook only raises the odds that borrowers end up somewhere worse, like payday loan storefronts or pawn shops.

Workable fixes exist. What's missing is the will to admit the foundation is broken and treat this as a priority, not an afterthought.

The next wave of financial innovation is worth getting excited about. But you don't build the house before stabilizing the foundation. Let's fix what's beneath us first.