Judge deals blow to Colorado’s crackdown on high-cost loans

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The state of Colorado has taken a hit in its effort to impose an interest rate cap on loans made to its residents.

A cohort of trade groups suing the state was granted a preliminary injunction to block a Colorado law that targets partnerships between fintechs and state-chartered banks to offer loans that exceed the state’s interest rate limits.

Colorado’s legislation, signed into law last year, was slated to take effect July 1, but the ruling will make it impossible to enforce in most situations. The law is part of an effort across many states to crack down on high-cost consumer lending.

The legal question in the case revolves around how to interpret the Depository Institutions Deregulation and Monetary Control Act of 1980. States can opt out of the federal statute and implement their own rate caps on loans “made in” their own states. 

Colorado argues that the “made in” language refers to where both the borrower and bank are based, meaning that if a borrower is in Colorado, that’s where the loan was made.

The plaintiffs — the American Fintech Council, the National Association of Industrial Bankers and the American Financial Services Association — argue in their lawsuit that “made in” refers to where the lender is located.

On Tuesday, U.S. District Judge Daniel Domenico agreed with the plaintiffs, issuing a preliminary injunction that prevents Colorado from enforcing the interest rate cap on any of the trade groups’ community bank or fintech members that are based out of state. Nationally chartered banks are not subject to the law.

“In plain parlance, it is the lender who makes a loan; nobody thinks of themselves as ‘making a loan’ when they borrow money from a family member or put a charge on a credit card,” Domenico wrote. “It follows, then, that the answer to the question of where a loan is ‘made’ depends on the location of the bank.”

The Colorado attorney general’s office, which is named as a defendant in the suit, declined to comment on “active litigation.” The state has the opportunity to appeal the decision.

Supporters of the Colorado law hope to see enhanced scrutiny of high-cost consumer loans, especially those issued by banks with home bases in states with lax interest rate limits.

Lauren Saunders, associate director at the National Consumer Law Center, said she thinks the injunction is “flatly wrong and expects it to be overturned on appeal.” She said the key point of the statute is where borrowers are based.

“The judge ignored the whole purpose of the opt-out right and interpreted it in a way that it would be meaningless,” Saunders said.

She added that “most responsible banks, most mainstream fintechs are in compliance with the law.”

Those firms that oppose the law argue that Colorado would cut off many of its residents’ access to credit, and would limit competition between state-chartered banks and those with federal charters, which wouldn’t face the same restrictions. 

David Gossett, a partner at Davis Wright Tremaine and the lead attorney for the plaintiffs, said in a prepared statement that the state’s interpretation of the statute conflicts with federal law. He added that the Colorado law would “take away access to responsible, affordable credit products from people who need it most.”

Phil Goldfeder, CEO of the American Fintech Council, said the law would curb operations of dozens of the group’s community bank and fintech members. He added that it would impact tens of thousands of Colorado residents, who would lose access to hundreds of millions of dollars in potential credit. 

“We’re hopeful and optimistic that when the legal proceedings are over, that [Colorado] will continue to work with us to find the balance to ensure access to credit without potentially harming Colorado consumers,” Goldfeder said.

He said that he thinks there are better ways to limit predatory lending than by opting out of the 1980 federal statute.

In a brief filed in April, the Federal Deposit Insurance Corp. sided with the state of Colorado, which was seeking to dismiss the case. The FDIC asserted that loans are made wherever the borrower is located.

Alan Kaplinsky, senior counsel at the law firm Ballard Spahr, submitted a brief on behalf of the American Bankers Association and the Consumer Bankers Association in support of the motion for a preliminary injunction, in part as a response to the FDIC’s filing.

Kaplinsky said in an interview that if the plaintiffs win their case, the “ultimate irony” is that only state-chartered banks in Colorado would be subject to the rate cap.

“One way to put it is, Colorado has shot themselves in the foot,” Kaplinsky said. “If they run the course here, and the industry continues to prevail, then this will turn out not only to be an exercise in futility, but something that boomerangs on them.”

The case in Colorado is the first of its kind so far, but Minnesota, Rhode Island and Nevada have proposed similar opt-out laws.