A front-burner issue for consumer protection advocates for the last few years has been “puppy loans,” often marketed through pet stores. These are high-interest-rate loans made to people wanting to buy an expensive pet (think French bulldog, Tibetan mastiff, Portuguese water dog, etc.) but needing a loan to make the purchase.
By way of example, a company called EasyPay Finance has allegedly been making puppy loans with interest rates as high as 188%. These loans tend to be made to people who can least afford them and who can quickly find themselves saddled with a debt that gets in the way of other things like, say, buying groceries.
In most states, including Colorado, consumer lending laws prohibit loans with conscience-shocking interest rates. Puppy loan lenders, however, have developed an end run around these laws by setting up arrangements with a state-chartered bank located in a state having no interest rate limits. Although federal law allows national banks chartered under federal banking laws to export interest rates from their home state into other states, state-chartered banks weren’t able to do this until Congress, in 1980, passed the Depository Institutions Deregulation and Monetary Control Act. This law gives state-chartered banks the same right as national banks to export their own state’s interest rate laws when making a loan to a resident of another state.
In EasyPay’s case, it established an arrangement with a bank in Utah, Transportation Alliance Bank, which allowed it to take advantage of Utah’s no limit on consumer loan interest rates. Thus, EasyPay, with Transportation Alliance Bank as its “partner,” could make loans all over the country and charge whatever interest rates it could get people to agree to pay. (As an aside, this practice has come to be known as “rent-a-bank.”)
Now, cycling back to Colorado, a provision in the Depository Institutions Deregulation and Monetary Control Act allows states to opt out of the interest rate exportation right contained in the law. And in 2023, through House Bill 23-1229, the Colorado General Assembly did just that. Therefore, effective as of July 1 of this year, banks chartered in other states can no longer export their own state’s interest rate laws when making loans to Colorado residents. Instead, they must comply with Colorado’s consumer lending laws limiting interest rates.
An intended consequence of HB23-1229 is that finance companies making puppy loans (and any other loans) will no longer be able to affiliate with a state-chartered bank located in a state with no interest rate limitations and export that state’s law into Colorado. Instead, loans they make will need to comply with the rate limitations set forth in the Colorado Uniform Consumer Credit Code (the UCCC).
The Colorado UCCC (which is not uniform and is largely incomprehensible) has been baffling lawyers and judges for decades. However, to simplify things in the context of puppy loans, a finance company wanting to make puppy loans in Colorado with an interest rate in excess of 12% now needs a “supervised lender’s license” from the UCCC administrator and, even with such a license, interest rates will be capped at 21% for loans in excess of $1,000. For loans not exceeding $1,000, a lender with a supervised lender’s license can charge up to 36% or use an alternative arrangement involving a loan origination fee and a monthly maintenance fee.
Over the past few years, the Colorado attorney general has been trying to curtail bank renting through lawsuits and threats of lawsuits. This has included a lawsuit against EasyPay, which was settled last year. HB23-1229 should help the attorney general in this effort.
However, predatory lenders have a long history of ignoring legal impediments and it may take awhile before companies making puppy loans decide Colorado is a hostile environment for their products. For the moment, however, consumers need to be cautious about puppy loans involving out-of-state lenders. And now, more than ever, adopting a pet in need of a home from an animal shelter makes good sense.
Jim Flynn is a business columnist. He is of counsel with the Colorado Springs firm Flynn & Wright LLC. He can be contacted at moneylaw@jtflynn.com.
