Court of Appeals Enables Colorado to Enforce its Interest-rate Caps Against Out-of-State Bank Loans to Colorado Borrowers

Yesterday, the U.S. Court of Appeals for the Tenth Circuit issued a 2-1 decision holding that Colorado can enforce its interest-rate caps on loans made by out-of-state state-chartered banks to borrowers residing in Colorado.[1]  This decision reverses an earlier decision by the District of Colorado holding that Colorado could not do so.[2]

Under the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), state-chartered banks were authorized to charge the same interest rates as national banks, i.e., the higher of (i) 1% above the discount rate on ninety-day commercial paper in effect at the Federal reserve bank in the Federal reserve district where the bank is located and (ii) the rate allowed by the laws of the state where the bank is located.  State laws to the contrary are preempted.[3] DIDMCA thus placed state banks in the same position as national banks in this respect because the National Bank Act preempts state law interest rate caps on a national bank’s loans.

DIDMCA also allows a state to opt out of this national standard, but only as to “loans made in such State.”[4] In 2023, Colorado enacted legislation opting-out of DIDMCA and purporting to enforce Colorado’s interest-rate caps on loans made from out-of-state state-chartered banks to Colorado borrowers.[5]  Colorado joined Puerto Rico and Iowa as the only jurisdictions to opt-out of DIDMCA.[6]  Three trade associations (“Associations”) obtained injunctive relief from the district court, which interpreted the opt-out provision’s language “made in such State” to refer to the lender’s state, as only lenders make loans.[7]

The Tenth Circuit reversed, with the majority holding that the opt-out provision allows states to apply their interest rate caps to borrowers in their state, regardless of where the state-chartered bank making the loan is located.[8]  Accordingly, Colorado may soon enforce its interest-rate caps against out-of-state banks lending to in-state borrowers as well as to Colorado in-state banks.[9]  The district court’s injunction will remain in effect until the Tenth Circuit issues its mandate, which is typically shortly after the time to file a petition for rehearing expires.[10]  The Tenth Circuit is the first court of appeals to render this interpretation of the opt out.  The Associations may seek review by the full Tenth Circuit or petition for certiorari to the United States Supreme Court.  The Tenth Circuit’s decision creates a competitive disparity because it affects state banks but does not impact the ability of national banks to lend to Colorado borrowers at the rate allowed in the state in which the national bank is located.  This decision may impact whether other jurisdictions enact similar opt-out statutes.