Legislation to opt out of a 43-year-old federal law allowing FDIC-insured state banks to “export” interest on interstate loans to the same extent as their national bank counterparts is quietly, but swiftly, working its way through the Colorado legislature.  The bill has passed the House and is expected to be the subject of a hearing next week before a Senate Committee. This potentially significant change would be made by an easily-overlooked provision found at the end of a bill to modify certain terms applicable to short-term loans under the Colorado Consumer Credit Code, House Bill 23-1229.  The provision explicitly states that certain provisions of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) would not apply in Colorado.

Congress enacted DIDMCA in the wake of the U.S. Supreme Court’s landmark decision in Marquette v. First of Omaha Service Corp., 439 U.S. 299 (1978).  In Marquette, the Supreme Court held that Section 85 of the National Bank Act (NBA) authorizes a national bank to charge interest on interstate loans at rates allowed by the state where the bank is located, regardless of any conflicting laws of the state where the borrower is located.  Enacted 15 months after Marquette, DIDMCA Section 521 gives state-chartered insured depository institutions the authority to export interest rates permitted by the states where they are located.  Binding case law created since DIDMCA’s enactment establishes that such authority is identical to the authority enjoyed by national banks under MarquetteSee, e.g., Greenwood Trust Co. v. Mass., 971 F.2d 818, 827(a) (1st Cir. 1992), cert. denied, 506 U.S. 1052 (1993) (treating NBA Section 85 and DIDMCA Section 521  the same). 

DIDMCA Section 521 expressly states that Congress’ intention in giving this authority to  state banks was “to prevent discrimination against State-chartered insured banks . . . with respect to interest rates.”  Nevertheless, in DIDMCA Section 525, Congress gave states authority to legislatively opt out of Sections 521-523 “with respect to loans made in such State.”  A handful of states, including Colorado, enacted opt-out legislation shortly after DIDMCA went into effect.  With the exception of Puerto Rico and Iowa, these states (including Colorado) have all since repealed their original opt-out legislation, or allowed it to expire.

There is some debate about the effect Colorado’s proposed legislation would have on out-of-state banks, since an opt-out would apply only to loans made in Colorado.  Federal interpretations of DIDMCA Section 521 (codified at 12 U.S.C. 1813d) establish where a loan is made based on the parties’ contractual choice-of-law and the location where certain non-ministerial lending functions are performed, including where the credit decision is made, where the decision to grant credit is communicated from, and where the funds are disbursed.  See FDIC General Counsel Opinion No. 11, 63 Fed. Reg. 27282 (May 18, 1998).  Under these federal interpretations, out-of-state banks can establish controls to assure that interstate loans are made in the state where the bank is located rather than in the borrower’s state.  However, because an effective opt-out establishes that DIDMCA Sections 521-523 do not apply to “loans made in” the opt-out state, the question would arise whether these federal law interpretations apply for purposes of determining whether a loan was made in an opt-out state.  If they do not, courts in an opt-out state could determine that, even though interstate loans would be deemed made in the state where the bank is located under the federal interpretations, such loans were made in the opt-out state and, therefore, its usury laws apply.

We believe the far better conclusion is that the federal standards, which consider where certain non-ministerial functions are performed, should determine where a loan is made for purposes of whether a state’s opt-out has the effect of limiting the permissible interest rate on such loan, given that the opt-out right is established by federal law under DIDMCA Section 525.  Although the federal standards are applied in interpreting Section 521, in accordance with the basic canon of statutory construction that the same words used in different parts of an act should have the same meaning (the presumption of consistent usage), those federal standards also should be applied to an interpretation of where a loan is “made” for purposes of Section 525.

It should be noted that because an opt-out would mean DIDMCA Section 521 does not apply to loans made by a state-chartered bank in the opt-out state, the FDIC’s “Madden fix” rule (which relies on the interest rate authority provided by Section 521) also would not apply.  The FDIC’s rule (12 C.F.R. Part 331) was adopted to address the uncertainty created by the Second Circuit’s decision in Madden v. Midland Funding, which held that a non-bank that purchased charged-off loans from a national bank could not charge the same rate of interest on the loans that the national bank charged under NBA Section 85.  The FDIC’s rule provides that a loan made by an insured state-chartered bank that is permissible under Section 521 is not affected by the sale, assignment, or other transfer of the loan.  Because they could not rely on the FDIC’s rule, buyers of loans made in an opt-out state by state–chartered banks would face uncertainty as to whether they could charge the contract rates on such loans if such rates were higher than the rates permitted by the borrowers’ states.

It should also be noted that the rate exportation authority of national banks and federal savings associations is not affected by state legislation opting out of DIDMCA.  National banks’ rate exportation authority derives from the NBA, as discussed above; federal savings associations have exportation authority under the Home Owners’ Loan Act.

If the bill is interpreted by a Colorado appellate court to cover loans made by state banks located outside of Colorado and not allow such banks to export the rates permitted by the states where they are located to Colorado, many of them may cease making loans to Colorado residents, thereby harming Colorado consumers who would face reduced credit availability.  In addition, reduced competition might enable national banks and federal savings associations located outside of Colorado to increase the interest rates charged to Colorado residents and reduce or eliminate reward programs offered to Colorado consumers.