Colorado’s attempt to opt out of interest rate exportation by out-of-state, state-chartered banks ultimately will fail, and will cause irreparable harm in the interim: therefore, enforcement of the opt out should be preliminarily enjoined, according to the plaintiffs’ Motion for Preliminary Injunction (the “Motion”) filed April 2, 2024 in federal district court in Colorado in NAIB et al. v. Weiser et al.  In addition to the likelihood the plaintiffs will prevail on the merits, and the irreparable damage plaintiffs’ member banks will suffer, the Motion explains the balance of equities “weighs in favor of maintaining the status quo.”  Accordingly, a preliminary injunction is warranted as to loans not “made in” Colorado, as defined by federal law.

As detailed in our earlier blog, three consumer financial services industry trade groups filed NAIB et al. v. Weiser et al. last month, challenging a Colorado statute (to take effect July 1, 2024) that purports to opt out of Section 521 of the federal Depository Institutions Deregulation and Monetary Control Act of 1980 (“DIDMCA”).  Section 521 gives state-chartered, FDIC-insured banks the authority to export interest rates permitted by the respective states where they are located.  This statute was adopted to eliminate a competitive disadvantage suffered by state-chartered, FDIC-insured banks, giving state banks rate exportation authority equivalent to that enjoyed by national banks under the National Bank Act. 

The Motion points out that pursuant to Section 525 of DIDMCA, states may countermand (“opt out” of) the rate preemption provisions in DIDMCA Sections 521 – 523**, but only as to loans “made in” the state that opts out.  In order to opt out, a state must adopt a law “which states explicitly and by its terms that such State does not want the amendments made by such sections to apply with respect to loans made in such State…” (emphasis added).

The Motion then explains that Colorado’s opt-out, set forth in Colo. Rev. Stat. § 5-13-106, goes too far by purporting to prohibit interest rate exportation with respect to all “consumer credit transactions” in Colorado.  When coupled with Colorado’s definition of when a consumer credit transaction is “made in” Colorado (which under Colo. Rev. Stat. §5-1-201(1)(b) includes any Colorado consumer’s transaction “with a creditor who has solicited or advertised in this state by any means, including but not limited to mail, brochure, telephone, print, radio, television, internet, or any other electronic means”), Colorado clearly has exceeded the limited scope of the opt-out permitted by DIDMCA Section 525. DIDMCA Section 525 is a federal statute; hence, where a loan “is made” under this federal statute calls for a uniform federal definition.  As the Motion points out, “Section 525. . . must be interpreted as having a single meaning throughout the nation.”

The Motion cites DIDMCA’s legislative history to show that:

Congress designed Section 525 to allow states to restore their pre-DIDMCA ability to restrict their own in-state banks from lending above their own state rate limits… There is no suggestion in Section 525’s legislative history that Congress intended to allow states to use the opt-out to restrict the rates that out-of-state banks physically operating outside a state could charge when lending to borrowers living in an opting-out state…”

Rather, where a loan is made turns on where the lender undertakes certain core lending functions.  Therefore, “[u]nder federal law, a non-Colorado bank ‘ma[kes]’ a loan ‘in’ Colorado only when all the key functions associated with originating the loan—including the bank’s decision to lend, communication of that decision, and disbursal of funds—occur in Colorado.”

Consequently, the Motion reasons, the plaintiffs are likely to demonstrate that Colorado’s opt-out “is void and unenforceable as applied to loans not ‘made in’ Colorado as defined by federal law,” and therefore the plaintiffs are likely to prevail on the merits.

The Motion identifies several categories of irreparable harm plaintiffs’ member banks will suffer if a preliminary injunction is denied, including significant compliance, systems, and other operational costs; permanent loss of goodwill with customers and counterparties; and potentially “business-jeopardizing” lost revenue. Further, an injunction would serve the balance of equities: for example, without an injunction, many Colorado consumers

 …will have reduced access to the responsible, needed credit products offered by Plaintiffs’ members,… Yet national banks will continue to offer these same products at rates above what [Colorado’s Uniform Consumer Credit Code] allows.  With reduced competition from state banks, national banks will have less incentive to constrain their rates.  And consumers will have less choice.

A hearing on the Motion is set for May 16, 2024.  

The Motion presents well-reasoned arguments that merit thoughtful attention in the present action, and should be taken into account by any other states considering adoption of a DIDMCA Section 525 opt-out.

**DIDMCA Sections 522 and 523, respectively, preempted state interest-rate caps for insured savings and loan associations and insured credit unions.