Last week, we blogged about arguments by Colorado and the FDIC in their briefs opposing a motion for preliminary injunction that would enjoin application of Colorado’s opt-out statute with respect to loans by FDIC-insured state banks located outside of Colorado. We promised to blog again this week with a more detailed discussion of why their arguments are off base. Today, we tackle the central issue of the case: where a loan “is made” for purposes of Section 525.

Everyone seems to agree that the answer lies in discerning Congress’ intent in enacting Section 525. Colorado and the FDIC lament the fact that Congress did not explicitly define the meaning of “made in” for application to Section 525, and offer a tortured and misguided analysis of why they believe Congress intended to allow states to opt-out with respect to loans by out-of-state banks, regardless of where key lending functions are performed. We believe Congress’ purpose is clear, notwithstanding the lack of explicit definition of where a loan is made, when Section 525 is considered in appropriate context and basic principles of statutory construction are applied. In this light, it is unmistakable that the approach advocated by Colorado and the FDIC is plainly wrong. Congress did not intend for a state’s opt-out to apply to loans by banks that are not physically present in the state.

Colorado and the FDIC support their view of Congress’ intent with heavy reliance on case law articulating Constitutional principles as to whether Colorado would be prohibited from regulating loans by out-of-state lenders. Under their approach, if a state has Constitutional authority to regulate a loan, this must mean that the loan is made in that state. Colorado goes so far as to proclaim (falsely) that one of these cases, Quik Payday Inc. v. Stork, “hold[s] that where a borrower is in one state and the lender is in another, the loan is made in the state of the borrower’s location.” The FDIC also relies on Quik Payday and other cases articulating dormant Commerce Clause principles to suggest that courts have held that a loan is made in the state where the borrower is located. However, none of the cases cited actually holds that a loan or other transaction is “made in” one state or another when the parties are located in different states. At most, the line of cases they rely on establishes that the dormant Commerce Clause of the U.S. Constitution would not prohibit either the lender’s state or borrower’s state from regulating an interstate loan since both have significant interests in the transaction. The basis for the defendants’ and FDIC’s argument, apparently, is that Congress also intended to conflate Constitutional authority to regulate with where a loan is made, rather than to establish a location-based test focused on where lending functions occur.

We doubt this was Congress’ intention and believe it is more likely that Congress was aligned with the drafters of the 1974 Model Uniform Consumer Credit Code (Model U3C) in this respect. The Model U3C determines where a loan is made based exclusively on the lender’s location at the time key lending functions occur. However, the extraterritorial provisions of the Model U3C provide that, if the borrower is a resident of the enacting state, the enacting state’s laws apply regardless of where the loan was made “as though the loan were entered into in [the enacting] State.” Contrary to the position advocated by Colorado and the FDIC that a loan is “made in” a state if it is subject to regulation there, the Model U3C (and, incidentally, the version of the U3C in effect in Colorado when DIDMCA was enacted) explicitly distinguishes the location of where a loan is made from where the loan is subject to regulation. If the drafters of the Model U3C understood in 1974 that a loan could be “made in” one state but still subject to regulation in other states as well, there is no reason to believe Congress did not likewise have the same contemplation when it enacted DIDMCA in 1980. Congress did not say interest rate preemption would not apply if an opt-out state had authority to regulate the loan. Section 525 is more specific, providing that preemption would not apply if a loan is “made in” an opt-out state.

Also, the FDIC argues that an out-of-state bank necessarily makes a loan in Colorado whenever the borrower communicates an offer or acceptance of loan terms from the state. The FDIC apparently bases this argument on the fact that all loan contracts are necessarily bilateral, and the location of each party is therefore material to a determination of where the contract is made. But this approach confuses the making of a loan with the making of a loan contract. Under any ordinary understanding of these concepts, a loan contract provides that the lender makes a loan and the borrower receives and repays it. The question, therefore, of where a loan is made depends on where the lender is located when it performs the loan contract, not where the parties create the loan contract.

We don’t believe an explanation of dormant Commerce Clause cases decided after DIDMCA’s enactment or a tortured conflation of contract creation with contract performance is informative as to Congress’ thinking when it limited the scope of loans subject to a state’s opt-out under Section 525. Basic and longstanding rules of statutory interpretation better serve this purpose. In particular, the doctrine of in pari materia (generally, laws of the same subject matter must be construed uniformly) requires a reading of Section 525 that conforms with similar federal interest rate preemption and opt-out legislation, especially in this case where the other legislation was enacted contemporaneously and by the same Congress. When read in this light, we believe it is clear that Congress did not intend for a Section 525 opt-out to apply to loans by banks that are not physically present in the state.

Specifically, in addition to DIDMCA, the 96th Congress (1979-80) enacted interest rate preemption legislation applicable to certain business and agricultural purpose loans (P.L. 96-104 and P.L. 96-161 ), and certain FHA-guaranteed mortgage loans (P. L. 96-153), each of which, like DIDMCA, allowed states to opt-out. The opt-outs under P.L. 96-104 and P.L. 96-161 are substantively identical to Section 525, allowing states to opt-out with respect to loans “made in” the state. Under P.L. 96-153, however, the standard is different, allowing states to opt-out with respect to loans “made or executed in” the state.

It is, therefore, unmistakable that Congress intended to give the opt-out under P.L. 96-153 broader effect than the opt-outs under P.L. 96-104, P.L. 96-161 and Section 525. In our view, the only reasonable way to construe all of this legislation in pari materia is to conclude that the opt-out under P.L. 96-153 applies to loans that are either made by the lender or signed or carried out in the state opting out, while the opt-outs under P.L. 96-104, P.L. 96-161 and Section 525 apply only to loans made by a lender physically present in the state. It is not plausible to argue that the additional words “or executed” should be given no substantive effect.

The opt-out provisions of P.L. 96-153 demonstrate that Congress knew how to expand the scope of loans subject to a state’s opt-out simply by providing that it applies to all loans “made or executed” in the state. Especially considering the contemporaneous enactment of the statutes and their consideration by the same legislative committees, it’s hard to imagine laws that mandate in pari materia application more than DIDMCA and P.L. 96-153. It’s even harder to square their differences with the position advocated by Colorado and the FDIC.

The FDIC’s failure to even mention, let alone account for the distinction between the opt-out under Section 525 and the broader-scope opt-out rights under P.L. 96-153 seriously undermines the agency’s credibility in its amicus brief.

Finally, Colorado and the FDIC are dismissive of the core lending functions test borrowed from FDIC General Counsel Opinion 11 as the appropriate evaluation of where a loan is made. As discussed above, in light of the context of the “made or executed in” opt-out authorization found in similar legislation, Congress’ manifest purpose in enacting Section 525 was to base the determination of where a loan is made on an evaluation of where the out-of-state bank performs the functions involved in making a loan. The factors laid out in GC-11 represent a reasonable and informed framework to implement this purpose that has proven workable in the interstate branching context. It would therefore be a reasonable approach for the court to adopt here. Alternatively, the court could adopt the approach taken by the Model U3C, which would similarly base the determination solely on the lender’s location when certain loan making activities occur. Undoubtedly, the position advocated by the drafters of the Model U3C in 1974 represented the consensus view around the time DIDMCA and similar legislation were enacted.

A hearing on the motion for preliminary injunction is set for May 16.

We will continue to monitor and report developments in this case as they arise.

On June 6, 2024, from 1:00 p.m. to 2:30 p.m. ET, we will be holding a webinar “Interest Rate Exportation Under Attack,” in which we will be covering this topic in great detail. Click here to register.