The Colorado federal district court hearing NAIB, et al v. Weiser, et al., the lawsuit filed by three consumer financial services industry trade groups challenging Colorado’s opt-out legislation, has granted the plaintiffs’ motion for preliminary injunction.  As interpreted by the defendant State officials, Colo. Rev. Stat. § 5-13-106 (Opt-out Law), ), which is due to take effect on July 1, purports to apply Colorado’s interest rate and fee limits to interstate loans made by federally insured out-of-state state-chartered banks to Colorado borrowers.  The preliminary injunction provides that Colorado is preliminarily enjoined from enforcing its interest rate and fee limits “with respect to any loan made by the plaintiffs’ members, to the extent the loan is not “made in” Colorado and the applicable interest rate in Section 1831d(a) exceeds the rate that would otherwise be permitted.”

The law at issue in the case is the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA).  Section 521 of DIDMCA (codified at 12 U.S.C. Section 1831d(a)) applies to insured state banks and tracks Section 85 of the National Bank Act, the statute establishing interest rate authority for national banks, generally allowing banks to charge interest at the rate allowed in the state of their location or a floating rate that is 1% above a prevailing Federal Reserve discount rate, whichever is higher, and preempts lower state law interest rate limits.  In Marquette, a unanimous decision issued just 15 months prior to DIDMCA’s enactment, the U.S. Supreme Court held that Section 85 allows national banks to “export” the rate authorized in states where they are located on loans made to borrowers in other states.  Subsequent case law has construed DIDMCA Section 521 in pari materia with Section 85, thereby granting insured state banks the same rate exportation authority as national banks.

Section 525 of DIDMCA allows states to enact laws opting out of Section 521’s preemptive effect with respect to loans “made in” the enacting state.  The novel question that the Colorado court was asked to decide is what it means for a loan to be “made in” in Colorado for purposes of the scope of Colorado’s Opt-out Law or, more specifically, where a loan is “made” in the case of loans to Colorado residents by insured state banks located in other states.  The court stated that “[t]hese questions have yet to be decided by any court” and “have been open questions since the statute’s inception.”

The plaintiff industry groups contended that, for purposes of Section 525, loans to Colorado residents by insured state banks located in other states should be deemed “made in” the bank’s home state or the state where key lending functions occur.  Colorado argued that, for purposes of Section 525, a loan is “made in” both the borrower’s state and the state where the lender is located.  (The FDIC filed an amicus brief in support of Colorado taking the same position as to where a loan is made.)

In ruling on the plaintiffs’ preliminary injunction motion, the court first rejected Colorado’s arguments that the plaintiffs lacked standing, their claims were not ripe, and the plaintiffs’ lawsuit could not proceed because there was no private right of action available to them to enforce the rights created by Section 521.  The court gave two principal reasons for its conclusion that the plaintiffs had made a strong showing that they are substantially likely to succeed on the merits of their Section 521 claim.

First, the court concluded that the plaintiffs’ reading of “loans made in” Colorado found strong support in the plain language of Section 521 when viewed in the context of the statutory scheme as a whole.  Colorado argued that a loan is “made” by both the bank and the borrower.  The plaintiffs argued that, while a borrower “obtains” or “receives” a loan, only the bank “makes” a loan.  The court found that the plaintiffs’ view was “more consistent both with the ordinary colloquial understanding of who ‘makes’ a loan, and, more importantly, with how the words ‘make’ and ‘made’ are used consistently throughout the text of the Federal Deposit Insurance Act, including the [DIDMCA] amendments, as well as throughout the rest of Title 12 of the United States Code, which governs ‘Banks and Banking’ and includes the National Bank Act.”  More specifically, the court found that:

Taken as a whole, the consistent use of “make” and “made” throughout the statutory text indicates that the plain and ordinary answer to the question of who “makes” a loan is the bank, not the borrower.  It follows, then, that the answer to the question of where a loan is “made” depends on the location of the bank, and where the bank takes certain actions, but not on the location of the borrower who “obtains” or “receives” the loan. (emphasis included).
The plain language of Section 1831d’s opt-out provision, viewed in the context of the statutory scheme as a whole, indicates that  loans are ‘made’ by the bank, and that where a loan is ‘made’ does not depend on the location of the borrower.

Second, while commenting that the policy arguments and persuasive authorities cited by the parties were “mostly inconclusive or irrelevant and therefore unhelpful,” to the extent they shed light on the issues, the court found that they nevertheless provided support for the conclusion that loans are “made” by the bank and that where a loan is “made” depends on where the bank is located and takes various actions but not on the borrower’s location.  The court found that Colorado’s and the FDIC’s reliance on certain Dormant Commerce Clause cases was misplaced because “they address the separate issue of when one state may constitutionally regulate an activity involving conduct that occurs in another state.”

The court found that the plaintiffs satisfied the other requirements for a preliminary injunction. It found the plaintiffs had made a strong showing that their members would suffer irreparable harm if an injunction was not granted.  The plaintiffs argued that absent an injunction, they would have to stop offering their loan products to certain Colorado customers and once gone, those customers and their goodwill, as well as the goodwill of the banks’ business partners, might be gone forever, resulting in a type of intangible damages that may be incalculable and for which a monetary award could not provide adequate compensation.   

The court also found that the balance of harms weighed in the plaintiffs’ favor because national banks could continue making loans to Colorado residents with interest rates and fees above Colorado limits.  The court concluded that because national banks could continue making such loans, the Opt-out Law would place plaintiffs’ members at a disadvantage with respect to national banks while only providing marginally more protection from higher interest rates to Colorado residents.  In addition, the court found that the public interest favored enjoining enforcement “of likely invalid provisions of state law.”

By its terms, the preliminary injunction appears to apply only to loans made by members of the three plaintiff trade groups.  However, faced with the district court’s well-reasoned opinion, we do not expect Colorado to initiate an action to enforce the Opt-out Law against a non-member insured state bank located in a state other than Colorado or for a plaintiff’s attorney to initiate a class action on behalf of Colorado borrowers who obtain loans from such a non-member insured state bank.  In any event, if an effort is made by other trade groups to have the preliminary injunction extended so that it applies to all insured state banks located in states other than Colorado, we would expect the district court to grant such relief.

We have previously blogged about bills introduced in several states that are similar to the Opt-out Law and purport to opt-out of Section 521 of DIDMCA.  Hopefully, the Colorado opinion will give pause to legislators in those states who will realize that such legislation will only adversely affect state banks that are located in their states.

Colorado has 30 days to appeal the district court’s decision to the Tenth Circuit.

Ballard Spahr, on behalf of the American Bankers Association and the Consumer Bankers Association, submitted an amicus brief in support of the plaintiffs’ motion for preliminary injunction.