Leading Financial Services Trade Organizations Challenge Colorado's Interest-Rate Caps on Out-of-State Banks
Three leading trade organizations for the financial services industry filed a lawsuit in federal court today, challenging a new Colorado statute that violates federal law by imposing interest-rate and fee caps on loans made to Colorado residents by state-chartered banks, including banks outside Colorado.
The new law, HB23-1229, is scheduled to take effect on July 1, 2024. It was enacted as part of a campaign to curb "predatory" lending, including so-called payday loans and other high-cost, small-dollar, short-term credit. But as explained in plaintiffs' complaint, the cap on interest rates imposed by the new law applies far more broadly, is inconsistent with the federal Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), undermines the competitive position of community banks, and won't advance the state's goals.
Plaintiffs in the case are three trade associations: The National Association of Industrial Bankers; the American Financial Services Association; and the American Fintech Council. Their members include responsible, ethical state-chartered banks that do not make payday loans but instead offer a wide variety of useful, familiar, everyday credit products to Colorado consumers, including personal installment loans, "buy now, pay later" (BNPL) loans, and store-brand credit cards.
With the caps imposed by HB 23-1229, plaintiffs' members will no longer be able to offer these mainstream products to higher-risk Colorado consumers. At the same time, HB 23-1229 places no limits on federally chartered, national banks, which offer these very same products but are shielded from state interest rate caps.
"HB23-1229 is likely to have the opposite effect of what its supporters intend," said Frank Pignanelli, executive director of the National Association of Industrial Bankers. "Because the law's interest rate caps apply only to state-chartered banks, national banks will be able to continue charging the rates permitted under federal rules. As state-chartered banks are forced to reduce their participation in the Colorado market, the national banks will have less incentive to keep a lid on their rates and otherwise provide credit to underserved populations."
"Consumers deserve safe, affordable, and responsible financial options to determine what best serves their needs," said Phil Goldfeder, CEO of the American Fintech Council. "This ill-conceived new law will harm Colorado families, particularly those in minority and rural communities, and put state-chartered banks at a disadvantage. AFC's diverse members represent a cross-section of responsible fintech companies and innovative banks that embrace transparency and have democratized financial services by creating critical access to financial services for families who need it most."
"This proposal, if enacted, creates a host of unintended consequences that unfairly penalize and harm Colorado consumers who need greater financial flexibility, not less," said Bill Himpler, president and CEO at the American Financial Services Association. "AFSA's members provide responsible, affordable credit products to a wide range of consumers, including millions of consumers with less than perfect credit who deserve access to credit products that give them the financial tools they require in these uncertain economic times."
The three trade organizations are represented by a team of lawyers from Davis Wright Tremaine LLP, with support from Sullivan & Cromwell LLP and Ed Perlmutter of Holland & Knight LLP in Denver. Perlmutter is a former eight-term member of the U.S. House of Representatives, representing Colorado's 7th Congressional District, and two-term member of the Colorado State Senate.
"The language of HB23-1229 is plainly invalid," said David Gossett, a partner at Davis Wright Tremaine and lead counsel for the plaintiffs. "While federal law permits Colorado to regulate its own state-chartered institutions, DIDMCA precludes Colorado from regulating loans that, under federal law, are considered to have been made outside the state. Colorado would treat essentially all loans to any Colorado resident as made in the state, even if all of the lending bank's operations were in Delaware, New York, or Utah. It cannot do that, and thus the statute is inconsistent with federal law and is preempted." Gossett noted that the plaintiffs plan to file a motion seeking a preliminary injunction of the law later this week, once a judge is assigned to hear the case.
"With this statute, Colorado is applying its interest rate limits far more broadly than what Congress authorized under the relevant federal law," said Perlmutter. "In addition to being preempted, HB23-1229 is disadvantageous to our clients, to Colorado credit markets, and to the people of Colorado who rely on mainstream credit products to simplify and improve their lives. We and our clients look forward to having this misguided legislation enjoined."
The named defendants in the lawsuit are Colorado's attorney general, Phil Weiser, and the administrator of the Colorado Uniform Consumer Credit Code, Martha Fulford, both sued in their official capacities.
About American Financial Services Association
Founded in 1916, AFSA is the primary trade association for the consumer credit industry, protecting access to credit and consumer choice. AFSA provides the consumer credit industry and the consumers it services with a voice in Washington, D.C., where the association is headquartered, and access to the media and investment community. It also provides policy advice and issues management at both the federal and state level. Learn more at https://afsaonline.org/.
About American Fintech Council
A standards-based organization, AFC is the premier trade association representing the largest financial technology (Fintech) companies and innovative BaaS banks. Our mission is to promote a transparent, inclusive, and customer-centric financial system by supporting responsible innovation in financial services and encouraging sound public policy. AFC members foster competition in consumer finance and pioneer products to better serve underserved consumer segments and geographies. Learn more at https://fintechcouncil.org/.
About National Association of Industrial Bankers
NAIB is a Utah-based trade association representing industrial loan companies (ILCs). ILCs, or industrial banks, have been an integral part of the U.S. financial system for over a century, providing critical access to credit opportunities for those traditionally underserved by large national financial institutions. NAIB champions innovative financial services for Americans by expanding access to credit, guaranteeing consumer choice, and providing unique banking services. Learn more at https://www.industrialbankers.org/.
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