The National Association of Industrial Bankers (NAIB), the American Financial Services Association (AFSA) and the American Fintech Council (AFC) filed a lawsuit in federal court this week, challenging a new Colorado statute they claim violates federal law by imposing interest-rate and fee caps on loans made to Colorado residents by state-chartered banks, including banks outside of the state.
The new law, HB23-1229, is scheduled to take effect on July 1. The trio said it was enacted as part of a campaign to curb “predatory” lending, including payday loans and other high-cost, small-dollar, short-term credit.
The plaintiffs assert that 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.
The NAIB, AFSA, and AFC said their members 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, the plaintiffs said their 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 they say 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 NAIB. “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 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 AFC CEO Phil Goldfeder. “This ill-conceived new law will harm 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 chief executive officer at the AFSA. “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 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 a 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.”
“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 the state attorney general, Phil Weiser, and the administrator of the Colorado Uniform Consumer Credit Code, Martha Fulford, both sued in their official capacities.