On June 18, state-chartered banks and their fintech partners received welcome news in ongoing litigation challenging the scope of Colorado’s opt-out from the interest exportation regime established by the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). The US District Court for the District of Colorado issued a preliminary injunction prohibiting state officials from enforcing state-specific interest limitations against any member of the plaintiff associations—the National Association of Industrial Bankers, American Financial Services Association and American Fintech Council—with respect to any loan not “made” in Colorado, where “made” means that the lender is located and conducts certain key loan-making functions.

Under DIDMCA, state-chartered, FDIC-insured banks have the authority to “export” the interest-related requirements of their home or, in certain cases, branch office (host) states when lending elsewhere (the “Interest Exportation Authority”). This authority preempts state regulation with respect not only to numeric usury caps and aspects of state law material to the calculation of the maximum permitted rate, but also to limitations on various fees considered “interest” under Federal banking law (e.g., origination fees, late fees, NSF fees, etc.).

DIDMCA provides states the ability to “opt-out” of the interest exportation regime, however. Specifically, the Interest Exportation Authority ceases to apply in any state “on the date . . . on which such State adopts a law . . . which states explicitly and by its terms that such State does not want the [Interest Exportation Authority] to apply with respect to loans made in such State[.]” Iowa and Puerto Rico have had longstanding opt-outs, and, Colorado enacted an opt-out last year that is set to become effective July 1, 2024.  Other states initially opted-out of the interest exportation regime but later repealed their opt-outs. 

The scope of DIDMCA opt-outs depends on where a loan is “made.” Proponents of broad opt-outs, including state legislators, regulators and enforcement agencies in Iowa and Colorado, have taken the position that a loan is made, or at least can be deemed to be “made” depending on the underlying facts, in the state in which the borrower is located at the time the loan is originated.

In advance of the effective date of the Colorado DIDMCA opt-out, a coalition of financial industry associations sued the Attorney General of Colorado and the Administrator of the Colorado Uniform Consumer Credit Code, the two officials who would enforce state interest limitations, to prevent their application of the opt-out to out-of-state banks making loans to Colorado residents. In the context of a motion for a preliminary injunction, the District Court’s June 18 ruling addressed both procedural issues regarding standing and ripeness, as well as the substance of the opt-out.

As initial procedural matters, the court determined that the plaintiff associations had standing because they represented members threatened by potential enforcement of preempted interest rate limitations or administrative costs and losses associated with compliance with preempted laws, and that the matter was ripe for consideration by courts notwithstanding that it raised questions about the validity of the opt-out in a pre-enforcement context in which the challenged state officials had not yet brought specific claims against banks or loan programs.

The court then assessed the substance of the DIDMCA opt-out regime itself. Drawing from the text of the DIDMCA provision, as well as by reference to other federal banking law provisions regarding lending activity, the court concluded that “making” a loan was an activity conducted by the lender, such that a loan is made in the state in which the lender is located or conducts core loan-making activity. The court rejected arguments by the defendant Colorado officials and an amicus brief submitted by the FDIC that a loan could be made in both the state in which the lender was located and the state in which the borrower was located. The court differentiated verbs commonly referring to actions taken by lenders with respect to loans, including “making,” from those commonly referring to actions taken by borrowers, such as “receiving” or “obtaining;” and it distinguished precedent cited by the defendants and FDIC suggesting loans, just as any contact, could be made (in the sense of “entered into”) in multiple states as relating to inapposite considerations of constitutional jurisdiction rather than DIDMCA’s particular use of the term “made.”

Having resolved both the procedural and substantive aspects in favor of the plaintiffs, the court then granted plaintiffs’ motion for a preliminary injunction. The preliminary injunction is an initial step suspending enforcement during the pendency of the litigation based on the plaintiffs’ likelihood of success on the merits and the damage enforcement of the DIDMCA opt-out beyond appropriate boundaries would have on plaintiffs’ members. Unlike more fact-intensive litigation, however, it is not clear that much additional process will be necessary at the District Court level for a permanent injunction to be entered (and, thereafter, subject to potential appeal by the Colorado defendants). Moreover, while the injunction is applicable, on its face, solely to members of the plaintiff associations, we have seen recent litigation (specifically, litigation regarding the effectiveness of the CFPB’s “1071” small business data collection rule) in which similarly limited preliminary injunctions were later expanded to cover all potentially affected persons.