The American Fintech Council and two other trade associations filed a lawsuit Monday, aiming to block a Colorado law that would cap interest rates and fees on loans made to state residents by state-chartered banks.
The law, set to take effect July 1, is meant to curb high-cost, small-dollar, short-term credit products but would bar state-chartered banks from offering personal installments loans and buy-now-pay-later loans, the plaintiffs argued. However, the law would not apply to federally chartered banks.
The law “is likely to have the opposite effect of what its supporters intend,” said Frank Pignanelli, executive director of the National Association of Industrial Bankers, another of the plaintiffs.
“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,” Pignanelli said in a statement.
The law, plaintiffs argued, won’t help the state attain its goal and would make community banks less competitive.
“Consumers deserve safe, affordable and responsible financial options to determine what best serves their needs,” Phil Goldfeder, the American Fintech Council’s CEO, said in a statement. “This ill-conceived new law will harm Colorado families, particularly those in minority and rural communities, and put state-chartered banks at a disadvantage.”
The American Financial Services Association is the suit’s third plaintiff.
The law presumably could make policing lending violations less laborious for state authorities, which typically have brought legal action against companies on a case-by-case basis.
Colorado in 2017 sued two online lenders — Avant and Marlette Funding — and their partner banks, New Jersey-based Cross River and Utah-based WebBank, claiming the interest rates charged exceeded state limits. The case, decided in 2020, explored whether the fintechs or their partner banks were “true lender” in the transactions in question. As the case wore on, Avant and Marlette excluded Colorado loans from new securitizations, and WebBank stopped originating loans in the state.
The catch in the incoming law is that it would impose caps on loans offered not just through Colorado banks but through banks chartered in other states, too.
That, plaintiffs argue, makes it run counter to the federal Depository Institutions Deregulation and Monetary Control Act of 1980.
That law “precludes Colorado from regulating loans that, under federal law, are considered to have been made outside the state,” David Gossett, a partner at Davis Wright Tremaine and lead counsel for the plaintiffs, said in a statement.
“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,” Gossett said. “It cannot do that.”
The plaintiffs plan, once a judge is assigned to the case, to file a motion for preliminary injunction that would keep the law from taking effect, Gossett said.
Lauren Saunders, associate director at the National Consumer Law Center, said the plaintiffs are misinterpreting the federal DIDMCA.
"They're confusing two different parts of the law that have different standards," Saunders told American Banker. "As long as we are seeing state-chartered banks enabling predatory lending in other states, we are going to see states exercising their rights to prevent that predatory lending."
Saunders submitted testimony Monday supporting a Rhode Island bill with a similar aim to the one in Colorado. Minnesota and Washington, D.C., have also sought to enact similar legislation.
"If this was just a one-off by Colorado, I don't know if people would have rallied around bringing a lawsuit,” Gossett told American Banker. “But when it's the tip of the iceberg, it does matter.”
The Colorado attorney general's office is named as a defendant in the suit. A spokesperson for the office declined to comment on what it calls active litigation.
