National Association of Industrial v. Weiser

Issue: Whether Colorado’s “rate opt-out law” violates the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA).

Case Summary: The American Bankers Association filed a coalition amicus brief urging the Tenth Circuit to affirm the District Court of Colorado’s preliminary injunction preventing Colorado from enforcing its “rate opt-out law.”

In 2023, Colorado passed House Bill 23-1229 to opt out of the federal interest exportation right granted to federally insured, state-chartered banks under DIDMCA. Under Section 521 of DIDMCA, a state-chartered bank may lend nationwide at either its home state’s interest-rate caps or a federal interest-rate cap, depending on which is higher. The federal interest rate cap is one percent above the specific Federal discount rate. Section 525 of DIDMCA allows states to enact laws opting out of Section 521’s preemptive effect on loans “made in” the enacting state. The opt-out law seeks to limit federal interest rate preemption only for consumer credit transactions made in Colorado. The law will take effect on July 1, 2024.

The National Association of Industrial Bankers, American Financial Services Association and American Fintech Council (fintech trades) sued Colorado and moved for a preliminary injunction to enjoin Colorado from enforcing its rate opt-out law. The fintech trades argued: Colorado’s attempt to opt out of DIDMCA exceeds its authority and violates the U.S. Constitution; the National Bank Act preempts the opt-out law; the opt-out law violates the U.S. Constitution’s Supremacy Clause; the opt-out law violates Sections 521 and 525 of DIDMCA; and the opt-out law violates the U.S. Constitution’s Commerce Clause. Colorado contended a loan is “made in” both the state where the borrower is located and the state where the lender is located.

On June 18, 2024, the district court granted a preliminary injunction enjoining Colorado from enforcing its rate opt-out law. The court determined where a loan is made under Section 525 of DIDMCA depends on where the lender is located and where the lender performs loan-making functions. The court reasoned the borrower’s location (in Colorado) does not determine where a loan is made. Colorado appealed the district court’s decision.

On appeal, the Federal Deposit Insurance Corporation (FDIC) filed its amicus brief supporting Colorado, arguing the district court’s interpretation equating the state where a loan is made with the state where the lending bank is located conflicts with the text, structure, purpose, and history of DIDMCA. Additionally, The FDIC contended that the district court erred in its premise that only banks can make loans and in its conclusion that where a loan is made, depends on where a lender is located.

ABA filed its brief urging the Tenth Circuit to affirm the preliminary injunction.  To begin, ABA argued the DIDMCA’s legislative history supports the district court’s conclusion that where a loan is made under Section 525 of DIDMCA depends on where the lender is located and where the lender performs loan-making functions. The legislative history of the usury preemption provisions in Sections 521-523 of DIDMCA focused on state depository institutions located in states with modest usury ceilings that made it economically infeasible to lend money to residents within those same states because of prevailing high interest rates. Further, ABA pointed out that Congress was mindful of federalism concerns, as states could opt out of the preemption provisions in Section 521-523 “with respect to loans made in such State.” Colorado did not cite anything in the legislative history demonstrating that this opt-out right was intended to apply to interstate loans to borrowers in the opt-out state made in other states by out-of-state banks. ABA also highlighted that Congress enacted DIDMCA before interstate lending occurred. During this time, Congress was focused solely on intrastate lending and creating parity between competing and state-chartered depository institutions and national banks. Therefore, there is nothing in the legislative history supporting the notion that Congress had interstate lending in mind when it enacted the “opt-out” right in Section 525 of DIDMCA.

ABA also argued Colorado’s argument that a loan is made in the state where the borrower is located would create an unworkable morass. Colorado and FDIC argued that a loan is made not only in the state where the bank is located and performs its loan-making functions, but also in the state where the borrower is located when the loan is made. Adopting Colorado’s argument would require state banks—but not national banks—to apply a multitude of varying interest rates to borrowers who travel to opt-out states and use their credit cards or obtain online loans in those states. State banks would also have to develop systems to determine where the borrower was located when an advance was requested and approved or where the borrower was located when an online loan was requested, approved, and funded. The brief underscored that if a loan is deemed to be “made” in each state where the borrower is located at the time of a transaction, the complex system of modern interstate banking would be thrown into confusion.

Additionally, ABA argued a reversal would result in less competition for national banks making loans to Colorado borrowers. Colorado argued that the rate opt-out law was enacted to protect its residents from predatory interest rates. But this argument ignores the fact that national banks will remain unaffected by the rate-opt out law and can still charge Colorado residents whatever interest rates are permitted by the laws of the national banks’ home states, which in many states are uncapped. Colorado law provides that lenders may not charge interest greater than 21% on store-brand credit cards. ABA thus explained that it is economically infeasible for lenders to make loans at the foregoing Colorado interest rate limits to marginalized consumers deemed to pose too much of a credit risk. If the district court’s opinion is reversed, national banks would face less competition in Colorado from state banks and thus would have far greater latitude to charge even higher interest rates and fees to credit-challenged Colorado consumers.

Finally, ABA argued no deference is owed to FDIC’s amicus brief. ABA noted that the Supreme Court, Tenth Circuit, and other appellate courts have repeatedly held that no deference is owed to “agency litigating positions that are wholly unsupported by regulations, rulings, or administrative practice.” FDIC did not point to any prior FDIC regulation, rule, or opinion letter where it has adopted the position for Section 525. ABA asserted it has been 44 years since the enactment of DIDMCA, but the FDIC has yet to propose a regulation setting forth its view on where a loan is made for purposes of Section 525. Providing deference to the FDIC’s newly announced views on the issue in its amicus brief would impermissibly allow the agency to create a de facto new regulation.