Advocates Urge Federal Appellate Court to Correct Reading of Federal Statute Permitting States to Reclaim Usury Authority

September 25, 2024 — Press Release

WASHINGTON – In a case centered around a federal law that was interpreted by a court for the first time, the Center for Responsible Lending (CRL) and the National Consumer Law Center (NCLC) submitted an amicus brief urging the U.S. Court of Appeals for the 10th Circuit to correct the lower court’s misinterpretation of a Colorado law, and the federal law on which it is based, in order to prohibit out-of-state banks from helping lenders charge Colorado borrowers interest rates that are higher than state law allows. The brief supports the State of Colorado and reversal of a federal district court decision in the case, NAIB v. Weiser.

The brief states: “This case addresses whether states have the choice, given to them by Congress, to prevent out-of-state banks from circumventing state usury laws designed to protect consumers, charging rates as high as 200% APR. They do. The District Court’s decision eliminates Congress’s careful balance that enables states to reclaim their traditional power to protect borrowers from predatory lending.”

Earlier this summer, a federal district court in Denver limited Colorado to enforcing its usury laws only against state-chartered banks located in Colorado or that operate lending operations in the state. The State appealed, and CRL and NCLC shortly thereafter filed their brief supporting the State. CRL and NCLC’s brief explains why the district court erred in its statutory analysis while also providing a detailed account of the relevant legislative history, which confirms that Colorado can enforce its usury laws against state-chartered banks that lend to Colorado borrowers but do not have a physical presence in the state. It also explains why the district court’s interpretation of the federal law giving states the right to reassert their usury laws contradicts the view of the Federal Deposit Insurance Corporation, the federal agency tasked with supervising state banks, during both Republican and Democratic administrations.

With the rise of online lending in recent years, more nonbank lenders have engaged in “rent-a-bank” schemes, where they form a superficial partnership with banks in an attempt to evade interest rate caps of the borrower’s state. Generally, state-chartered banks are subject to the usury laws of the state they’re headquartered in. When Congress enacted the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980, it enabled  state-chartered banks to “export” these home state rates to other states, but also permitted states to “opt out” of this regulatory regime and protect their residents by applying state usury law to out-of-state banks.

The brief states that the DIDMCA opt out “was included to allow states to go back to the circumstances in existence prior to the DIDMCA’s enactment. Those circumstances included the power to enforce usury restrictions against out-of-state chartered banks, and the District Court’s construction of section 525, which denies that power to opted-out states, is at odds with the text, history, and legislative record.”