Colorado can once again enforce its maximum interest rate for payday loans and other forms of consumer debt, even if the bank issuing the loan is located in a different state.
The 10th Circuit Court of Appeals ruled this week that Colorado’s 36-percent APR ceiling applies to all loans made to its residents. It’s the latest — and almost certainly not the last — turn in a years-long fight over payday lending rules in the state.
At issue is the interpretation of a 1980 federal law called the Depository Institutions Deregulation and Monetary Control Act, or DIDMCA. The law enables a bank to charge interest rates allowed in the state where it’s headquartered, even on loans made to people in other states. But it also gives states the ability to opt out of this provision.
In 2023, the Colorado legislature voted to do just that, opting the state out of this component of DIDMCA. Backers were concerned that payday lenders were teaming up with out-of-state banks to again offer short-term, high-interest loans to Coloradans in need of quick cash.
Yet, before that opt-out could take effect, three national financial trade groups sued to block it. The trade groups argued that the opt-out provision only applies to Colorado-based lenders doing business in other states.
The central legal question is whether, when the federal law refers to where a loan was “made” — does that mean the state where the lender is based, or the borrower?
Last year, a federal district court sided with the trade groups and ordered Colorado to halt its enforcement of interest limits on out-of-state loans. But, in a split decision issued Monday, a three-judge panel of the 10th Circuit reversed that ruling and allowed enforcement to begin.
“The Tenth Circuit decision … honors Congress’s intent, to give every state the power to protect its residents from predatory out-of-state loans,” said Center for Responsible Lending attorney Andrew Kushner in a statement. Kushner said the appeals court’s ruling would allow other states to follow Colorado’s lead “to catch lenders trying to evade their usury laws.”
The Center for Responsible Lending statement said this is the first such appellate decision to define a state’s authority over out-of-state lenders.
However, the three trade groups said Tuesday they were “exploring every legal option” for appeal in the case. The National Association of Industrial Bankers — the lead plaintiff in the case — said in a statement to CPR News that the decision could discourage interstate lending.
“The Tenth Circuit’s ruling opens the door to a confusing patchwork of state laws that will make credit costlier and less available across the country,” said NAIB Executive Director Frank Pignanelli in the statement. The Utah-based NAIB argued Congress’s intent in passing the DIDMCA was to create a “uniform national standard” for lending across state lines.
“The decision increases legal uncertainty for banks and fintech platforms that lend nationally,” the statement said.
Much of Colorado’s concern over short-term out-of-state loans is being driven by the rise of the fintech lending industry — tech companies that take a nontraditional approach to making loans.
“This decision puts Colorado consumers — especially low and moderate-income families — at risk of being cut off from safe, regulated financial services at a time when they need them most,” said American Fintech Council CEO Phil Goldfeder.
“We will both continue to litigate this case and work with Congress to reaffirm its original intent under DIDMCA to prevent states from creating barriers that weaken consumer protections and restrict financial access,” he continued.
Colorado has been attempting to rein in what it considers predatory lending practices for years. For more than a decade, both the state legislature and voters have passed laws capping interest rates for companies offering services like payday loans. Opponents to those caps have argued they could drive payday lenders out of business entirely, depriving working-class families of much-needed emergency lines of credit.
