Fintechs Fear Contagion of Colorado’s Interest Rate Import Ban

Fintech companies are alarmed at the possible contagion of Colorado’s pending move to opt out of a federal law that allows them to evade the state’s loan interest rate caps by partnering with out-of-state banks.

Fintech lenders often get around a state’s interest rate cap by partnering with banks chartered in another state to “import” rates that exceed the cap. Fintechs say the Colorado legislation will make it difficult to partner with other-state-chartered banks to issue loans in Colorado. Online lenders in Colorado have already faced a series of enforcement actions by the state’s attorney general, Phil Weiser (D).

They also fear consumer advocates’ push to have other states adopt measures similar to Colorado’s efforts.

“I believe this may be the tip of the iceberg,” said Alan Kaplinsky, senior counsel at Ballard Spahr LLP who has represented banks, fintechs, and other consumer finance companies.

Gov. Jared Polis (D) has supported interest rate caps in the state. Consumer advocates say they expect he will likely allow HB 23-1229 to become law later this month by either signing it or electing not to veto it. Polis’s office didn’t respond to a request for comment.

Colorado Rate Caps

Colorado’s bill is designed to close gaps in its consumer lending laws following a 2018 public referendum that capped interest rates on payday loans in the state at 36%. Colorado also caps interest rates on credit cards and other credit products issued by state-chartered banks at 21%.

The bill puts limits on so-called alternative charge loans that impose higher rates than payday loans.

It also opts out of a provision in the Depository Institutions Deregulation and Monetary Control Act (DIDMCA), a 1980 law that let federally insured state-chartered banks issue loans in other states using interest rates permitted in their home state—even if the rate is higher than what’s allowable in the borrower’s state. That law was intended to give state banks the same interest-rate portability powers that nationally chartered banks enjoy.

Backers of the Colorado legislation say it’s goal is to stop fintechs from charging rates above those allowed in Colorado by partnering with banks in states without interest-rate caps, such as Utah.

“You just have to abide by the same provisions that any other entity does, basically a Colorado state-chartered bank or a nationally chartered bank,” Rep. Mike Weissman (D), one of the bill’s sponsors in the Colorado House of Representatives, said at a March 27 hearing.

‘Nuclear Option’

Several states, including Colorado, initially opted out of DIDMCA provisions only to repeal it in subsequent years. Currently only Iowa and Puerto Rico still restrict interest rates that banks chartered in other states can charge to their residents.

When Congress passed the 1980 law, few state-chartered banks were offering loans in other states. That changed with the advent of the fintech-bank partnership model, where online lenders do the work of issuing loans while banks funds the loans and usually sell them off later.

Fintechs say that what Colorado is doing would force consumers in the state to use other products with potentially higher interest rates, such as credit cards issued through federally chartered banks.

The “opt-out is a nuclear option when there are a variety of less restrictive ways to achieve the goals of proponents,” Cheye-Ann Corona, a government relations and public policy manager for buy now, pay later company Affirm Inc., told a Colorado Senate panel at an April 25 hearing.

Whack-a-Mole

Fintechs doing business in Colorado say they have largely complied with terms of settlements that the state’s attorney general reached in 2020 with online lenders Avant LLC and Marlette Funding LLC and their bank partners WebBank and Cross River Bank, respectively, for allegedly violating the state’s interest-rate caps.

Online lenders have used the Avant and Marlette settlements as a model, choosing to get a state license and be supervised by Colorado financial regulators. Those fintechs are considered the “true lender” in a transaction, not their out-of-state bank partners.

But the settlements addressed misconduct only after it occurred, said Ellen Harnick, the director of state policy at the Center for Responsible Lending. The Colorado bill that opts out of DIDMCA provisions prevents violations of Colorado interest-rate laws from happening in the first place, she said.

The initiative also would keep the attorney general from having to play whack-a-mole with different lenders, Harnick said.

State lawmakers are “going to say that our state-licensed lenders should comply with the law, and out-of-state lenders should comply with the law,” she said.

The opt-out will likely face legal challenges.

There are questions about whether the 1989 Financial Institutions Reform Recovery and Enforcement Act repealed the opt-out choice for states, according to Catherine Brennan, a partner at Hudson Cook LLP who represents fintech companies.

Consumer groups “simply do not want banks to engage in nationwide uniform lending, and so the goal is to make it so the law that governs a consumer agreement is the law where the consumer is located,” she said.

The Federal Deposit Insurance Corp., which regulates federally insured state-chartered banks, has so far taken the position that the opt-out provision remains valid.

Other thorny legal issues, including where a loan technically originates, could also be brought to court.

Harnick and other consumer advocates want to see states beyond Colorado implement similar opt-out laws.

But once other states start adopting their own laws blocking the importation of out-of-state interest rates, fintech companies will no longer have the ability to operate “a seamless, nationwide vanilla program that’s the same in all the states,” Brennan said.