Have State-Chartered, FDIC-Insured Banks Finally Achieved Interstate Usury Parity with National Banks?

Consumer Finance Monitor

In today’s podcast, which repurposes a recent webinar, we examine the impact, if any, of a landmark opinion rendered by Judge Daniel Domenico of the Federal District Court for the District of Colorado in a case challenging recently enacted Colorado legislation on interstate loans made from outside Colorado to Colorado residents. We also address the effects this decision and the outcome of this litigation may have on interstate rate exportation by state-chartered banks across the country.

We open with a brief history of the interest rate exportation authority of national and state-chartered banks, and theories developed by opponents to attack those exportation powers. Next, we turn to a discussion of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), the federal legislation adopted to create competitive equality between state-chartered banks and national banks by giving state banks the ability to export the interest rates and late fees allowed by the laws of the state where the bank is located, notwithstanding interest rate and late fee limitations imposed by the borrower’s state. We then focus on the “opt-out rights” conferred on states under Section 525 of DIDMCA, and states that have attempted to exercise (or broaden) this right, including Colorado’s recent adoption of an opt-out statute.

We then delve into the details of the current court challenge to the Colorado opt-out statute, including a close examination of the statute itself, the state’s enforcement position, and the complaint filed by the plaintiff trade associations seeking to strike down the statute. We review the briefs filed and oral arguments made, including amicus briefs filed by the FDIC, supporting the state, and by the American Bankers Association and Consumer Bankers Association, supporting the plaintiffs (the latter of which was submitted on behalf of these amici by Ballard Spahr, LLP). We point out that the position taken by the FDIC in its amicus brief is the exact opposite of the position taken by the FDIC in 1991 in the Greenwood Trust Company v. Commonwealth of Massachusetts case in the 1st Circuit Court of Appeals regarding a Massachusetts opt-out statute. In that case, the FDIC agreed with Greenwood, a Delaware state-chartered bank, that the Massachusetts opt-out statute had no effect on the power of a state-chartered, FDIC-insured bank like Greenwood to charge Massachusetts credit card holders the “interest” permitted by Delaware law. The FDIC never acknowledged or explained this flip-flop in its amicus brief filed or during oral argument in the Colorado statute.

We proceed with an in-depth discussion of the thorough and thoughtful opinion issued by Judge Domenico granting the plaintiffs’ motion for a preliminary injunction preventing Colorado from enforcing its opt-out statute against their members not located in Colorado who are making loans to Colorado residents from outside Colorado, pending the outcome of the litigation, holding that the plaintiffs are substantially likely to succeed on the merits. This order is currently on appeal in the Tenth Circuit and is in the process of being briefed.

We then conclude with thoughts about the potential effect of the Colorado litigation on Iowa’s opt-out statute, in place since 1980, a survey of opt-out legislation pending in other states, and how the Colorado litigation might affect the future of opt-out laws in these and other states.

Alan Kaplinsky, former Practice Leader and Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, moderates today’s episode, and is joined by Burt Rublin, Joseph Schuster, and Ron Vaske, Partners in the Group, and Kristen Larson, Of Counsel in the Group.