State Banks and Interstate Lending: The Playing Field Could Become Uneven

by Charles Gullickson, Davenport Evans

When it comes to interstate lending, bankers have long known that their banks have the ability to “export” their home state usury rates to borrowers across the country regardless of the borrowers’ home state usury limitations. When making loans to borrowers across state lines, a banker simply needs to worry about whether the interest rate is permissible under the laws of the bank’s home state. Lesser known perhaps is that different statutes create this ability for national banks and state banks, and they are distinct in one crucial aspect.

For national banks, the ability to export home state usury rates is found in Section 85 of the National Bank Act (codified at 12 U.S.C. § 85), while for state banks the exportation provision flows from the Depository Institutions Deregulation and Monetary Control Act (“DIDMCA”) enacted by Congress in 1980 (the key provision of DIDMCA for state banks is codified at 12 U.S.C. § 1831d). What distinguishes the relevant provisions of DIDMCA is that Section 525 of the Act allows states to opt out of the DIDMCA interest rate exportation provisions while Section 85 of the National Bank Act does not give a state any ability to opt out of the National Bank Act provisions.

Sections 521-523 of DIDMCA grant state-chartered banks the same power as national banks under Section 85 of the National Bank Act. As the preamble to Section 521 states, “to prevent discrimination against State-chartered insured depository institutions,” it was Congress’s intent to level the playing field between state-chartered and national banks with respect to usury laws. Section 525 of DIDMCA, however, allows for a state to opt out of the provisions in Sections 521-523. An opt-out under DIDMCA precludes a chartered bank in an opt-out state from exporting their home interest rate to other states. When a state chooses to opt out, the opt out only applies to loans made in that state.

In 2023 Colorado passed and signed into law Colorado HB 23-1229. This law, to take effect July 1, 2024, will exercise Colorado’s right under Section 525 of DIDMCA to opt out of Sections 521-523. However, Colorado seeks to expand the definition of where a loan is made to also include the state where the borrower is physically located when entering into the transaction. This definition would subject state-chartered banks across the nation to Colorado’s usury laws when making a loan to a Colorado resident. Colorado asserts the law will apply to not only Colorado chartered banks but also to state banks chartered in other states as well.

The National Association of Industrial Bankers, American Financial Services Association, and American Fintech Council (collectively, “Trade Associations”) filed a complaint in the United States District Court for the District of Colorado challenging Colorado’s opt out legislation and its expansive interpretation of where a loan is made. Under previously established federal law, a loan is made only in a state other than the state where the bank is chartered when all the key functions associated with originating the loan occur in that other state. These key functions include the bank’s decision to lend, communication of the loan approval decision, and disbursal of loan proceeds, all of which typically occur where the bank is located. Under this interpretation, only Colorado’s state-charted banks would be subject to Colorado’s usury laws, unless the key functions test was satisfied in Colorado by an out-of-state bank.

In the litigation filed by the Trade Associations challenging the Colorado legislation, the FDIC filed an amicus or “friend of the court” brief in support of the legislation enacted in Colorado. The FDIC, contrary to any previously established regulation or opinion letter, has sided with Colorado’s interpretation of where a loan is made for purposes of Section 525 of DIDMCA. The FDIC has previously taken the position that state-charted banks are able to export the interest rate from the bank’s location for purposes of Section 521. Contrary to this, in its brief the FDIC now asserts, for purposes of Section 525, that a loan is made both in the state where the bank is located and where the borrower is physically located. In its brief the FDIC essentially backpedaled from a legal opinion issued by the FDIC in 1998 (often referred to as General Counsel’s Opinion No. 11) which broadly interpreted DIDMCA to make a state bank’s ability to export its home state usury rates precisely track the ability of national banks.

If the Colorado and FDIC interpretations are adopted, all state-charted banks would be subject to Colorado’s usury laws when lending to Colorado residents. If other states adopt similar legislation, this would require state-charted banks to comply with numerous inconsistent state laws. The Trade Associations, in their pending litigation, argue this would violate the Commerce Clause of the U.S. Constitution. They argue Colorado’s and the FDIC’s interpretation impedes the flow of interstate commerce by creating a significant burden on banks to comply with the varying usury laws across the states. Additionally, state-chartered banks will have the same competitive disadvantage to national banks they faced prior to the enactment of DIDMCA—exactly what the statute sought to prevent.

National banks have the freedom to disregard the Colorado opt-out legislation because states do not have the ability to opt out of the federal statute that creates the exportation doctrine for national banks. On the other hand, state banks do not have the same luxury to ignore the Colorado legislation when making loans to Colorado residents. Because of the Colorado opt-out legislation applies to any loans made to a Colorado resident, regardless of where the bank lender is located, state banks do need to pay heed to Colorado interest rate limitations. The FDIC in its brief filed in Colorado should be cause for concern for state banks everywhere because it endorses the proposition that a state can draft its DIDMCA opt out legislation to apply to any loans to borrowers residing in that state, regardless of where the bank is located.