Appeals Court Clears Way for Colorado to Enforce Interest Rate Caps on Out-of-State Loans

Last week, Colorado secured a major legal victory allowing the state to enforce its 36 percent interest rate cap on consumer loans made to residents, even when those loans originate from out-of-state banks working with fintech lenders.

In 2023, Colorado passed legislation to opt the state out of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), preventing out-of-state, state-chartered banks from making loans to Colorado residents in excess of a 36 percent interest rate cap. Under DIDMCA, state-chartered banks can “export” the interest rates permitted in their home state to borrowers in other states. After Colorado initially passed the DIDMCA opt out legislation, it was challenged by industry trade associations who argued that the opt-out was intended only for loans made by banks within Colorado and not for out-of-state banks lending to Colorado residents.

In last week’s ruling, the U.S. Court of Appeals for the 10th Circuit overturned a lower court’s injunction, ruling in a 2-1 decision that loans can be considered “made” where the borrower is located, not just where the lender operates. The ruling targets specifically bank-fintech partnerships in which nonbank lenders partner with banks in states that do not have meaningful interest rate limits.

While consumer advocacy groups argued that these products intentionally bypassed state protections, industry groups countered that limiting these loans could restrict access to emergency credit and disrupt longstanding federal banking models. They also warned that the decision could undermine the nation’s dual banking system and harm the fintech partnerships that have helped expand financial services in recent years.

Only a handful of other states, including Iowa and Puerto Rico, have exercised DIDMCA’s opt-out provision, meaning that the decision could influence national policy debates over interstate lending, rate exportation, and the regulation of bank-fintech partnerships.

Further legal challenges, including a possible Supreme Court review, are expected.