Colorado is first state in decades to opt out of federal law that facilitates 225% APR loans
WASHINGTON – Advocates applauded a new Colorado law signed yesterday by Gov. Jared Polis to protect Coloradoans from predatory lending through “rent-a-bank” schemes. The bill exercises Colorado’s right to opt out of a federal law that predatory lenders claim allows them to ignore state interest rate laws and charge rates of 100% to 225% if they launder their loans through an out-of-state bank.
“I applaud Gov. Polis, Reps. Weissman and Mabrey, and Sen. Gonzales for protecting Coloradans from predatory lenders that use out-of-state banks to evade the state’s interest rate limits. Other states should follow Colorado’s lead and stop rogue, out-of-state banks from helping predatory lenders evade laws against high-cost lending and spread pain throughout the country,” said Lauren Saunders, associate director of the National Consumer Law Center.
The federal law, the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA or DIDA), allows state-chartered banks to charge rates permitted in their home state anywhere in the country. In recent years, a number of high-cost nonbank lenders – including American First Finance, EasyPay Finance, Elevate, the auto title lender LoanMart, Opportunity Financial (OppFi), and the installment loan brands of the payday lenders CashNetUSA and Check ‘n Go – have teamed up with banks in states like Utah that have no rate caps, claiming their loans are bank loans exempt from state interest rate limits.
The Colorado bill, HB23-1229 sponsored by Reps. Mike Weissman and Javier Mabrey and Sen. Julie Gonzales, exercises the state’s right to opt out of DIDCMA. Shortly after DIDMCA was passed in 1980, about a dozen states opted out, but over the years all but Iowa and Puerto Rico opted back in.
“Colorado’s action shows that states have another powerful tool to prevent out-of-state predatory lenders from invading their state and abusing their residents,” Saunders added. Although some states have been able to attack predatory rent-a-bank lending by showing that the bank is not the true lender, the much more effective approach is simply to require out-of-state banks to comply with the same laws as home state banks. Colorado, the District of Columbia, and California have recently brought enforcement actions against rent-a-bank schemes. Those actions have had an impact but are time-consuming and do not automatically have the same broad impact as a law applying the state’s interest rate limits to out-of-state banks.
When a state opts out of DIDMCA, it only affects state-chartered banks. It is these banks that are currently fronting for predatory lenders. States do not have the right to limit the rates charged by national banks, but the Office of the Comptroller of the Currency, which regulates national banks, has been more effective in keeping its banks out of rent-a-bank schemes than the Federal Deposit Insurance Corp. (FDIC), which regulates the banks currently involved in these schemes. Advocates have called on the FDIC to stop FinWise Bank, Transportation Alliance Bank, Republic Bank & Trust of Kentucky, Community Capital Bank and First Electronic Bank from fronting for predatory lenders.
For more information:
- High-Cost Rent-a-Bank Loan Watch List
- Predatory Puppy Loans by TAB Bank and EasyPay Finance, February 1, 2022
- Consumer Alert: Deceptive Auto Repair Financing Practices, May 10, 2022
- In Evaluating TAB Bank, FDIC Should Consider Consumer Harm, Possible Legal Violations, from Predatory Lending, June 30, 2022
- TAB Bank, Facilitator of Predatory Puppy Loans, Gets Rating Downgraded by FDIC, February 6, 2023
- FDIC Should Downgrade FinWise Bank Over Predatory ‘Rent-a-Bank’ Lending, March 15, 2023
- FDIC Should Downgrade Three Banks Engaged in Predatory “Rent-a-Bank” Lending, March 30, 2023