DIDMCA Opt-Out Update—Tenth Circuit Reverses Colorado Preliminary Injunction

Litigation involving Colorado’s opt-out from the interest exportation provisions of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) has taken an adverse turn for the financial services industry. On November 10, the United States Court of Appeals for the Tenth Circuit issued a ruling reversing a preliminary injunction imposed by the United States District Court for the District of Colorado in June 2024 that prevented enforcement of Colorado’s usury restrictions against parties to the litigation, including any members of various industry association parties—the National Association of Industrial Bankers, American Financial Services Association and American Fintech Council—with respect to loans in which the lender was not located, for interest exportation purposes, in Colorado. Subject to further proceedings, the Tenth Circuit’s ruling re-opens the door for loans originated by state-chartered banks and similar financial institutions to be subject to Colorado usury restrictions when either: (i) the borrower is located in the state; or (ii) subject to certain exceptions, the lender is located in the state, regardless of the location of the borrower. The ruling will become effective, if at all, only after issuance of the Tenth Circuit mandate, which may be stayed pending further appellate proceedings as discussed below.

As addressed in our prior discussion of the Colorado DIDMCA opt-out and related litigation, DIDMCA provides the basis, under federal banking law, for state-chartered, FDIC-insured banks and certain similar financial institutions to “export” the Interest-related requirements of their home or, in certain cases, branch office (host) states when lending elsewhere. Both national banks and state-chartered banks have such authority, but DIDMCA conditions state-chartered banks’ authority on the ability of individual states to opt out of the interest exportation regime under 12 U.S.C. § 1831d. Iowa and Puerto Rico have had longstanding opt-outs; certain other states initially opted out but later repealed such opt-outs; and Colorado enacted an opt-out that would have become effective July 1, 2024 but for litigation by industry participants that resulted in the June 2024 preliminary injunction.

On its face, the Colorado opt-out would apply state-specific interest restrictions to any consumer credit transaction made in the state. Based on longstanding interpretations of the scope of the term “interest” for exportation purposes, this would include restrictions not only on periodic rates, but also various fees (such as origination fees, late fees, and NSF fees) that compensate the lender for the extension of credit or the risk of default. For closed-end consumer loans and non-credit card open-end loans, annual percentage rates typically would be capped by the Colorado Consumer Credit Code at the greater of 21% or certain higher values permissible for smaller loans based on application of a tiered rate structure to outstanding balances or, for loans not exceeding $1,000, application of an alternate fee structure involving the combined effects of an acquisition charge imposed at origination and dollar-denominated monthly charges, rather than a traditional periodic interest rate.

The Colorado opt-out does not apply, on its face, to business-purpose loans or loans to business entities. It also does not apply to loans made by national banks, as their interest exportation authority derives from the National Bank Act, which does not have a state opt-out structure similar to that under DIDMCA. While the Colorado opt-out does apply, on its face, to credit card products, the Colorado legislature largely deregulated rates on general purpose consumer credit cards under state law simultaneous to its adoption of its DIDMCA opt-out, such that application of state-specific rates to such products should not, in most cases, be materially limiting.

It remains to be seen how the industry association plaintiffs will respond to the Tenth Circuit’s ruling. It is possible that further procedural steps, such as petitioning for review of the panel decision by the Tenth Circuit sitting en banc or petition for certiorari could result in further stays of the effectiveness of the Colorado DIDMCA opt-out while such processes are pending. If the plaintiffs timely petition for rehearing en banc, typical practice would be for the mandate effecting the Tenth Circuit’s ruling to be stayed pending the outcome of such petition. On the other hand, if the plaintiffs petition for certiorari, typical Tenth Circuit practice would be for the mandate to be stayed only if the court determined that certiorari had a significant chance of being granted. Alternatively, it is possible that, having been remanded to the District Court for further proceedings, the matter could proceed to a decision on the merits in the District Court before making its way back through the appellate process. Under any of these paths, there will be a period of continued uncertainty, both as to the final outcome of the DIDMCA opt-out litigation and as to edge issues, such as the treatment of loans originated between the original July 1, 2024 opt-out effective date and the date on which any preliminary injunction or stay formally is lifted. We will continue to provide updates on this matter as it progresses.