District Court Sides with Banks in Colorado Interest Rate Cap Dispute

The U.S. District Court for the District of Colorado recently granted a preliminary injunction against Colorado officials sought by trade groups consisting of members that are or partner with FDIC-insured state-chartered banks that lend to consumers.  The district court preliminarily enjoined the Colorado officials from enforcing a statutory interest rate cap against loans made by lenders that are not located in Colorado, based on the court’s determination that where a loan is “made” under the Federal Deposit Insurance Act (FDIA) is only where the lender performs its loan-making functions, not both the lender’s location and the borrower’s location.

The FDIA provides a cap on interest rates that state-chartered banks may charge borrowers and expressly preempts any lower caps that may be imposed by state law.  However, the FDIA also contains a provision allowing states to “opt out” of the FDIA cap (i.e., impose a lower cap) with respect to loans “made in” that state.  Colorado argued that the “made in” language allowed it to enforce its interest rate cap against loans when either the lender or the borrower were located in Colorado.  The trade groups moved for a preliminary injunction, claiming that the state’s interpretation exceeded its authority under the FDIA because loans made to Colorado borrowers by out-of-state lenders were not “made in” Colorado.

In holding that the location where a loan is made is that of the lender, not the borrower, the district court reasoned that loans are “made” only by lenders; loans are not “made” by borrowers.  The district court preliminarily enjoined the Colorado officials from enforcing state law interest rates against lenders not located in Colorado, to the extent the applicable FDIA rate exceeds the state law rate.