On June 18, 2024, in NAIB, et al v. Weiser, et al., the United States District Court for the District of Colorado granted the motion for preliminary injunction filed by plaintiffs, the National Association of Industrial Bankers (NAIB), American Financial Services Association (AFSA), and American Fintech Council (AFC) (collectively, “Trade Associations”), against the Colorado Attorney General and Administrator of the Colorado Uniform Consumer Credit Code (Colorado), which challenges Colorado’s opt out of Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and its interpretation of Colo. Rev. Stat. § 5-13-106, which was set to take effect on July 1, 2024.

Background on DIDMCA and Legal Challenge by Trade Associations

As discussed in our prior alerts, Sections 521–523 of DIDMCA granted federal authority to insured, state-chartered banks and credit unions, authorizing them to contract for the interest rate permitted by the state where the bank is located and export that interest rate into other states. In June 2023, Colorado signed into law legislation exercising its right under Section 525 to opt out of DIDMCA, which it believes will require state-chartered banks and credit unions to adhere to Colorado laws regarding interest rate and fee limitations.

The preliminary injunction filed by the court follows the original complaint filed by the Trade Associations on March 24, 2024, in the United States District Court for the District of Colorado on behalf of their members, which challenged the interpretation of Colo. Rev. Stat. § 5-13-106 and the opt-out. Colorado filed a motion to dismiss on May 13, 2024.

Amicus Curiae Briefs in Support

In a unique turn of events, the Federal Deposit Insurance Corporation (FDIC) filed an amicus curiae brief in support of Colorado’s position and asserted that loan transactions between parties in different states are made in the state where the borrower enters into the transaction. The FDIC’s position contradicted the FDIC’s long-standing position on this topic that loans are made in the state where the contractual choice-of-law and the location where certain non-ministerial lending functions are performed, such as where the credit decision is made, where the decision to grant credit is communicated from, and where the funds are disbursed.

The American Bankers Association and Consumer Bankers Association also filed an amicus curiae brief in support of the Trade Associations and noted that the position the FDIC took was the first time it had ever argued that the loan is made where the borrower is located.

Court’s Interpretation and Ruling

The preliminary injunction issued by the court in NAIB, et al v. Weiser, et al. provides that Colorado is enjoined preliminarily from enforcing the rate and fee limitations “with respect to any loan made by the [Trade Associations’] members, to the extent the loan is not “made in” Colorado and the applicable interest rate in Section 1831d(a) exceeds the rate that would otherwise be permitted.” The court found strong support in the interpretation where a loan is “made” in the plain language of Section 521 when viewing the statutory scheme holistically and when coupled with the Federal Deposit Insurance Act and Title 12 of the United States Code, containing the National Bank Act.

Further, the court provided that “[t]he plain and ordinary answer to the question of who ‘makes’ a loan is the bank, not the borrower. It follows, then, that the answer to the question of where a loan is ‘made’ depends on the location of the bank, and where the bank takes certain actions, but not on the location of the borrower who ‘obtains’ or ‘receives’ the loan.”

Implications and Potential Impact of the Injunction

While the court found that the requirements for a preliminary injunction were satisfied, it is certainly worth noting that if the Trade Associations were not granted the injunction, the products their members offer could no longer be offered to Colorado customers. As a result, “those customers—and their goodwill along with that of the banks’ business partners—may be gone forever.” Even if the Trade Association members were able to recover monetary damages from Colorado, “the loss of customers, loss of goodwill, and erosion of a competitive position in the marketplace are the types of intangible damages that may be incalculable, and for which a monetary award cannot be adequate compensation.”

Additionally, the court determined that the balance of the harms weighed in favor of the Trade Associations because national banks would be able to continue making consumer loans to Colorado residents irrespective of the interest rate and fee limitations under Colorado law and placing the Trade Associations’ members at a disadvantage, all for only providing marginally more protections from higher interest rates. Further, the court determined that the public interest favors enjoining enforcement of “likely invalid provisions of state law.”

Colorado has 30 days to appeal the preliminary injunction, and an appeal is very likely. However, the outcome of such an appeal is uncertain. Assuming the District Court decision is upheld on appeal, the rate and fee limitations would no longer be applicable to out-of-state, state-chartered banks that make consumer loans to Colorado residents. If the decision is overturned, these parties would need to adhere to the prescribed rate caps and fee limitations as prescribed by Colorado law.

The Takeaway

Even though this injunctive relief is limited to the Trade Association’s members, we still recommend that financial services companies operating in the FinTech and non-depository space remain mindful that Colorado has previously used true lender theories to challenge loan charges assessed by out-of-state depository institutions in the context of bank partnership programs, resulting in a prior Assurance of Discontinuance (AOD) that sets forth guidelines for true lender determinations in Colorado.