Lenders sue state to stop rate caps
Three banking industry groups sued the state of Colorado on Monday in an attempt to stop a new law that imposes interestrate caps on small loans from outof-state lenders.
Under federal law, a state’s interest rate limits apply only to lending institutions located in that state, allowing national banks and lenders from outside Colorado to avoid this state’s 36% interest rate cap on payday loans or its 21% rate cap on store credit cards.
But that same federal law allows states to opt out of the national model and enforce its own interest rate caps on every company doing business in the state. The Colorado General Assembly and Gov. Jared Polis did that last year, and the opt-out will take effect July 1.
Unless U.S. Magistrate Judge Kathryn Starnella declares the opt-out unconstitutional.
The National Association of Industrial Bankers, American Financial Services Association and American Fintech Council are asking her to do so. The industry groups say they are innocent bystanders in Colorado’s “all-fronts war against predatory, payday-style lending.”
“Plaintiffs’ members are not payday lenders,” they wrote in a lawsuit filed Monday in Denver’s federal court. “To the contrary, they offer a wide variety of useful, familiar, every-day credit products — like personal installment loans, store-brand credit cards and installment loans offered by retailers at point of sale to fund single larger-cost consumer purchases.”
These companies “will no longer find it economically practicable to lend to many Colorado residents” after July 1, the lawsuit claims. That will leave only national banks — who still aren’t bound by Colorado’s rate caps — creating a reduction in competition that will “inevitably lead to higher rates” and “perversely” hurt poorer Coloradans, the lawsuit predicts.
The Colorado Attorney General’s Office declined to comment on those claims Monday.
The three plaintiffs want House Bill 23-1229 declared unconstitutional because, they say, it seeks to impose caps on loans made outside Colorado, interfering in interstate commerce. Loans are made in the state where the lender is, not where the borrower resides, the industry groups argue, so most of their members should be exempt from Colorado’s caps.
The plaintiffs are represented by nine attorneys across five states, including Ed Perlmutter with Holland & Knight in Denver. The Democrat served eight terms in Congress, where he chaired a subcommittee on consumer financial protection, before retiring in 2022.
“HB 23-1229 is disadvantageous to our clients, to Colorado credit markets and to the people of Colorado who rely on mainstream credit products to simplify and improve their lives,” Perlmutter said in a news release Monday, calling the new law “misguided.”