Consumer advocates are praising a new Colorado law that they say will limit high-cost consumer lending by out-of-state banks, saying they hope other states pass similar measures.
The change means Colorado will opt out of a decades-old federal law that allows interest rates charged by banks from other states to be exported to Colorado residents. Consumer groups say that law lets high-cost lenders charge exorbitant interest rates to consumers by partnering with a few banks outside Colorado.
Some states, particularly Utah, have relatively loose limits on the interest rates that banks chartered within their borders can charge. Those banks sometimes work with high-cost lenders to offer loans with rates above what Colorado and other stricter states would otherwise allow — an arrangement that consumers advocate deride as the "rent-a-bank" model.
That approach is "saddling working families with high-cost debt," said Ellen Harnick, director of state policy at the Center for Responsible Lending. Other states should follow Colorado's lead and prevent their residents from being charged high rates that are allowed elsewhere, she said.
"These lending arrangements are proliferating, and they're very expensive to shut down one by one," Harnick said, pointing to the substantial legal costs that states incur when they fight those lenders in court.
The prevalence of high-cost lending in Colorado, which has taken an
But high-cost lenders do operate in many other states. Officials in that industry say they provide a service that helps consumers who need cash but are often shut out of traditional bank loans.
The Online Lenders Alliance, a trade group that represents high-cost lenders, cautioned other states against following Colorado's lead, saying that the new law will be bad for both consumers and the banks that partner with high-cost lenders.
"Any state that goes along with this misguided effort will be creating a lose-lose proposition for community banks and consumers — especially those who struggle with access to credit," Andrew Duke, the group's executive director, said in a statement.
Colorado's new law relies on the Depository Institutions Deregulation and Monetary Control Act, a 1980 federal law that lets state-chartered banks export their home state interest rates elsewhere.
States have the ability to opt out of the 43-year-old law, though Iowa is currently the only one that does so. Federally chartered banks have the ability to export their rates under a separate federal law.
Colorado is exercising its opt-out authority under the measure that Democratic Gov. Jared Polis signed into law. The provision will take effect on July 1, 2024.
But already, a legal debate is brewing over whether the state law leaves potential wiggle room for high-cost lenders.
In a
Lauren Saunders, associate director at the National Consumer Law Center, described such debates as lawyers trying to "gin up uncertainty" even though the language on state opt-outs is clear.
Alan Kaplinsky, senior counsel at the law firm Ballard Spahr, said he "would not be surprised" if lawmakers in other Democratic-led states introduce similar bills.
That domino effect, he cautioned, may lead to fewer loan options for consumers. It also could force consumers to turn to less regulated sources of credit, he said.
"I'm not aware of any other state that's done it, but it's very early," Kaplinsky said.
