Coloradans are about to face a significant barrier to accessing short-term credit.  HB23-1229, enacted in June 2023, and set to take effect on July 1, 2024, sets interest rate caps on consumer loans by removing the state from the interstate lending framework created by the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA, Pub. L. No. 96-221).  The DIDMCA allows depository institutions to lend at rates permitted by the lender’s state of origin, giving borrowers the freedom to borrow money at competitive rates from institutions across the country.  As of May 2024, every state except Iowa allows their state-chartered banks to participate in this national network of lenders.  

HB23-1229, like other state laws capping interest rates, will create two harmful effects.  First, it will disproportionately impact disadvantaged communities and drive these borrowers out of the state.  According to the nonprofit Urban Institute, members of the African-American, Hispanic, and Native American communities have a lower median credit score than other Americans.  Colorado’s counterproductive law would effectively block small business owners in these communities from accessing the credit many may need to fill short term financing gaps as well as consumers who need short term loans.  Data from the Small Business Administration published in 2022 show that Coloradans who identified with these minority communities owned more than 94,000 small businesses across the state.  Lawmakers should not deny minority and low-income entrepreneurs, as well as young people, recent immigrants, and other consumers the opportunity to build their credit, nor reduce opportunities for businesses to grow and consumers to borrow in Colorado.

Second, HB23-1229 throws a wrench into the competitive interstate credit market, threatening to return Colorado to the era of siloed banking policy that closed off each state’s credit market, denying lenders the possibility of reducing risk by diversifying their holdings.  Despite universal recognition among economists that price controls, including caps on the price of money, invariably cause shortages, DIDMCA does not pre-empt states from levying price controls on goods and services sold within their borders.  Instead, it regulates interstate commerce by prohibiting states from attempting to control the price of loans made in other states. 

HB23-1229 attempts an end run around DIDMCA by levying price controls on financial services that Colorado residents purchase out of state.  According to a legal analysis by Troutman Pepper, HB23-1229 “intends to limit the charges that can be imposed by out-of-state depository institutions making loans to Colorado residents.”  Such state financial protectionism raises barriers to access to those in need, makes credit pools less diversified and more fragile, and threatens to return lending markets to the days of the so-called “branch banking” prohibitions that prohibited out-of-state banks from opening branches in a state. 

In the 1930s, state branch banking laws limiting banks’ ability to serve out-of-state customers exacerbated the Great Depression by exposing each state’s banking sector to the volatility of local conditions, especially local agriculture.  A bad harvest in Indiana, for example, could cause a bank run because Hoosier banks were not allowed to diversify their balance sheet by opening new branches to lend to or accept deposits from Ohio farmers. 

By the late 1990s, every state had abolished its branch banking prohibitions thanks to the recognition that they made the financial sector more volatile and susceptible to bubbles.  Since then, consolidation in the banking sector has generally stabilized credit markets and made them more competitive by shielding them from these regional fluctuations.

Since February 2019, Colorado has imposed a 36 percent annual interest rate cap on short-term loans of $1,000 or less offered by non-bank institutions located in the state, but this cap does not bind Colorado residents who choose to borrow from lenders located out-of-state.  Nevertheless, the cap has detrimentally impacted Coloradans’ ability to borrow.  In 2021, the Colorado General Assembly appropriated funds for a study of credit availability and how it compares with other states.  The study, published in 2023, found that subprime borrowers in Missouri, a state with no rate cap, enjoyed a greater access to capital and a lower delinquency rate on small loans than borrowers in Colorado.  HB23-1229’s extension of Colorado’s rate cap to out-of-state lenders would only expand this disparity.  Coloradans deserve the same access to credit as all other Americans. 

On March 25, 2024, the American Financial Services Association, American Fintech Council, and National Association of Industrial Bankers filed a federal lawsuit seeking to enjoin the Colorado law before it takes effect on the grounds that it violates DIDMCA.  While the statute allows states to opt out of the interstate agreement against levying rate caps on short term, high interest loans, the plaintiffs allege that the Colorado law illegally applies its overbroad interest rate caps to other services that DIDMCA did not contemplate, including “personal installment loans, ‘buy now, pay later’ (BNPL) loans, and store-brand credit cards.  With the caps imposed by HB23-1229, plaintiffs’ members will no longer be able to offer these mainstream products to higher-risk Colorado consumers,” according to the Consumer Financial Services Law Monitor published by Troutman Pepper.

Limiting consumer and business freedom to borrow represents a return to discriminatory and anti-growth banking policy.  To help those with vulnerable credit access the capital to improve their lives and businesses, state and federal lawmakers should instead eliminate interest rate caps and Congress should eliminate the cap on debit card vendor interchange fees mandated by the Durbin Amendment to the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010.  While interest rate and vendor fee caps limit the supply of capital, unprecedented levels of public borrowing expand the demand for loanable funds, crowding out private borrowing and making capital even less accessible to everyday Americans, particularly in states like Colorado where borrowers must pay the cost of counterproductive financial services regulation.