Stopping rent-a-bank lenders from evading Colorado’s consumer protection laws

In 49 states, online lenders can legally partner with a bank in a different state and use that other state’s interest rates.

For example, Colorado law caps the APR on a $8,000 loan over 3 years at 21.5%. But an online lender is legally allowed to partner with a bank in a different state that has a higher APR on those loans and charge more. This is called rent-a-bank.

When you are dealing with loans of thousands of dollars, even a small APR increase can cost thousands of dollars.

For example, under CO law, the total repayment costs on that $8,000 loan jumps from $10,900 to $13,200 if the lender can use a different state’s laws and apply a 36% APR.

However, since the 80’s, Iowa has opt-ed out of this system.

And thanks to action in 2023, Colorado will too, becoming only the 2nd state (plus Puerto Rico) that has chosen to protect their laws and their state’s borrowers from rent-a-bank lenders.

How states can stop rent-a-bank lenders in their states

The federal Depository Institutions Deregulation and Monetary Control Act of 1980 (“DIDMCA”) allows state-chartered banks to export to other states the state usury limits applicable in the state where the bank is headquartered.

However, it allows state’s to opt-out – something Iowa did in the early 1980’s.

So, for 40 plus years, Iowa has ensured that if you are a state-chartered bank (in Iowa or elsewhere), you need to follow Iowa’s usury rate.

In testimony before the Colorado General Assembly and in a recent presentation on our webinar we hosted, former Director of Consumer Protection in Iowa, Jessica Whitney, spoke to the law’s success. Not only are Iowa borrowers better protected from lenders seeking to charge more than Iowa law allows, enforcement costs are lower, the state bank and credit union market is robust and there is little evidence that consumers are missing access to important credit services or products.

Colorado is now poised to join Iowa. In 2023, the legislature, led by State Representatives Mike Weissman and Javier Mabrey and Senator Julie Gonzales, passed HB23-1229 triggering the opt-out effective July 1, 2024.

Online lenders should respect Colorado’s usury laws.

I’m proud Colorado is the 2nd state to take action – standing up for Colorado’s laws and Colorado consumers.