Economic Standard
By Michael DeSantis, American Commitment
Last year, Colorado passed a law to opt-out of the Depository Institutions and Monetary Control Act of 1980 (DIDMCA), the federal law that allows state-chartered banks to follow the rules and regulations of their home state even when they operate in other states. A small handful of states, including Iowa and Puerto Rico, have considered similar legislation, reflecting a significant legislative move that could destabilize the competitive balance between national and state-chartered banks. That law creates a virtuous competition between states to have sensible rules, while not overburdening small banks with having to have a massive compliance department everywhere they operate. The opt-out means that in Colorado, inappropriate price controls – specifically, an annualized rate cap of 36 percent even for very short-term loans, effectively banning them – will now apply to lenders from other states. That means Colorado consumers in a crunch who need a short-term loan may not have any legal options and be forced to turn to loan sharks, bounced checks, or other desperation options.
Colorado’s opt-out also effectively sidelines the fintech industry that has flourished under the current regulatory regime. This legislative shift targets state-chartered banks, including community and minority banks, which have benefited from partnerships with fintech companies to extend their reach to underserved consumers. This move will disproportionately harm those already on the financial margins, cutting off access to innovative financial products that have served as a lifeline for many.
The DIDMCA was intended to prevent discrimination against state-chartered banks and to foster competitive equality within the U.S. dual banking system. By opting out, states like Colorado risk enabling national banks and federal savings associations to monopolize the lending market in their jurisdictions, potentially raising interest rates and reducing reward programs for residents.
The landscape of American banking was significantly altered by a 1978 Supreme Court decision, which allowed banks holding a “national charter” to be governed by the interest rate ceilings of the state in which they are based, rather than those of the customer’s residence. This decision facilitated an explosion of competition and accessibility in the credit card market, previously dominated by more restrictive and less accessible forms of credit.
This move by the Colorado legislature disproportionately harms lower-income households who already struggle in accessing capital. This is being marketed as a consumer protection law but its effect is precisely the opposite.
According to a January 2023 study prepared for the Colorado Attorney General, credit in the form of personal loans is less available in Colorado compared to states with less strict regulations, especially for those with lower credit scores. In Iowa, which remains opted out of DIDMCA, small-dollar credit is even scarcer, with only 0.16% of Iowans obtaining such loans.
The implications of this decision extend beyond the fintech industry to the very fabric of financial accessibility in Colorado. Traditional banks have historically shown little interest in serving higher-risk and lower-income consumers, a situation exacerbated by stringent financial regulations. Since Colorado is setting a ceiling on interest and opting out of DIDMCA, there will be less competition within Colorado. The less competition will have no banks fighting to provide financial vehicles for lower-income households.
The prohibition of payday loans and the imposition of a 36% interest rate cap have already constrained brick-and-mortar access to small-dollar credit, with fintech companies stepping in to fill the void left by traditional lenders.
Fintech companies, often in partnership with nimble, state-chartered banks, have emerged as crucial providers of financial services to consumers overlooked by major banks. By offering competitive alternatives to traditional financial products, fintech has increased the availability of credit to those with poor or unestablished credit histories. However, Colorado’s legislative shift threatens to extinguish this beacon of hope, potentially driving state-chartered banks to recharter as national entities and undermining the unique dual-banking system that has defined American finance.
As the state grapples with inflation and escalating living costs, the importance of maintaining access to diverse and competitive financial services cannot be overstated. The opt-out from DIDMCA, combined with existing interest rate ceilings, severs a critical lifeline for many Colorado residents. The potential ripple effects of Colorado’s decision could encourage other states to adopt similar measures, further constraining the financial options available to the country’s most vulnerable populations.
If we have learned anything through each bailout exercise, it’s that less competition and more regulations are never good for the consumer. As Colorado stands at this crossroads, the time is ripe for a reassessment of its stance on DIDMCA, with the hope of preserving the financial inclusivity and innovation that fintech has brought to the fore.