Colorado Opt-Out Threatens State Banks and Fintech Partnerships

The 10th Circuit Court of Appeals, sitting en banc, is weighing whether Colorado can block its residents from using credit products issued by state-chartered banks in other states. The case turns on an obscure opt-out provision in a 1980 federal law. At stake is the survival of the dual banking system and the business models of hundreds of community banks and fintech lenders.

The dispute traces back to the 1978 Marquette ruling. The Supreme Court decided that a credit card agreement follows the interest-rate law of the bank's home state, not the consumer's. That allowed national banks to offer cards nationwide at market rates, bypassing state usury ceilings. Congress extended the same privilege to state banks in 1980 through the Depository Institutions Deregulation and Monetary Control Act (DIDA). DIDA gave state banks parity: they could export their home state's rates and could charge up to the prime rate plus 1%. Congress left an escape hatch. States could opt out of this parity regime.

For decades, no state used the opt-out. Colorado did, two years ago. Oregon followed recently. Colorado argues that opting out lets it prohibit its own residents from borrowing from out-of-state state banks at rates above Colorado's ceiling. That interpretation is wrong, say opponents. The opt-out only denies Colorado state-chartered banks the right to charge above the state's usury limit. It does not give Colorado the power to police loans made in other states.

A three-judge panel of the 10th Circuit sided with Colorado. It held that a loan is "made" in both the lender's and borrower's location at once. That reasoning unravels quickly. If a Delaware bank issues a card to a Texas student who applies from New Mexico, buys gas in Oklahoma, and goes to college in Colorado, the loan would be "made" in four states. A card legal in Texas and Oklahoma would become illegal in Colorado. The Supreme Court rejected such multiplicity in Marquette. A loan is made where the bank sits. That holds whether the consumer walks in, mails an application, or clicks online.

If Colorado's view prevails, state-chartered banks lose the competitive advantage Congress gave them. Roughly 79% of U.S. banks hold a state charter, most of them small community lenders. Those banks serve rural areas and small businesses that national banks often ignore. Many fintech companies partner with state-chartered banks and credit unions to offer personal loans, store-brand cards, and subprime credit. A state-by-state patchwork of rate restrictions would make those partnerships unworkable. The most capable state banks would simply convert to national charters, hollowing out the dual system.

The harm would fall hardest on Colorado's own consumers. Economists have already documented that Coloradans face tighter credit access than residents of other states. Opting out raises state ceilings for nobody while restricting supply. Borrowers with weaker credit profiles would be pushed to unregulated lenders or shut out entirely. Research shows that usury limits reduce credit for high-risk borrowers while actually increasing availability for low-risk ones. The regressive effect is well established.

The 10th Circuit's en banc decision will set a precedent for other states weighing similar opt-outs. Oregon has already acted. Others are watching. A ruling that upholds Colorado's theory would invite a cascade of state-level restrictions, fragmenting the national credit market and accelerating the shift of state banks to federal charters. A ruling that rejects the panel's logic would preserve the parity that has kept the dual banking system viable for forty years. The court should clean up this mess.