This past June, Colorado lawmakers passed legislation to opt the state out of a federal law provision known as the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), effective July 1. By doing so, it embarked on an experiment that sadly will not end well for consumers.

DIDMCA was enacted to create more competition among banks — a competition that yields more options, lower costs and expanded access to credit in consumer lending. DIDMCA does this by granting state-charted banks certain benefits that federally-charted banks enjoy. In short, national banks have federal preemption, which means they only have to comply with federal requirements and those of their home state, even when offering products and services to residents of other states.

Though DIDMCA allows states to “opt out” of this enhanced interstate banking, Iowa is currently the only state that has truly opted out. The other states seemingly realize without DIDMCA, state-chartered banks are subject to the patchwork of laws in each state in which they offer products, creating barriers to entry across state lines and giving an unfair advantage to federally-chartered banks.

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There are substantial doubts as to the legal validity of Colorado’s decision to opt out of this provision. Nonetheless, if it goes into effect, a meaningful source of competition and options for Colorado consumers will be closed off. Many Colorado residents who have sought and secured loans from state banks outside of Colorado will no longer find these options available. New potential competitors will also likely face insurmountable new barriers to entry, depriving Coloradans of the innovative products residents in other states may access.

Over the last few years, Colorado adopted a number of restrictions that reduced the availability of consumer credit. A January 2023 study prepared for the Colorado Attorney General by the Financial Health Network constitutes the best available evidence of the state of credit in Colorado. The study compared Colorado with several other states and found credit in the form of personal loans was less available in Colorado than in comparison states with less strict laws —especially for those with lower credit scores. In Iowa, the only state to remain opted out of DIDMCA, small-dollar credit is even less available with only 0.16% of Iowans obtaining small-dollar loans.

Why does this matter? These smaller loans are an important source of credit for those who need them, many of whom do not enjoy the financial flexibility or credit options available to consumers with higher credit scores. They are often a source of liquidity credit used to bridge gaps between variable income and unexpected expenses. Without access to these financial products, many consumers risk falling behind on other obligations or facing steeper financial penalties for overdrafts and late payments.

Banks, especially community banks, have employed innovative technology to expand their services to more communities and reach more customers. This makes them more likely to reach out, offer credit to non-prime customers, and serve underserved communities. Blocking or discouraging entry by out-of-state banks — as opting out of DIDMCA does — will not only worsen the already low availability of credit for credit-challenged consumers in Colorado, but may also prevent those banks from profitably competing to provide service to any Colorado borrower.

Coloradans, like all Americans, benefit from innovation and robust competition. States should make it easier, not harder, for their residents to experience these benefits. Colorado lawmakers should address the serious concerns surrounding this opt-out before it takes effect.

Dr. Howard Beales is an emeritus professor of Strategic Management and Public Policy in the School of Business at the George Washington University, and he served in various roles at the Bureau of Consumer Protection at the Federal Trade Commission, including as director.  He and Dr. Andrew Stivers coauthored “The Impact of Colorado Ending Equal Competition between State and National Banks,” in October 2023.