The Denver-based federal appeals court ruled on Monday that Colorado may use a decades-old provision of federal law to require out-of-state banks to abide by Colorado’s maximum interest rates when they lend to in-state residents.

A three-judge panel of the U.S. Court of Appeals for the 10th Circuit overturned a trial judge’s injunction blocking Colorado from enforcing its 2023 legislation against members of three finance industry groups. The 2-1 decision, which is the first of its kind, could trigger consequences for how banks operate and how states regulate predatory lending.

“We acknowledge that this decision may cause some immediate uncertainty,” wrote Judge Gregory A. Phillips in the Nov. 10 majority opinion. However, he stressed the only question the panel answered was whether a specific federal law authorized Colorado’s interest rate policy, and not whether constitutional or other statutory provisions blocked the state’s legislative choice.

Judge Veronica S. Rossman, writing in dissent, believed the majority incorrectly interpreted the law and caused a “practical problem.” Now, the relevant interest rate for a loan is either the one in the borrower’s state or the one in the lender’s home state, with the potential for conflict.

“I struggle to see how this patchwork approach — which abides a level of disuniformity Congress never intended — will be administrable in our world of interstate, online banking,” she wrote.

The basic legal question for the 10th Circuit — Where is a loan “made?” — fit within a broader, more complex history of banking regulations stretching back more than four decades.

Amid rampant inflation in 1980, Congress passed a provision known as Section 521, allowing state-chartered banks to lend at interest rates up to their own state’s cap or slightly above the federal rate, whichever was higher. The purpose was to ensure state-chartered banks in states with low interest rate ceilings could still afford to lend money and compete with nationally chartered banks.

However, a second provision, Section 525, granted states the power to opt-out and ensure state-chartered banks charged interest rates in line with their state’s law. The opt-out applies to loans “made in” the state.

In 2023, Colorado lawmakers chose to opt-out through House Bill 1229. The state joined Iowa and Puerto Rico as the only other jurisdictions in the opt-out category. The bill’s sponsors explained the goal was to prevent out-of-state banks from “hopping around” Colorado’s consumer lending laws by charging higher interest rates for financial products than Colorado law allows for its institutions.

The National Association of Industrial Bankers, a trade group based in Utah, sued Colorado in conjunction with other industry associations over HB 1229. The groups sought to avoid letting Colorado apply its own ceilings on interest rates, which are somewhat lower than those elsewhere, to banks chartered by other states that lend to Colorado consumers.

In June 2024, U.S. District Court Judge Daniel D. Domenico issued a preliminary injunction barring Colorado from applying its caps to the plaintiffs when they made loans from outside of Colorado to Colorado residents.

Although Domenico acknowledged Congress could have used clearer language, he rejected the state’s argument that loans “made in” a state referred to either the bank’s state or the borrower’s state. Instead, the language referred to the location of the bank.

“In plain parlance, it is the lender who makes a loan; nobody thinks of themselves as ‘making a loan’ when they borrow money from a family member or put a charge on a credit card,” he wrote.

Colorado’s appeal to the 10th Circuit attracted significant attention from outside organizations.

Democratic attorneys general defended the ability of their states to regulate predatory loans to their residents, no matter where the lender is located. Republican attorneys general countered that laws like Colorado’s would create an incentive for state-chartered banks to obtain a federal charter and evade state caps.

The Federal Deposit Insurance Corporation initially supported the state’s reading of federal law, until the Trump administration withdrew the agency’s brief one month after taking office.

“The banks’ interpretation robs the state of one of its oldest police powers, creating a race to the bottom where banks will move to states with effectively no interest rate caps so they can charge vulnerable Coloradans triple-digit interest rates,” Senior Assistant Attorney General Brian Urankar told the 10th Circuit panel during oral arguments in March.

Ultimately, the majority agreed loans “made in” a state refers to the state where either the borrower or the lender is located. Therefore, Colorado was within its rights to cap interest rates imposed by out-of-state institutions on Colorado consumers.

“Congress could have focused on the lender through language such as ‘loans made by state banks in such State’ or, even better, ‘loans originated by state banks in such State’,” wrote Phillips for himself and Judge Richard E.N. Federico.

He added that no state would ever opt-out of the federal authorization to charge higher interest rates if that state could only regulate interest charged by locally charted banks, with no ability to stop out-of-state banks from charging residents much more.

Rossman wrote in dissent that the federal law at issue was focused on “regulating banks, not protecting borrowers.” She noted that interstate lending by state-chartered banks was minimal at the time Congress enacted the opt-out provision. Therefore, the logical reading was that loans are “made in” the state where the bank is located.

“The majority authorizes the scope of Colorado’s opt out, but federal law does not,” Rossman wrote. “The majority opinion seems to recognize the confusion that awaits.”

The case is National Association of Industrial Bankers et al. v. Weiser et al.