The District of Columbia’s city council is weighing legislation that, if enacted, would “opt” the District out of pro-consumer lending provisions. If this sounds familiar, it’s because just a couple of months ago, Colorado was debating the same issue and ended up passing “opt-out” legislation that will go into effect July 1. If D.C. follows suit, consumers will suffer greatly as access to credit dries up.

The issue at hand is rooted in the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). The act established rules for state and federal banks nationwide. Regarding interest rate caps on loans, the DIDMCA allowed for out-of-state, state-chartered banks to issue loans per the rate caps of the state where they were chartered, regardless of the customer’s residency. This meant that if a bank chartered in Georgia issued a loan with a 35 percent interest to a customer in Colorado with a 36 percent rate cap, that loan would still be permitted.

Under the DIDMCA, usury laws apply only to loans “made in” the state, not loans made outside the state. The crux of the issue comes down to how “made in” is defined, with the understanding that out-of-state chartered banks aren’t making loans in a state where a customer resides. 

If “made in” refers to the origin of the loan, then banks chartered outside the state in question would not be subject to the state’s usury laws where their customers live. If “made in” refers to the destination of the loan, then all loans, no matter their origin, made to residents of the state must abide by its usury laws.

These provisions were laid out in sections 521-523 of the DIDMCA, but section 525 allowed states to “opt out” of these constraints. However, this has rarely been an issue in the past; only Iowa, Puerto Rico and now Colorado have elected to opt-out. With D.C. debating whether to follow suit, a trend may be forming that forces the courts to decide on the correct interpretation of section 521.

Read the full article here.

Isaac Schick is with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on X @ConsumerPal.