Competitive Inequality: State-Chartered Banks Targeted by Attempts to Limit Interstate Lending Rights

March 7, 2024 Advisory

On July 1, 2024, Colorado will become the latest jurisdiction to implement a law aimed at stopping state-chartered banks from setting interest rates on certain loans in the same way – and at the same levels – as their national bank competitors.

The Colorado law and other similar pending state legislation are aimed at stopping the abuses of “rent-a-charter” arrangements (explained below) that allow nonbanks to skirt state usury limits by contracting with banks. However, these initiatives will have a far broader impact on the U.S. dual banking system by burdening state-chartered banks engaged only in traditional interstate bank lending practices (i.e., not rent-a-charter arrangements) with compliance challenges inapplicable to their national bank peers.

Colorado and Other Jurisdictions. With its new law, Colorado will join Iowa and Puerto Rico as the only U.S. jurisdictions attempting to “opt out” of a 1980 federal law (the Depository Institution Deregulation and Monetary Control Act or DIDMCA)[i] that permits state-chartered banks to “export” interest rates like their national bank counterparts.[ii] Minnesota, Rhode Island and the District of Columbia are currently considering similar legislation to attempt to opt out of DIDMCA’s rate exportation provisions. Also, Iowa has recently become more aggressive in enforcing its 1980 opt-out law.[iii]

DIDMCA “Rate Exportation.” DIDMCA “rate exportation” allows each state-chartered bank to use the interest rates authorized by the states “where the bank is located” (i.e., the states in which those banks have their main offices or branches)[iv] for loans to borrowers situated in other states.[v] The effect of DIDMCA and the ability of state-chartered banks to export interest rates is addressed in detail by FDIC General Counsel’s Opinion Nos. 10 and 11, published in 1998 and 12 CFR Part 331.[vi]

State Ability to Opt Out of DIDMCA. As originally enacted, DIDMCA allowed the state where the loan is “made” to pass a law to opt out of DIDMCA to prohibit rate exportation for loans made in those opt-out states. Both the FDIC and the Office of the Comptroller of the Currency (OCC) have agreed that a loan is made for purposes of rate exportation in the state in which the bank, at its main office or a branch, conducts certain “non-ministerial” actions to effect the loan: approval of the loan, extension of credit and disbursal of loan funds.[vii] The FDIC and OCC also agree that the state of residence of the borrower does not determine where the loan is made for rate exportation purposes.[viii]

Despite these federal interpretations, some states – including Colorado – have state statutory provisions that declare a loan is made in that state if the borrower resides there and the lender has solicited or advertised for the loan in the state.[ix]

States attempting to opt out of DIDMCA rate exportation may face a legal argument that the federal interpretations should prevail regarding where a loan is made. Under this argument, opting out of DIDMCA rate exportation would have the limited impact of only prohibiting banks located in – and making loans from – the opt-out state from exporting rates for loans to borrowers in other states.

No Impact on National Banks. As explained above, state opt-out laws have no impact on national banks, which can continue to export rates for loans to borrowers situated in any jurisdiction under other federal law.[x]

Issues Regarding Repeal of DIDMCA Opt-Out Provision. Colorado and other jurisdictions that attempt to pass a new DIDMCA opt-out law will have to contend with another legal hurdle: The DIDMCA provision authorizing states to opt out of rate exportation was codified in a “Note” to statutory section 12 USC 1780g, and that section, along with the rest of the National Housing Act (12 USC 1724 et. seq.), was repealed by the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (FIRREA). So, any recently enacted law purporting to opt out of DIDMCA rate exportation will undoubtedly be subject to the claim that the ability to opt out ended over three decades ago when FIRREA was enacted.

Definition of “Interest.” DIDMCA only authorizes exportation of “interest.” It does not authorize exportation of types of fees that are not included within the applicable federal definition of interest. Under FDIC rules,[xi] for example, interest includes not only “numerical periodic rates,” but also late fees, overlimit fees and annual fees. However, the FDIC rules do not include other types of fees within the definition of interest, such as appraisal fees, finders’ fees, credit insurance fees, credit report fees, document preparation fees and notary fees.[xii]

Alternate Approach: Rent-a-Charter and “True Lender” Doctrine Issues. One of the primary issues targeted by states attempting to opt out of DIDMCA rate exportation is to stop interstate lending abuses associated with “rent-a-charter” schemes.

The rent-a-charter concept normally involves a nonbank that facilitates loans technically made by an out-of-state bank in an arrangement that relies upon the out-of-state bank’s DIDMCA rate exportation authority. Under this DIDMCA authority, the out-of-state bank can charge higher interest rates than the nonbank could charge in the jurisdiction of the borrowers. However, after facilitating the loans, the nonbank typically acquires those loans from the out-of-state bank or otherwise holds the preponderant economic interest in those loans.

State government authorities have taken actions to curb certain rent-a-charter arrangements by characterizing nonbanks in those arrangements as the “true lenders” of the loans.[xiii] These government actions contend that, as the true lender, the nonbank should not benefit from the bank’s DIDMCA rate exportation preemption rights.

However, states that are attempting to opt of the DIDMCA rate exportation provisions in total are going a step further than the true lender enforcement approach, by attempting to prohibit all state-chartered bank DIDMCA rate exportation, rather than prohibiting rate exportation being used to benefit entities that have no statutory rights to it. Consequently, state-chartered banks engaged only in traditional interstate bank lending would be forced by these new opt-out laws to implement complex multistate usury compliance programs that will be inapplicable to their national bank peers.

Advocates of the new opt-out legislation may argue that it is needed to curb high interest rates, whether or not those rates are the product of rent-a-charter arrangements. However, the legislation will not stop federally chartered banks – including the giant Wall Street banks – from offering those same higher rates, but it will put state banks, most of which are smaller community banks, at a competitive disadvantage.

Summary. DIDMCA specifically states that its intent is to “prevent discrimination against State-chartered insured depository institutions” to foster the competitive equality of the U.S. dual banking system, in which national and state-chartered banks compete with each other on equal terms. The recent movement by states to opt out of DIDMCA rate exportation pushes our banking system toward a crucial imbalance between banks with different charters.

Because online interstate lending has become so prevalent in the modern banking environment, this new wave of state attempts to opt out of DIDMCA rate exportation could have a widespread impact on state-chartered banks – including many smaller community banks serving borrowers in more than one state.


[i] 12 USC 1831d.

[ii] See 12 CFR 331.1 and 331.4(a).

[v] Note: DIDMCA also provides general preemption over state laws limiting interest rates on first lien mortgage loans made by banks, subject to a different state opt-out provision.

[vi] See footnote iv.

[viii] Id.

[ix] Col. Rev. Stat. 5-1-201(1).

[x] 12 USC 85; OCC Interpretive Letter No. 822 (Feb. 17, 1998); Marquette National Bank v. First Omaha Serv. Corp., 439 U.S. 299 (1978).

[xii] Note that the federal “most favored lender” doctrine, as explained in 12 CFR 331.4(b), and contractual provisions for choice of governing law can also impact permissible interest rates.

[xiii] See for summary and citations provided in Letter to FDIC from Attorneys General of CA, CO, CT, DC, HI, IL, IA, ME, MA, MI, MN, NV, NJ, NM, NY, NC, OR, PA, VA, WA (October 18, 2021).

Contact Us
  • Worldwide
  • Boston, MA
  • Chicago, IL
  • Denver, CO
  • Dublin, Ireland
  • Edwardsville, IL
  • Jefferson City, MO
  • Kansas City, MO
  • Las Vegas, NV
  • London, England
  • Miami, FL
  • New York, NY
  • Orange County, CA
  • Philadelphia, PA
  • Princeton, NJ
  • Salt Lake City, UT
  • St. Louis, MO
  • Washington, D.C.
  • Wilmington, DE
abstract image of world map
Boston, MA
800 Boylston St.
30th Floor
Boston, MA 02199
Google Maps
Boston, Massachusetts
Chicago, IL
100 North Riverside Plaza
Suite 1500
Chicago, IL 60606-1520
Google Maps
Chicago, Illinois
Denver, CO
4643 S. Ulster St.
Suite 800
Denver, CO 80237
Google Maps
Denver, Colorado
Dublin, Ireland
Fitzwilliam Hall, Fitzwilliam Place
Dublin 2, Ireland
Google Maps
Edwardsville, IL
115 N. Second St.
Edwardsville, IL 62025
Google Maps
Edwardsville, Illinois
Jefferson City, MO
101 E. High St.
First Floor
Jefferson City, MO 65101
Google Maps
Jefferson City, Missouri
Kansas City, MO
2345 Grand Blvd.
Suite 1500
Kansas City, MO 64108
Google Maps
Kansas City, Missouri
Las Vegas, NV
7160 Rafael Rivera Way
Suite 320
Las Vegas, NV 89113
Google Maps
Las Vegas, Nevada
London, England
Royal College of Surgeons of England
38-43 Lincoln’s Inn Fields
London, WC2A 3PE
Google Maps
Miami, FL
355 Alhambra Circle
Suite 1200
Coral Gables, FL 33134
Google Maps
Photo of Miami, Florida
New York, NY
7 Times Square, 44th Floor
New York, NY 10036
Google Maps
New York City skyline
Orange County, CA
19800 MacArthur Boulevard
Suite 300
Irvine, CA 92612
Google Maps
Philadelphia, PA
2005 Market Street
29th Floor, One Commerce Square
Philadelphia, PA 19103
Google Maps
Philadelphia, Pennsylvania
Princeton, NJ
100 Overlook Center
Second Floor
Princeton, NJ 08540
Google Maps
Princeton, New Jersey
Salt Lake City, UT
222 South Main St.
Suite 1830
Salt Lake City, UT 84101
Google Maps
Salt Lake City, Utah
St. Louis, MO
7700 Forsyth Blvd.
Suite 1800
St. Louis, MO 63105
Google Maps
St. Louis, Missouri
Washington, D.C.
1717 Pennsylvania Avenue NW
Suite 400
Washington, DC 20006
Google Maps
Photo of Washington, D.C. with the Capitol in the foreground and Washington Monument in the background.
Wilmington, DE
1007 North Market Street
Wilmington, DE 19801
Google Maps
Wilmington, Delaware