Earlier this week, with little fanfare, Colorado Governor Jared Polis signed a bill into law that could have a lasting impact on the availability of credit to Colorado residents.
As a Colorado resident and a big fan of access to credit, I have followed this bill’s status since it was introduced during this year’s legislative session.
Before we understand what this bill entails, we need a little history lesson on arcane federal lending law. In 1980 the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was signed into law to expand the flow of credit and increase competition among lenders. It allowed state-chartered banks to export interest rates permitted in their home state, bypassing state usury laws. This was done to put state-chartered banks on a level footing with nationally chartered banks.
Congress gave states the right to opt out of DIDMCA, and while several states flirted with that idea, only Iowa and Puerto Rico are currently opted out of this law.
With this new bill, Colorado would join this very short list of states if it takes effect (scheduled for July 2024). And some worry that this could lead to contagion, with other states following suit.
This Colorado bill is a big deal for responsible fintech lenders
The core issue is the exportability of state interest rate laws. Fintech lenders, by their very nature, operate across state borders, and rather than go through the expensive and ludicrous (in my opinion) process of registering as a lender in every state, they partner with a bank that typically originates the loan and then sells it back to the fintech lender. This model has worked well, although it is not without controversy (more on that later).
Cross River Bank has pioneered the fintech lending space; it is the partner bank of choice for many large lenders.
In fact, according to an article co-authored by Cross River’s Head of External Affairs, the bank “facilitated more than $1.5 billion in consumer loans to Colorado consumers in 2021 and 2022 alone.” And these loans were “very much below the 36% interest rate cap.”
The growth of fintech lending over the last fifteen years has provided consumers hundreds of billions of dollars of personal loans after the big banks virtually exited this segment during the Great Recession. This has been a huge boost for the economy and the quality of life of millions of Americans.
The fintech industry response
I reached out to Phil Goldfeder, the CEO of the American fintech Council (AFC), for his comment on what this action by Colorado means:
If it takes effect, this law will decrease access to responsible credit, put community banks at a disadvantage, and leave many Colorado consumers, particularly those in minority and rural communities, with no option but to rely on unregulated predatory and high-interest alternatives. Responsible fintech companies that partner with community banks to originate transparent consumer loans provide safe options to high-priced predatory lenders. In addition, they create safe pathways out of debt and foster financial stability at responsible interest rates without compromising on regulatory compliance or consumer protection.
The bottom line is that consumers are better off when they have more choices, and this bill will limit those choices as responsible fintech lenders will be forced to withdraw from Colorado. But note the wording Phil uses: “If it takes effect.” Though the AFC failed to defeat the bill, they secured more than a year before any changes took effect. And so, this bill may never take effect. The AFC and others will be working towards this goal.
The magical thinking of consumer advocates
I often hear consumer advocates saying that high-interest lenders are one of the most significant barriers to financial health. Now, I am dead against the payday lending industry or any product that can lead to a debt spiral where, for example, a $500 loan quickly turns into a $2,000 or $3,000 debt. But that is not how fintech lenders operate.
These advocates are the same people that demand a national interest rate cap of 15% as if that would be a solution. That would mean that lenders would simply not make credit available to vast population segments.
Fintech lenders are data-driven; they know the expected default rate for each interest rate tier with a high degree of accuracy. If you limit interest rates, they will just withdraw from the market. And where does that leave the consumer whose credit results in a 20% or 25% interest rate? If they need a car repair or a new furnace, they will not just say; I shouldn’t get a loan for that because those interest rates are predatory. They need the money and will get it any way they can, even if that means going to a payday lender or pawn shop.
So, these restrictions actually have the exact opposite impact of what the consumer advocates want. The problem does not disappear if you remove the supply; the demand will always be there. The magical thinking of consumer advocates is that removing the supply will take away the demand.
Colorado has been in the news before
In August 2020, I wrote about the settlement involving Avant, Marlette, Cross River Bank and WebBank, and the state of Colorado. This resulted from two lawsuits brought by Colorado for alleged violations of the state’s usury laws. With the settlement, Colorado set out a framework for positive bank-fintech partnerships, which the industry agreed to.
Soon after the settlement, Colorado Attorney-General Phil Weiser spoke about it at Fintech Nexus USA 2020, a virtual event that year. In that discussion, he said:
We think [this settlement] provides a roadmap, and it says to fintech, we believe you can come to Colorado; there is an opportunity that, as I outlined, it’s important; there are people in rural Colorado that lack access to the same sort of credit that others may take for granted we want fintech providing competition alternatives and we want it to provide a standard for liability with an oversight model. What’s good about the settlement we reached is that it created a form of oversight that companies can live with and addresses our concerns.
But now the Attorney-General has changed his tune and contradicted his comments from 2020, as he supports the recent bill.
The status quo will apply for now, but unless something changes in a year, large numbers of Colorado consumers will find themselves without access to responsible credit. And that will be an expensive lesson for all.
