National banks have always had the ability to export the rates and fees of the state in which they are located nationwide under Section 85 of the National Bank Act and thereby preempt conflicting state usury laws.
During the high inflationary period of the early 1980s, Congress passed the Depository Institutions Deregulation and Monetary Control Act, known as DIDMCA, which, among other things, gave state banks parity with national banks, allowing them to charge the rates and fees of their state across state lines and preempting conflicting state usury limitations.
But DIDMCA contained one caveat: It allowed states to opt out of that preemption given to state banks for loans made in the opt-out state.
Originally, some seven states opted out of this federal preemption, and six of those opted back into federal preemption. For decades, Iowa remained the sole opt-out state, and many lenders, not knowing what the effect of an opt-out was, combined with the smallness of the state's population, either avoided lending in Iowa or adhered to the state's usury limitations.
Along comes the Colorado attorney general, who, after a long court fight in Fulford vs. Marlette Funding LLC and Fulford vs. Avant of Colorado with online fintech lending programs, in 2020 forged a settlement in Denver County District Court allowing internet lending to continue at rates up to 36% despite the state's 21% usury limit.
In 2024, the attorney general pushed for legislation to opt Colorado out of DIDMCA, its premise being that this would prevent out-of-state banks from charging rates in excess of the 21% state limitation.
The Colorado General Assembly passed the provision that was to go into effect in July 2024, but its effectiveness was stayed due to litigation brought by three trade groups in National Association of Industrial Bankers v. Weiser.
The U.S. District Court for the District of Colorado in this litigation found that it is the bank's location that determines where a loan is made. But the U.S. Court of Appeals for the Tenth Circuit in a divided Nov. 10 decision reversed that finding and ruled that a loan is made in two places: the location of the borrower's residence, and where the bank is located.
And, on April 2, the entire Tenth Circuit vacated that decision. It will rehear the case en banc.
But in the interim, Oregon passed its own version of a DIDMCA opt-out, which is to become effective in early June.
Not only does it impose the state's interest rate cap of 36% on consumer loans up to $50,000, but it also broadens the definition of where a loan is made to include where the consumer resides as well as where the consumer enters into the loan agreement — which would complicate compliance with this directive.
It is not known whether this legislation will be challenged in court.
Other states, including Rhode Island, are considering opt-out legislation, and legislation has been introduced in Congress to repeal the ability for states to opt out of DIDMCA.
Uncertainty Created by the Opt-Out
The financial markets — and lenders — abhor uncertainty. Yet the recent developments described above do nothing but stoke the flames of uncertainty. Up until now, the relative importance of opting out has been limited to one state.
Paramount is that there is no real guidance on what the consequences of opting out are — which relates back to the DIDMCA applicability to where the loan is made.
To oversimplify, lenders take the position that a loan is made where the bank is located — a position the Colorado district court agreed with — as it is the bank that extends the credit. The consumer position has been that a loan is made where the borrower resides.
The original Tenth Circuit panel agreed in part with this, but also came to an unworkable solution — that a loan could be made in two places. Again, this presents uncertainty. How is a lender to know if the loan is governed by the bank's location or the borrower's residence when they are different states?
Laws like the Oregon statute further complicate the issue by extending the reach of the DIDMCA opt-out to anyone from any state entering into a contract in Oregon — also unworkable and uncertain.
This uncertainty also creeps into the essence of banking. Does an opt-out allow a state to impose the law only on its own state-chartered banks, potentially eliminating the right of banks in the opt-out state to export rates and fees under DIDMCA? This would harm banks located in the opt-out states.
Or, if any one state can restrict the ability of out-of-state banks to make loans under federal preemptive principles, then the consequence would potentially be a decrease in interstate lending — similar to what occurred with Iowa's opt-out when lenders ignored the state and did not make loans there — resulting in a decrease in access to credit.
Inability to obtain credit often hurts the consumers that states claim they are trying to protect.
Should the opt-out craze spread, the uncertainty grows greater. The Federal Deposit Insurance Corp. has been of little help, given that it has flip-flopped on this issue.
For decades, FDIC guidance stated that a loan is made where certain nonministerial functions are being performed, such as making the credit decision, informing the borrower of the decision and disbursing funds.
These factors of course support the notion that a loan is made where the bank is located. Although the FDIC supported those decisions in various court proceedings, when Colorado passed its opt-out legislation, the Biden-era FDIC supported the state. In the recent Tenth Circuit proceeding, both the FDIC and Office of the Comptroller of the Currency supported the rehearing.
Political flip-flopping only adds to the uncertainty and fuels the fire. If more states jump on the opt-out bandwagon, the patchwork of state laws will resemble the landscape prior to DIDMCA and the court decisions solidly supporting federal preemption.
Looking Ahead
Only national banks are in the catbird seat, as none of this applies to them, and they remain free to export rates and fees without restriction.
The actions of the states are only half a loaf and serve only to undermine the dual banking system by subjecting state banks to the disparities that DIDMCA was trying to remedy. Already, several fintechs — in taking advantage of the current deregulatory environment — have applied for national bank charters, which, if granted, would undermine the state actions being taken as to opt-outs.
Other fintechs that are engaged in programs with state-chartered banks will be faced with more limited options, including seeking a national bank to work with, complying with state rate limitations, exiting states with opt-out laws or challenging the laws in court.
None of these are particularly palatable, and all result in challenges in compliance and additional cost and effort. In addition, state banks in the opt-out states may find themselves on the heels of a dilemma — litigation over their ability to export rates and fees when their state has opted out of federal preemption.
Conclusion
The uncertainty is likely to continue. Passage at the federal level of a restriction on the ability to opt out is uncertain. A Tenth Circuit decision will likely result in a request to the U.S. Supreme Court to hear whatever outcome is reached.
Additional litigation or state action will only exacerbate the problem and drive more market participants to the national bank charter or reduce consumers' access to credit.
The FDIC's credibility to weigh in on this issue is problematic and subject to political change and whim. Unfortunately, it becomes difficult to forge a strategy to deal with this systemic uncertainty. But that is the opt-out world we are in.
This article was published by Law360 on May 6, 2026, and is republished with permission.
