OAKLAND, CA – Governor Jared Polis signed into law yesterday a measure to prevent online and out-of-state lenders from making high-cost loans in violation of Colorado law. The measure could be taken up in other states as a powerful tool for addressing the growing problem of lenders end-running state consumer protections through evasive schemes and legal maneuvering.

Ellen Harnick, executive vice president and director of state policy for the Center for Responsible Lending (CRL), made the following statement:

“Governor Polis has signed a law that is a solid solution to a huge and growing problem that is saddling working families with high-cost debt. The scale of evasion by high-cost lenders is alarming – it has become a whole business model backed by aggressive industry lobbying and political contributions. Colorado’s consumer protection laws are reasonable and necessary. Colorado lenders comply with the law, and online lenders should do so, too.”

These evasions are accomplished by “partnership” schemes between on-line lenders and a handful of out-of-state, state-chartered banks. The schemes utilize a provision of a federal law, the Depository Institutions Deregulation and Monetary Control Act (DIDMCA), a 1980 law that permits banks to “export” interest rates from their home state to states with tighter lending laws.

In what advocates term the “rent-a-bank” scheme, on-line lenders “rent” the bank’s name for this purpose, putting the bank’s name on the loan documents, while the true lender is the online company. DIDMCA gives states the right to opt-out of this provision, and the new Colorado law asserts that right.

Advocates havecalled on bank regulators to stop the evasions, with mixed results. State Attorneys General have sued the online lenders, but the evasions have become increasingly pervasive, making it costly and difficult to shut them down one-by-one. Colorado’s new law will sidestep that legal entanglement by holding online lenders to the same laws that Colorado lenders comply with when lending in Colorado.

In Colorado, online lenders seek to charge annual rates of 30% to 36% for large loans, some as large as $10,000 to $30,000. Often these are debt consolidation loans, which are by definition targeted to borrowers already over-burdened with debt. Large loans at such rates can easily worsen a borrower’s financial situation. The DIDMCA opt-out would also allow states to stop online lenders marketing triple-digit debt trap loans, which are typically smaller.

Iowa has been opted out of DIDMCA for decades and has quickly shut down attempts at evasions over the years.


Press Contact: Carol Parish carol.parish@responsiblelending.org