Federal Court Blocks New Limits on Short-Term Loans in Colorado

Seth Klamann
The Denver Post
(TNS)

A federal judge this week blocked provisions of a new Colorado law that would’ve limited interest rates on certain short-term loans made by out-of-state banks.

U.S. District Judge Daniel D. Domenico granted a request by a trio of financial trade organizations to block the implementation of HB23-1229, which passed the legislature last year but was set to go into effect July 1. Though the broader lawsuit will continue, Domenico ruled that Colorado lawmakers’ effort to cap interest rates on certain loans made by banks located outside of the state likely violates federal law.

The Colorado Attorney General’s Office, which defended the law, declined to comment Thursday, citing the ongoing litigation.

The three groups that sued to block provisions of the law — the National Association of Industrial Bankers, the American Financial Services Association and the American Fintech Council — called the ruling “a major victory” in a statement Thursday. They filed their suit in March.

The ruling, which is temporary while the rest of the suit proceeds, does not fully block the law. But it prevents the state from enforcing the law’s limits on alternative charge loans — a cousin to payday loans — that are undertaken by Colorado residents but provided by banks located elsewhere. Loans made by Colorado banks are still covered.

Advocates had argued that non-Colorado banks were using loopholes to charge residents triple-digit interest rates on short-term loans. In 2018, voters here capped interest rates on payday loans through Proposition 111. But the measure didn’t cover all short-term loans.

According to a report from the Colorado Attorney General’s Office, nearly 96,000 such loans — often for several hundred dollars — were distributed in 2021 alone. As many as 20% of borrowers struggled to pay them back, according to the report (though the report also said the number may be “substantially” lower).

The lending and financial industries have argued that the loans are critical tools for high-risk borrowers who need immediate support.

Payroll