Colorado Just Reined In High-Cost Online Lending. Maybe.

Colorado Just Reined In High-Cost Online Lending. Maybe.

June 7, 2023, Law360

Andrew Smith's commentary appeared in a Law360 article about Colorado's first-in-a-generation legislation to crack down on high-cost lending by out-of-state banks.

Now that it has been signed into law, Colorado's opt-out will not take effect for more than a year and will apply only to loans made after that time. But at least one bank partnership lender is already said to be eyeing an exit from the Colorado market, underscoring what financial services attorneys say could be a key adverse side effect of the legislation: reduced credit availability for in-state borrowers.

"You're going to be taking out some part of the market," said Andrew. "We can debate about how big or how important a part of the market it is, but you're definitely going to be excluding those out-of-state banks that loan at rates in excess of Colorado law."

Andrew said it's not just interest rates that outside state banks will be mindful of, though. Fee structures can be calibrated to allow for lower rates, but they in turn might attract unwanted regulatory scrutiny.

"Let's say you're a state-chartered bank working with a fintech partner and you have a credit product that you've designed to offer nationally," Andrew said. "You may have built the product to have $18 late fees, but Colorado only permits a $15 late fee. You may just decide not to sell the product in Colorado because there are too many potential pitfalls to complying with all that rate and term regulation."

This is sort of a natural experiment," Andrew said. "There are a lot of questions around what this will mean for state-chartered banks inside and outside of Colorado, and it remains to be seen what will happen."

"But if I were a Coloradan who needed this kind of credit, I'm not sure I'd appreciate being a guinea pig for this natural experiment," he added.