A new state law in Oregon is drawing fire from some of the biggest names in consumer finance, and the fight could end up rewriting the rules for how banks do business across state lines.
Three trade associations representing industrial banks, online lenders, and consumer finance companies filed a federal lawsuit this month challenging Oregon’s House Bill 4116, a law that took effect June 5. The law attempts to cap interest rates at 36% annually on consumer loans of $50,000 or less, even when those loans are made by banks chartered in other states. The plaintiffs are the National Association of Industrial Bankers, the Online Lenders Alliance, and the American Financial Services Association.
According to an analysis by attorneys at law firm Ballard Spahr, the case centers on a 1980 federal banking law called the Depository Institutions Deregulation and Monetary Control Act, or DIDMCA. That law generally allows state-chartered banks to charge interest rates approved in their home state and to offer those rates to borrowers in other states. Oregon argues that a provision of DIDMCA known as the “opt-out” clause gives it the power to block out-of-state banks from applying their home-state rates to Oregon borrowers. The trade groups say Oregon has misread the law.
The plaintiffs argue that Oregon’s opt-out authority only applies to loans made within Oregon’s own borders, not loans made by banks in other states to borrowers who happen to live in Oregon. Ballard Spahr notes that the complaint leans heavily on a prior federal court ruling that defined where a loan is legally “made” as the location of the bank, not the borrower. That ruling, from the district court in a case involving Colorado attorney General Philip Weiser, was later reversed on appeal, though a full appeals court panel has since agreed to rehear it. The outcome of that case is still pending.
The lawsuit also raises a separate challenge under the U.S. Constitution’s Commerce Clause. Oregon’s law would apply to any loan where an Oregon resident makes payments from an Oregon bank account, even if the loan was originated entirely outside the state. According to Ballard Spahr, the plaintiffs argue that this amounts to Oregon reaching beyond its borders to regulate activity in other states, which federal courts have repeatedly prohibited.
The practical stakes are already becoming clear. According to Ballard Spahr, the trade associations say their members have already begun pulling back. “Enforcement of the statute has forced many state-chartered banks to reduce lending activity in Oregon, curtail relationships with retail and fintech partners, and withdraw credit products from high-risk borrowers residing in Oregon.”
The case also sharpens a competitive divide. National banks get their rate-export authority from a different federal law, one that Oregon’s opt-out does not cover. That means national banks can continue offering their home-state rates to Oregon borrowers while state-chartered banks cannot, creating an uneven playing field that the plaintiffs say was never Congress’s intent.
Oregon joins Iowa, Colorado, and Puerto Rico as jurisdictions that currently maintain DIDMCA opt-outs. Ballard Spahr notes the Oregon case will land before a federal court at the same time the Tenth Circuit is reconsidering the Weiser ruling before a full-panel review. Together, the two proceedings could set the terms of state power over interstate lending for years to come. The outcome will have direct consequences not just for banks, but for the fintech companies and retailers that rely on bank partnership models to reach consumers across state lines.
