Hot on the heels of the CFPB’s renewed assault on credit access with its aggressive targeting of the Buy Now, Pay Later (BNPL) financial tools, Colorado is launching its own war on credit. The state’s HB23-1229, set to take effect on July 1, 2024, imposes strict interest rate caps on consumer loans, withdrawing Colorado from the interstate lending framework established by the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). As Alec Mena from Citizens Against Government Waste writes, this misguided legislation threatens to undermine consumer access to credit and stifle economic growth in the state.

HB23-1229 disproportionately impacts minority communities and small business owners, who often rely on short-term credit to manage financial gaps. According to the Urban Institute, African-American, Hispanic, and Native American communities typically have lower median credit scores than other Americans. For the more than 94,000 minority-owned small businesses in Colorado, as the Small Business Administration reported in 2022, this law could mean the difference between growth and closure. These entrepreneurs and other consumers needing short-term loans will face significant barriers to accessing credit under the new law.

Restricting access to credit for these communities is not just an economic issue but a matter of social equity. The Colorado legislation effectively denies these individuals the opportunity to build their credit and improve their financial standing. Lawmakers must recognize that such policies widen the economic gap rather than bridge it, leaving minority and low-income entrepreneurs with fewer resources to thrive.

The impact extends beyond disadvantaged communities. By capping interest rates on out-of-state loans, the law disrupts the competitive interstate credit market vital to the U.S. economy. DIDMCA was designed to prevent states from imposing price controls on loans made in other states, fostering a national lending environment that mitigates regional economic volatility.

Historically, state-imposed banking restrictions exacerbated economic downturns by limiting banks’ ability to diversify their holdings. For instance, during the Great Depression, state laws restricting branch banking prevented banks from spreading their risk, leading to more severe local economic crises. By reintroducing such restrictions, Colorado risks returning to a siloed banking policy era that could destabilize its financial sector.

The law’s attempt to control financial services purchased out of state undermines the principles of interstate commerce. A legal analysis by Troutman Pepper notes that the legislation “intends to limit the charges that can be imposed by out-of-state depository institutions making loans to Colorado residents.” This protectionist approach reduces the diversity and stability of credit pools, making the market more susceptible to regional economic fluctuations.

Several financial associations, including the American Financial Services Association, American Fintech Council, and National Association of Industrial Bankers, have filed a federal lawsuit. They argue that the law violates DIDMCA by imposing overbroad interest rate caps on services beyond short-term loans, such as personal installment loans, BNPL loans, and store-brand credit cards. If these caps are enforced, it will severely limit the availability of these mainstream financial products to higher-risk Colorado consumers.

State and federal lawmakers should eliminate interest rate caps, price controls, and unnecessary regulatory barriers to promote economic growth and protect consumer access to credit. By fostering a competitive and inclusive credit market, policymakers can ensure that all consumers, regardless of their financial standing, have the opportunity to access the capital they need.

The Southwest Public Policy Institute has extensively studied the impact of restrictive lending laws in our reports “No Loan for You!” and “No Loan for You, Too!” These studies highlight how similar policies in New Mexico have stifled credit access and economic opportunities. Colorado is taking a step backward in financial regulation, hampering economic growth and harming the very consumers it aims to protect.

Policies should enhance, rather than restrict, access to credit and promote economic inclusivity. The CFPB’s overreach and Colorado’s legislative action represent a dangerous trend of regulatory overkill, attacking consumer choice and financial freedom.

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