DENVER (CN) - The 10th Circuit reversed a lower court's injunction on Monday, reinstating Colorado's loan rate caps that had been challenged by several banking associations.

"We hold that 'loans made in such state' refers to loans in which either the lender or the borrower is located in the opt-out state," wrote U.S. Circuit Judge Gregory Phillips in a 67-page opinion.

Following the passage of legislation seeking to cap loan rates, the appellate court was asked to review whether the Depository Institutions Deregulation and Monetary Control Act of 1980 supported Colorado's claim that it could control loans made to consumers in its state or whether banks were correct to assume rate caps are determined by their headquartered location.

"Because Colorado has opted out of 1831d, that statute no longer preempts Colorado's interest-rate caps for loans from out-of-state banks to Colorado borrowers. Without 1831d's preemptive force, the rationale for the preliminary injunction falls apart," Phillips, a Barack Obama appointee, explained, referring to the section of the Federal Deposit Insurance Act outlining parity between federal and state interest rates.

With the Colorado Uniform Consumer Credit Code in July 2024, the Centennial State capped the interest rates banks can charge local consumers. The National Association of Industrial Bankers, the American Fintech Council and the American Financial Services Association sued the state in March 2024, arguing it lacked the authority to regulate national bank rates governed by federal law.

To date, only Colorado, Iowa and Puerto Rico have sought to impose their own rate caps rather than following federal guidance.

Under Colorado's interpretation of the law, state interest rate caps would protect Colorado residents who signed up for a loan in Colorado, regardless of where the bank was headquartered. In its appeal, the state argued that rate caps were necessary to protect consumers from predatory interest rates.

Under the federal law, the banks countered, states can only regulate state-chartered bank loans because national bank loans are made wherever the national office is located. U.S. District Judge Daniel Domenico, a Donald Trump appointee, granted the banks' motion for a preliminary injunction, finding loans are "made by the bank, and that where a loan is made does not depend on the location of the borrower."

In reaching his conclusion, Domenico erred in his analysis of a single word, the 10th Circuit found.

"The District Court therefore read 'loans made in such state' to refer to only the lender's state. But the District Court's reasoning assumed without analysis that the definition and function of 'made' are synonymous with the definition and function of 'make,'" Phillips wrote.

"We disagree with the District Court's approach, which in our view placed an unwarranted focus on the lender by departing from the statute's text. Instead, we read 'made in such state' as a participial adjective phrase that modifies the word 'loans,'" Phillips wrote.

While Phillips was joined by two Joe Biden appointees on the panel, only U.S. Circuit Judge Richard Federico signed onto the opinion with him.

U.S. Circuit Judge Veronica Rossman authored a second opinion, concurring on the bank's standing while dissenting on the departure from the lower court's conclusion.

"The majority authorizes the scope of Colorado's opt out, but federal law does not," Rossman wrote in her 30-page dissent.

"The best evidence from statutory text, context, and history confirms a consumer loan 'made in such State' under Section 525 means the place where the lending bank is chartered or performs its non-ministerial loan making functions - and not, as Colorado and the majority insist, where the borrower is located," the Biden appointee wrote.

Attorney David Gossett, of the D.C. firm Davis Wright, represented the banks on appeal and did not immediately respond to an inquiry for comment.

A spokesperson for the Colorado Attorney General's Office declined to comment.

With the injunction overturned, the case has been remanded to Domenico's court for further proceedings.

Source: Courthouse News Service