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FIL-61-98 Attachment C

[Federal Register: May 18, 1998 (Volume 63, Number 95)]

[Notices]

[Page 27282-27286]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr18my98-69]


 

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FEDERAL DEPOSIT INSURANCE CORPORATION


 

 

General Counsel's Opinion No. 11, Interest Charges by Interstate

State Banks


 

AGENCY: Federal Deposit Insurance Corporation (FDIC).


 

ACTION: Notice of General Counsel's Opinion No. 11.


 

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SUMMARY: The FDIC has received inquiries regarding the application of

section 27 of the Federal Deposit Insurance Act to State banks

operating interstate branches. This General Counsel's Opinion sets

forth the Legal Division's conclusions regarding where such banks are

``located'' for purposes of section 27; when host state, as opposed to

home state, laws will provide the appropriate interest rates for loans

to customers; how various functions related to making loans to

customers should be defined and the impact that they will have on the

application of a particular state's interest rates to those loans; and

the need for appropriate disclosure of the laws governing the loan to

bank customers.


 

FOR FURTHER INFORMATION CONTACT: Barbara I. Taft, Assistant General

Counsel, (202) 898-6830, Rodney D. Ray, Counsel, (202) 898-3556 or

Robert C. Fick, Counsel, (202) 898-8962, Federal Deposit Insurance

Corporation, Legal Division, 550 17th Street, NW, Washington, DC 20429.


 

Text of General Counsel's Opinion


 

General Counsel's Opinion No. 11; Interest Charges by Interstate Banks


 

By William F. Kroener, III, General Counsel


 

Background


 

Section 27 of the Federal Deposit Insurance Act (``FDI Act'') (12

U.S.C. 1831d) \1\ (``section 1831d'') establishes the maximum rates

that insured state-chartered depository institutions and state-licensed

insured branches of foreign banks (collectively, ``State banks'') may

charge their customers for most types of loans. Section 1831d is

patterned after and has been construed in pari materia with section

5197 of the Revised Statutes (12 U.S.C. 85) (``section 85'' of the

National Bank Act (``NBA'')). Like section 85, section 1831d has been

construed to provide State banks with ``most favored lender'' status

and to permit State banks to ``export'' interest charges allowed by the

state where the lender is located to out-of-state borrowers.

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\1\ For the convenience of the reader, the initial reference to

a provision of the FDI Act or interstate branching legislation will

be made to the citation, as enacted, followed by the United States

Code citation. Thereafter, the provision will be referred to by the

section number contained in the United States Code. For example, the

initial citation of section 27 of the FDI Act will be followed by

the United States Code citation (12 U.S.C. 1831d) and the section

will subsequently be referred to as ``section 1831d''.

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Since the enactment of the Riegle-Neal Interstate Banking and

Branching Efficiency Act of 1994, Pub. L. 103-328, 108 Stat. 2338

(1994)(``Riegle-Neal Act'') and the Riegle-Neal Amendments Act of 1997,

Pub. L. 105-24, 111 Stat. 238 (1997) (``Riegle-Neal Amendments

Act'')(collectively, ``Interstate Banking Statutes'') questions have

arisen regarding the appropriate state law for purposes of section

1831d that should govern the interest charges on loans made to

customers of a State bank that is chartered in one state (the bank's

home state) but has a branch or branches in another state (the host

state) (an ``Interstate State Bank''). These questions have not

previously been addressed by the Legal Division. Therefore, this

General Counsel's Opinion sets forth the Legal Division's

interpretation of section 1831d as it relates to the Interstate Banking

Statutes to provide guidance in this area to State banks and the

public.\2\

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\2\ This opinion is not intended to address these issues with

regard to national banks. The Office of the Comptroller of the

Currency (``OCC''), which has regulatory jurisdiction over national

banks, has issued several Interpretive Letters addressing these

issues, in the context of national banks and section 85. See, OCC

Interpretive Letter No. 686, September 11, 1995, reprinted in [1995-

1996 Transfer Binder] Fed. Banking L. Rep. (CCH) P 81-001

(``Interpretive Letter No. 686''); OCC Interpretive Letter No. 707,

January 31, 1996, reprinted in [1995-1996 Transfer Binder] Fed.

Banking L. Rep. (CCH) P 81-022 (``Interpretive Letter No. 707'');

OCC Interpretive Letter No. 782, May 21, 1997, reprinted in [Current

Binder] Fed. Banking L. Rep. (CCH) P 81-209 (``Interpretive Letter

No. 782''); OCC Interpretive Letter No. 822, February 17, 1998,

reprinted in [Current Binder] Fed. Banking L. Rep. (CCH) P 81-265

(``Interpretive Letter No. 822'').

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The Riegle-Neal Act established, for the first time, a

comprehensive federal statutory scheme for interstate branching by

state and national banks. In doing so, Congress recognized the

potential efficiencies to be gained by an interstate branch banking

structure as well as the complications that could arise in determining

when an interstate bank should look to the laws of its home


 

[[Page 27283]]


 

state or a host state to determine the interest rates that the bank may

permissibly charge its customers.


 

1. Where May an Interstate State Bank Be Located for Purposes of

Section 1831d?


 

Section 1831d(a) establishes the maximum interest charges that

State banks may charge their customers for most types of loans. The

interest charges are established by reference to the location of the

lender. The statute provides:


 

In order to prevent discrimination against State-chartered

insured depository institutions, including insured savings banks, or

insured branches of foreign banks with respect to interest rates, if

the applicable rate prescribed in this subsection exceeds the rate

such State bank or insured branch of a foreign bank would be

permitted to charge in the absence of this subsection, such State

bank or such insured branch of a foreign bank may, notwithstanding

any State constitution or statute which is hereby preempted for

purposes of this section, take, receive, reserve, and charge on any

loan or discount made, or upon any note, bill of exchange, or other

evidence of debt, interest at a rate of not more than 1 per centum

in excess of the discount rate on ninety-day commercial paper in

effect at the Federal Reserve bank in the Federal Reserve district

where such State bank or such insured branch of a foreign bank is

located or at the rate allowed by the laws of the State, territory,

or district where the bank is located, whichever may be greater.

(Emphasis added.) \3\


 

\3\ The alternative interest rate that is tied to the discount

rate on 90-day commercial paper in effect at the Federal Reserve

Bank is not tied to state law but it, like the rate allowed by state

law, also requires a determination of where the lender is

``located''.

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While the FDI Act does not specifically address where a lender is

located for purposes of section 1831d, the same reference to interest

rates where the bank is located is contained in section 85 of the NBA,

upon which section 1831d is based.\4\

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\4\ Section 85 states, in relevant part: ``Any association may

take, receive, reserve, and charge on any loan or discount made, or

upon any notes, bills of exchange, or other evidence of debt,

interest at the rate allowed by the laws of the State, Territory, or

District where the bank is located, or at a rate of 1 per centum in

excess of the discount rate on ninety-day commercial paper in effect

at the Federal reserve bank in the Federal reserve district where

the bank is located, . . . .'' (Emphasis added.)

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Prior to the enactment of section 1831d, the United States Supreme

Court recognized that a national bank, pursuant to section 85, could

``export'' interest charges allowable in the state where the bank was

located to debtors domiciled outside the bank's home state.\5\ In

Marquette the Court determined that the national bank was ``located''

for purposes of section 85 in the state designated in its organization

certificate and could charge interest to residents of other states at

rates permitted under the laws of the state so designated.\6\ Section

85 has been recognized to be the ``direct lineal ancestor'' of section

1831d, which was enacted as part of the Depository Institutions

Deregulation and Monetary Control Act of 1980, Pub. L. 96-221, 94 Stat.

132 (1980). Congress made a conscious choice to pattern section 1831d

after section 85 to achieve competitive equality in the area of

interest charges between state and national banks.\7\

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\5\ Marquette Nat'l Bank v. First Omaha Serv. Corp., 439 U.S.

299 (1978) (``Marquette'').

\6\ See also Cades v. H & R Block, 43 F.3d 869 (4th Cir.), cert.

denied, 515 U.S. 1103 (1995); Christiansen v. Beneficial Nat'l Bank,

972 F. Supp. 681 (S.D. Ga. 1997); Basile v. H & R Block, 897 F.

Supp. 194 (E.D. Penn. 1995).

\7\ See Greenwood Trust Co. v. Commonwealth of Massachusetts,

971 F.2d 818, 826-827 (1st Cir.), cert. denied, 506 U.S. 1052 (1993)

(``Greenwood'').

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Reading the two provisions in pari materia because of their

historical background, the court in Greenwood determined that section

1831d provided a state bank with the ability to export interest charges

to out-of-state borrowers from the state in which it was chartered

(recognizing the state where the bank was chartered, Delaware, as the

place where the bank was ``located'' for purposes of section 1831d).\8\

Therefore, prior to the enactment of the Interstate Banking Statutes,

the state where a State bank was chartered had been established as the

state in which a bank was ``located'' for purposes of exporting

interest rates under section 1831d(a).

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\8\ Greenwood, at 829; see also Venture Properties, Inc. v.

First Southern Bank, 79 F.3d 90 (8th Cir. 1996) (Arkansas bank

located in Arkansas for purposes of section 1831d).

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Following enactment of the Interstate Banking Statutes it is

possible for an Interstate State Bank to make loans to customers either

from the state in which it is chartered or from an out-of-state branch.

Although the courts do not appear to have addressed the issue of

whether an Interstate State Bank may be located for purposes of section

1831d in the state where it is chartered and in each state where it

maintains one or more branches the OCC has recently issued several

Interpretive Letters indicating that an interstate national bank may be

``located'' for purposes of section 85 in the state where its main

office is located, as well as in the state or states where it maintains

branches. See Interpretive Letter Nos. 686, 707, 782 and 822.

Similarly, in my view an Interstate State Bank also may be

``located'' for purposes of section 1831d in its home state and in each

state where it maintains out-of-state branches. There are at least

three reasons for this view. First, the Riegle-Neal Amendment Act's

applicable law clause for State banks 9, discussed in

greater detail below, is an indication of Congress' recognition that

maintaining a branch within a state, except as otherwise provided in

section 1831a(j), constitutes a sufficient presence (i.e., location) in

the state to subject the branch to host state laws, including the host

state's consumer protection laws (which include applicable usury

ceilings). Second, the OCC also has observed, most recently in

Interpretive Letter No. 822, that there is a clear and direct

relationship between section 94 of the NBA, addressing the ``location''

of a national bank for venue purposes, and section 85, addressing the

``location'' of a bank for usury purposes, based upon court decisions

construing the two provisions. The language of section 1831d, which is

based largely upon sections 85 and 86 10 of the NBA, has

been recognized to include judicial interpretations of those

provisions.11 Finally, there is an evident congressional

intent to provide State banks with competitive equality with national

banks in enacting section 1831d 12 and to provide parity

between State banks and national banks in enacting the Riegle-Neal

Amendments Act.13

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\9\ 12 U.S.C. 1831a(j)(1).

\10\ Section 86 of the NBA provides the remedy for violations of

section 85. Section 1831d(b) is the statutory counter-part contained

in the FDI Act.

\11\ See Greenwood, at 827; Hill v. Chemical Bank 799 F. Supp.

948, 952 (D. Minn. 1992) (``Hill'') (``The key language of (section

1831d) is substantially identical to language in sections 85 and 86

of the National Bank Act, the federal usury provisions governing

national banks. Generally, similar language should be interpreted

the same way, unless context requires a different interpretation.

Further, Congress is presumed to be aware of judicial

interpretations of statutory language when it intentionally

incorporates the language of one statute into another statute.'')

\12\ See 126 Cong. Rec. 6900 (1980) (statement of Senator

Proxmire); 126 Cong. Rec. 6907 (1980) (statement of Senator

Bumpers); see also Hill, at 952 (``Given the similarity in language

and clearly expressed intent of Congress to create parity between

state and national banks, (section 1831d) should be interpreted

consistently with sections 85 and 86.'')

\13\ See 143 Cong. Rec. H3089 (daily ed. May 21, 1997)

(statement of Representative Roukema).

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2. If a State Bank is Located in More Than One State, Which State's

Usury Provisions Govern the Loans From the Bank?


 

Given that a State bank can be located in more than one state, the

next question is what state's usury provisions should govern loans made

by an Interstate State Bank.


 

[[Page 27284]]


 

The answer to this question requires reference to the applicable

law and usury savings clauses contained in the Riegle-Neal Act, the

Riegle-Neal Amendments Act, which subsequently amended the applicable

law clause for State banks, and to the legislative history underlying

these provisions.

The Applicable Law Clause for State Banks

With the introduction of nationwide interstate branching, questions

arose as to the appropriate law to be applied to out-of-state branches

of interstate banks. Congress addressed this matter for national banks

in section 102(b)(1) of the Riegle-Neal Act, which amended section 36

of the NBA to add a new subsection (f), which included 12 U.S.C.

36(f)(1)(A)(''the applicable law clause for national banks''), and

addressed this matter for State banks in section 102(b)(3)(B) of the

Riegle-Neal Act, which amended section 1831a of the FDI Act to add a

new subsection (j), which included 12 U.S.C. 1831a(j)(1)(''the

applicable law clause for State banks'').

As originally enacted by the Riegle-Neal Act, the applicable law

clause for national banks provided for the inapplicability of specific

host state laws to a branch of an out-of-state national bank under

specified circumstances, including where Federal law preempted such

state laws for a national bank.14 No similar provision,

however, was contained in the applicable law clause for State

banks.15 This made branches of out-of-state State banks

subject to all of the laws of the respective host state. In contrast, a

national bank operating with branches in various states benefitted from

preemption, and hence greater uniformity than a State bank, with regard

to those host state laws specified in section 36(f)(1)(A) 16

that affected their operations. This led to concerns that the nation's

dual banking system might be jeopardized because State banks might opt

to convert from state to national bank charters to avoid compliance

with a multitude of different state laws in each state in which State

banks wished to operate through interstate branches.

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\14\ Section 36(f)(1)(A)(ii) also provided for preemption of

host state law where the Comptroller determines that state law

discriminates between an interstate national bank and an interstate

state bank.

\15\ Section 36(f)(1)(A)reads in relevant part as follows:

The laws of the host State regarding community reinvestment,

consumer protection, fair lending, and establishment of intrastate

branches shall apply to any branch in the host State of an out-of-

State national bank to the same extent as such State laws apply to a

branch of a bank chartered by that State, except--

(i) when Federal law preempts the application of such State laws

to a national bank * * *

In the context of the law applicable to branches of out-of-state

State banks, however, section 1831a(j)(1) read in relevant part as

follows:

The laws of a host State, including laws regarding community

reinvestment, consumer protection, fair lending, and establishment

of intrastate branches, shall apply to any branch in the host State

of an out-of-State State bank to the same extent as such State laws

apply to a branch of a bank chartered by that State. (Emphasis

added.)

\16\ The reference to ``applicable usury ceilings'' in the

Riegle-Neal Act Conference Report's (``Conference Report'')

discussion of host state consumer protection laws clearly indicates

that the statute's reference to consumer protection laws of host

states included any applicable host state usury ceilings. See H.R.

Rep. No. 651, 103d Cong., 2d Sess., 51 (1994).

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On June 1, 1997, the interstate branching provisions of the Riegle-

Neal Act became fully effective. Shortly thereafter, on July 3, 1997,

section 1831a(j) was amended by the Riegle-Neal Amendments Act to

revise the applicable law clause for State banks. As amended by the

Riegle-Neal Amendments Act, section 1831a(j)(1) provides:


 

The laws of a host State, including laws regarding community

reinvestment, consumer protection, fair lending, and establishment

of intrastate branches, shall apply to any branch in the host State

of an out-of-State State bank to the same extent as such State laws

apply to a branch in the host State of an out-of-State national

bank. To the extent host State law is inapplicable to a branch of an

out-of-State State bank in such host State pursuant to the preceding

sentence, home State law shall apply to such branch. (Emphasis

added.) 17


 

\17\ Pub. L. 105-24, 111 Stat. 238 (1997).

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As explained by the legislation's sponsor, Representative Roukema,

the purpose of the legislation was to provide parity between State

banks and national banks. In describing the amendment's effect on host

state consumer protection laws, she indicated:


 

* * * Moreover, it recognizes the importance of host State laws

by requiring all out-of-State banks to comply with host State laws

in four key areas, community reinvestment, consumer protection, fair

lending, and intrastate branching, unless the State law has been

preempted (with respect to) national banks. In that instance the law

of the State which issued the charter will prevail.18


 

\18\ 143 Cong. Rec. H3089 (daily ed. May 21, 1997).

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Therefore, under section 1831a(j)(1), the laws of a host state

apply to branches of out-of-state State banks to the same extent such

state laws would apply to a branch of an out-of-state national bank. If

the laws of the host state would be inapplicable to a branch of an out-

of-state national bank they are equally inapplicable to a branch of an

out-of-state State bank and the home state law will generally apply to

the branch of an out-of-state State bank.19

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\19\ Section 1831a(j)(3)(B), however, requires that the

applicable law clause for State banks not be construed to affect the

applicability of Federal law to State banks and State bank branches

in a home or host state. Therefore, the reference to home state law

in the applicable law clause for State banks may not dictate the

result in all circumstances regarding interest charges on loans to

bank customers if reference to other federal law, such as section

1831d, the usury savings clause, or the rules regarding exportation

of interest charges, would lead to a different result.

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The Usury Savings Clause

The next question is when the host state interest provisions will

apply to a branch of an out-of-state State bank. For that issue, it is

necessary to consider the Riegle-Neal Act's usury savings clause and

the pertinent portions of the statute's legislative history.

Section 111 of the Riegle-Neal Act (the usury savings clause), was

added to the legislation prior to its enactment by an amendment

sponsored by Senator Roth to address the effect of the Riegle-Neal Act

on sections 85 and 1831d. The amendment was introduced by Senator Roth

in response to uncertainty expressed by the Acting Chairman of the FDIC

and one of the Governors of the Federal Reserve Board regarding the

effect that pending drafts of the interstate banking legislation might

have on the exportation of interest rates by a bank to borrowers

residing in states where the bank also operated an out-of-state

branch.20 See 140 Cong. Rec. S12789 (daily ed. Sept. 13,

1994) (remarks of Senator Roth).

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\20\ See Nationwide Banking and Branching and the Insurance

Activities of National Banks: Hearings Before the Senate Committee

on Banking, Housing, and Urban Affairs, 103d Cong., 1st Sess. 272

(1993) (Response to Written Questions of Senator Roth from Andrew C.

Hove, Jr.); (Response to Written Questions of Senator Roth from John

P. LaWare), id. at pp. 280-81.

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The usury savings clause provides, in pertinent part:


 

No provision of this title and no amendment made by this title

to any other provision of law shall be construed as affecting in any

way--

* * * * *

(3) The applicability of (section 85) or (section 1831d) of the

Federal Deposit Insurance Act. 21


 

\21\ 12 U.S.C. 1811 (note).

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Therefore, Congress did not intend for the Riegle-Neal Act to

affect the applicability of section 1831d to State banks.


 

[[Page 27285]]


 

Harmonization of the Applicable Law Clause for State Banks with the

Usury Savings Clause

While the usury savings clause could conceivably be read to

conflict with the language of the applicable law clause,22

reference to the Riegle-Neal Act's legislative history allows the

provisions to be harmonized and placed in proper context.23

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\22\ As enacted by the Riegle-Neal Act, as indicated earlier,

the applicable law clause for State banks made branches of out-of-

state State banks subject to the laws of the host state. Also, as

indicated earlier, concerns had been expressed over the impact that

the application of host state laws regarding consumer protection

might have on the ability of an out-of-state bank to export interest

charges authorized by its home state to a state where the bank

maintained a branch.

\23\ In this respect, the analysis tracks that employed by the

courts. See Weinberger v. Hynson, 412 U.S. 609, 631-32 (1973) (``It

is well established that our task in interpreting separate

provisions of a single Act is to give the Act `the most harmonious,

comprehensive meaning possible' in light of the legislative policy

and purpose. (Citations omitted).''); Dierksen v. Navistar

Internat'l Transportation Corp., 912 F. Supp. 480, 486 (D. Kansas

1996) (``A primary rule of construction of a statute is to find the

legislative intent from its language, and where the language used is

plain and unambiguous and also appropriate to an obvious purpose the

court should follow the intent as expressed by the words used.

(citation omitted). It is the duty of the court, insofar as

practical, to reconcile different statutory provisions so as to make

them consistent, harmonious and sensible. (Citation omitted).

Allegedly repugnant statutes are to be read together and harmonized,

if at all possible, to the end that both may be given force and

effect. (Citation omitted).'')

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In discussing the usury savings clause, the Conference Report

states:


 

Section 111(3) specifically states that nothing in Title I

affects sections (85) or (1831d). Accordingly, the amendments made

by the (Riegle-Neal Act) that authorize insured depository

institutions to branch interstate do not affect existing authorities

with respect to any charges under section (85) or (1831d) imposed by

national or state banks for loans or other extensions of credit made

to borrowers outside the state where the bank or branch making the

loan or other extension of credit is located.24 (Emphasis

added.)

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\24\ H.R. Rep. No. 651, 103d Cong., 2d Sess., 63 (1994).


 

Senator Roth explained this section of the Conference Report as

---------------------------------------------------------------------------

follows:


 

The statement of the managers expressly refers to the potential

of a ``branch making the loan or other extension of credit * * *''

This language underscores the widespread congressional understanding

that, in the context of nationwide interstate branching, it is the

office of the bank or branch making the loan that determines which

state law applies. The savings clause has been agreed to for the

very purpose of addressing the FDIC's original concerns and making

clear that after interstate branching, section (85) and section

(1831d) are applied on the basis of the branch making the

loan.25

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\25\ 140 Cong. Rec. S12789 (daily ed. Sept. 13, 1994).


 

According to Senator Roth, for purposes of determining where a loan

is ``made'' the managers of the Conference Committee recognized that in

the new interstate banking environment banks with a branch or branches

in other states could involve those branches in some but not all

aspects of a loan transaction without the state law where the branch

was located becoming applicable to the loan. In explaining the

provisions Senator Roth distinguished ``ministerial functions''

26 from other functions (subsequently referred to as ``non-

ministerial functions'' 27) related to the loan. To further

explain the importance of these distinctions, in the context of the

appropriate state law to apply to an interstate bank loan, Senator Roth

indicated:

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\26\ These include providing loan applications, assembling

documents, providing a location for returning documents necessary

for making a loan, providing loan account information, and receiving

payments.

\27\ The non-ministerial functions are the decision to extend

credit, the extension of credit itself, and the disbursal of the

proceeds of the loan.


 

(It) is clear that the conferees intend that a bank in State A

that approves a loan, extends the credit, and disburses the proceeds

to a customer in State B, may apply the law of State A even if the

bank has a branch or agent in State B and even if that branch or

agent performed some ministerial functions such as providing credit

card or loan applications or receiving payments.28

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\28\ 140 Cong. Rec. S12789-12790 (daily ed. Sept. 13, 1994).


 

Senator Roth's comments, considered in the context of the

applicable law clause for State banks, are indicative of congressional

intent to recognize a parallel between existing law and the law that

should be applied if a loan was made in a branch or branches of a

single host state. Existing law already recognized the effect of home

state law on the state laws of a borrower's residence when loans were

made by national banks and State banks, respectively, to out-of-state

borrowers. In the context of interstate branching, however, Congress

intended to strike a balance between the application of host state and

home state interest provisions by applying the same exportation

principle previously recognized by the courts to loans made in a host

state because the three non-ministerial functions occurred in a branch

or branches of the host state.

Therefore, under the Riegle-Neal Act's usury savings clause the

ability of an out-of-state State bank to export the interest charges

that are permissible in the home state are preserved, even if a branch

or branches of the same bank is located in the same state as the

borrower. If all of the non-ministerial functions involved in making

the loan are performed by a branch or branches located in a host state,

however, the host state's interest provisions should be applied to the

loan.

Non-Ministerial Functions Occur in Multiple States or Outside of

Banking Offices

There are some situations that are not addressed by the Interstate

Banking Statutes. These include loans where the three non-ministerial

functions occur in different states or where some of the three non-

ministerial functions occur in an office that is not considered to be

the home office or branch of the bank (collectively, ``banking

offices''). The OCC recently addressed these issues in Interpretive

Letter 822. With regard to loans where the three non-ministerial

functions occur in banking offices located in different states and the

loans cannot be said to have been ``made'' in a host state under the

criteria discussed in the legislative history of the Riegle-Neal Act,

the OCC concluded that the law of the home state could always be chosen

to apply to the loans because such a result will avoid throwing

``confusion'' into the complex system of modern interstate banking by

having no rate to apply and because the bank is always the lender,

regardless of where certain functions occur.

The other situation addressed in Interpretive Letter 822 is where

any of the non-ministerial functions occur in a host state but not in a

branch. This could occur, for example, where a loan is approved in a

back office but the proceeds of the loan are disbursed in a branch in a

host state.

In these and similar situations, the OCC concluded that home state

rates may be used. Alternatively, in those situations the interest

rates permitted by the host state where a non-ministerial function

occurs may be applied, if based on an assessment of all of the facts

and circumstances, the loan has a clear nexus to the host

state.29

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\29\ The non-ministerial functions, according to Senator Roth's

discussion of the Conference Report, are factors to be considered in

determining which state's law should be applied to a loan. See Roth

statement, at S12789:

The rationale for this conference amendment (substituting loan

servicing for disbursal of loan proceeds in the agency authority

contained in section 101) is that the actual disbursal of proceeds--

as distinguished from delivering previously disbursed funds to a

customer--is so closely tied to the extension of credit that it is a

factor in determining, in an interstate context, what State's law to

apply. (Emphasis added.)


 

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[[Page 27286]]


 

I agree with the OCC Chief Counsel's analysis on these issues and

her observations in Interpretive Letter 822 regarding the significance

of an appropriate disclosure to customers that the interest to be

charged on the loan is governed by applicable federal law and the law

of the relevant state which will govern the transaction.

The Non-Ministerial Functions

The OCC identified three non-ministerial functions for national

banks in Interpretive Letter No. 822 based upon the Riegle-Neal Act's

legislative history. An inquiry is required to determine the location

where each of the non-ministerial functions occur. Briefly stated, the

OCC determined that ``approval'' (i.e., the decision to extend credit)

occurs where the person is located who is charged with making the final

judgment of approval or denial of credit, and the site of the final

approval is the location where it is granted. ``Disbursal'' means

actual physical disbursal of the proceeds of a loan, as opposed to the

delivery of previously disbursed funds to the customer. Disbursal can

occur in various ways, including delivery to the customer in person or

crediting proceeds to the customer's account at a branch, but does not

include delivering the funds to an escrow or title agent who, in turn,

disburses them to the customer or for the customer's benefit.

``Extension of credit'' means the site from which the first

communication of final approval of the loan occurs.

While the need for such inquiries as to non-ministerial functions

may not be initially apparent, I believe that Senator Roth's

distinction for purposes of the ``disbursal'' function between ``the

actual disbursal of proceeds'' and ``delivering previously disbursed

funds to a customer'' is indicative of the type of inquiry Congress

intended in order to identify non-ministerial functions which effect

where a loan is made for purposes of determining the state law to be

applied to a loan. The same definitions should be equally applicable to

State banks under section 1831d.


 

Conclusion


 

An Interstate State Bank can be ``located'' for purposes of section

1831d in the state in which it is chartered, as well as the states

where the bank's out-of-state branch or branches are located. The

Interstate Banking Statutes do not affect the ability of an Interstate

State Bank to export interest rates on loans made to out-of-state

borrowers from that bank's home state, even if the bank maintains a

branch in the state where the borrower resides. If an out-of-state

branch or branches of an Interstate State Bank in a single host state

performs all the non-ministerial functions (approval of an extension of

credit, extension of the credit, and disbursal of loan proceeds to a

customer) related to a loan, it ``makes'' the loan to the customer for

purposes of the Interstate Banking Statutes and the loan should be

governed by the usury provisions of the host state. If the three non-

ministerial functions occur in different states or if some of the non-

ministerial functions occur in an office that is not considered to be

the home office or branch of the bank, then home state rates may be

used. Alternatively, in those situations the interest rates permitted

by the host state where a non-ministerial function occurs may be

applied, if based on an assessment of all of the facts and

circumstances, the loan has a clear nexus to the host state. To avoid

uncertainty regarding which state's interest rates apply to a loan

Interstate State Banks should make an appropriate disclosure to the

customer that the interest to be charged on the loan is governed by

applicable federal law and the law of the relevant state which will

govern the transaction.

Authorized to be published in the Federal Register by Order of the

Board of Directors dated at Washington, DC, this 9th day of May, 1998.


 

Federal Deposit Insurance Corporation,

Robert E. Feldman,

Executive Secretary.

[FR Doc. 98-13084 Filed 5-15-98; 8:45 am]

BILLING CODE 6714-01-P

Last Updated: March 24, 2024