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4000 - Advisory Opinions
12 U.S.C. § 1831d Preempts Contrary State Common Law
Restrictions on Credit Card Loans
FDIC--93--27
July 12, 1993
Douglas H. Jones, Deputy General Counsel
You have inquired whether section 521 of the Depository
Institutions Deregulation and Monetary Control Act of 1980
("DIDA"), Pub. L. No. 96--221, 94 Stat. 132, codified as section
27 of the Federal Deposit Insurance Act (12 U.S.C. 1831d), authorizes
state-chartered banks insured by the Federal Deposit Insurance
Corporation ("FDIC") to
{{8-16-93 p.4752}}"export" charges authorized by
the bank's chartering state on credit card loans to borrowers in states
having common-law prohibitions on such charges. Subject to the
qualifications stated herein, we have concluded that it does. We have
assumed, for purposes of responding to your inquiry, that the "opt
out" provision in section 525 of DIDA does not apply here.
Accordingly, we need not and do not discuss the impact on this analysis
if the "opt out" right had been exercised.
Section 521 provides in pertinent part:
In order to prevent discrimination against State-chartered
insured depository institutions . . . such State bank . . . may,
notwithstanding any State constitution or statute which is hereby
preempted for the 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 the rate
allowed by the laws of the State . . . where the bank is
located. . . .
12 U.S.C. 1831d(a).
We have stated consistently that section 521 was intended to give
state-chartered FDIC-insured banks the same "most favored lender"
status and right to export interest enjoyed by national banks under 12
U.S.C. 85 ("section 85"). See, e.g., Letter from Frank
L. Skillern, Jr., General Counsel, FDIC #81--3 [1988--89 Transfer
Binder] Fed. Banking L. Rep. (CCH) ¶ 81,006 at 55,107 (February 2,
1981) (most favored lender); Letter from Kathy A. Johnson, Attorney,
FDIC #81--7 [1988--89 Transfer Binder] Fed. Banking L. Rep. (CCH)
¶ 81,008 at 55,110 (March 17, 1981) (exportation). In our most recent
interpretation, we concluded that section 521 preempts the laws of an
out-of-state borrower's home state, to the extent that such laws
purport to restrict the interest or fees that are a component of
interest or material to determination of interest ("Material
Fees") that an FDIC-insured state bank is authorized to assess by
its chartering state. See Letter from Douglas H. Jones,
Deputy General Counsel, FDIC #92--47 [Current] Fed. Banking L. Rep.
(CCH) ¶ 81,534 at 55,730--31 (July 8, 1992).
Although our previous interpretations have not explicitly so stated,
we believe that the form of such attempted restrictions--i.e., whether
they arise under a statute, constitution, or common-law doctrine--is
not controlling. We reach this conclusion because, regardless of form,
such restrictions would necessarily eviscerate the underlying purpose
of section 521: to provide state-chartered FDIC-insured banks with the
same authority enjoyed by national banks under Section
85 1
to charge interest and Material Fees in the amount authorized for the
most favored lender of the bank's home state.
Section 521 expressly preempts state constitutions and statutes. It
does not, however, either expressly preempt or expressly "save"
state common law causes of action 2
purporting to limit percentage interest rates or Material Fees. In
Cipollone v. Liggett Group, Inc., 112 S. Ct. 2608 (1992),
the Supreme Court ruled that an express preemption provision in a
statute made resort to an implied preemption analysis unnecessary,
"when that provision provides a reliable indicium of
congressional intent with respect to state
{{8-16-93 p.4753}}authority"'. Id. at 2618
(citation omitted) (emphasis added). Although some courts have
suggested that the presence of an express preemption provision acts as
an absolute bar to any implied preemption
analysis, 3
we believe that the better view (and that most consistent with the
language of Cipollone) was that taken by the United States
Court of Appeals for the Second Circuit in Toy Mfrs. of America,
Inc. v. Blumenthal, 986 F.2d 615 (2d Cir. 1992). Specifically, the
Second Circuit stated that "a finding of implied preemption (which
enlarges the field of preemption beyond what is covered by an express
provision) is not automatically foreclosed by the existence of a
preemption clause . . . ." Id. at 623. It went on to
rule that implied preemption analysis is barred only if it is first
determined that the express preemption clause provides a reliable
indicium of congressional intent. Id. at 623--24. See
also Boyle v. Chrysler Corp., 1993 Wisc. App. LEXIS 561, at
*14 (May 18, 1993) (court may engage in implied preemption
analysis where express preemption language does not provide a reliable
indicium of congressional intent).
Accordingly, we must first determine whether the express preemption
provision in section 521 "provides a reliable indicium of
congressional intent with respect to state authority."
Cipollone, 112 S. Ct. at 2618. If it does not, we must then
ascertain whether section 521 impliedly preempts common law
restrictions on interest or Material Fees on credit card loans imposed
by a foreign borrower's state of residence, when such interest or
Material Fees are permitted by an FDIC-insured bank's chartering state.
For the reasons set forth below, we conclude that the express
preemption provision in section 521 does not provide a comprehensive
indicium of congressional intent with respect to state authority, and
that section 521's preemptive sweep encompasses state common law
restrictions on credit card interest and Material Fees that are
inconsistent with its terms.
First, the introductory clause in section 521 stating the statute's
purpose of avoiding discrimination against state chartered federally
insured banks necessarily requires an analysis of the scope of the
implied preemption found in section 85 in order to ascertain
congressional intent. Section 521 is sui generis in this
respect: Congress transplanted verbatim in section 521 substantive
language from section 85 that had been the subject of extensive
judicial analysis over the course of more than 50 years, with the
explicit purpose of providing state-chartered banks with authority
identical to that enjoyed by national banks under section 85. In order
to ensure that there was no question at all about the manner in which
section 521 would be interpreted, Congress rather explicitly
incorporated by reference the body of jurisprudence that had sprung up
in connection with section 85 with the following statement of purpose
in the text of section 521: "In order to prevent discrimination
against State-chartered insured depository institutions. . . ."
Section 85, however, has no preemption clause, while section 521, in
addition to mirroring the operative substantive language of section 85,
does have an express preemption clause. In the absence of the express
preemption clause in section 521, the scope of section 521's preemption
would, of course, be coextensive with that of section
85. 4
The question then arises whether Congress, by inclusion of an express
preemption clause in section 521, intended to narrow the preemptive
sweep of the substantive language copied from section 85 to section
521. We have concluded that it did not.
We have located nothing in the legislative history of section 521
that explains why an express preemption clause was added to section
521, when section 85 lacked such a provision. The legislative history
of section 521 makes it clear, however, that the single overriding
purpose of section 521 was to confer on state-chartered FDIC-insured
banks the
{{8-16-93 p.4754}}same rights enjoyed by national banks.
Given this legislative purpose, and the lack of any evidence suggesting
a congressional intent to circumscribe the preemptive sweep of section
521, inclusion of the express preemption provision in section 521
appears to be nothing more than an attempt to guarantee state-chartered
banks, traditionally creatures of state law, the same rights enjoyed by
national banks under 12 U.S.C. 85. The fact that the express preemption
provision addresses statutes and constitutions but not common law
appears to merely reflect the form of specific usury limitations being
discussed before Congress in connection with section 521's passage
rather than a congressional attempt to "save" common law causes
of action from section 521's preemptive
sweep. 5
Given the clear intent of both the language and legislative history
of section 521--to establish competitive equality between state and
national banks--it seems reasonable to conclude that the preemptive
sweep of section 521 should generally be construed as being coextensive
with that of Section 85. That conclusion is reinforced by Congress'
enactment, concurrently with its adoption of section 521, of section
525 of DIDA ("section 525") 6
, which authorizes states to "opt out" of section 521. Both the
language of section 525 and the legislative history of sections 521 and
525 show that the opt out was designed to be the only exception to the
preemption in section 521: "State chartered depository
institutions are given the benefits of 12 U.S.C. 85 unless a State
takes specific action to deny State chartered institutions that
privilege." 126 Cong. Rec. S3170 (1980) (statement of Senator
Proxmire, Chairman of the Senate Banking Committee) (emphasis added).
The "specific action" that must be taken by a state to deprive a
state bank of the benefits of section 85 was described in the
conference report on section 521 as follows:
In order for a state to override a federal preemption of state
usury laws provided for in this title the override proposal must
explicitly and by its terms indicate that the state is overriding
the preemption. Under this requirement the state law, constitution, or
other override proposal must specifically refer to this Act and
indicate that the state intends to override the federal preemption this
Act provides.
H.R. Conf. Rep. No. 96--842, 96th Cong., 2d Sess. 79 (1980),
reprinted in 1980 U.S.C.C.A.N. 298, 309 (emphasis added). It
seems clear that the opt-out in section 525 was designed to be the only
exception to the rule that section 521 conferred on state-chartered
banks the same rights enjoyed by national banks under section 85:
"We say that we provide this override unless and until such
State legislatures adopt laws stating in substance that such State
does not want such amendment or amendments made to the statute with
respect to this. So I don't know what we could do that would be
effective beyond this." S. 1988 Hearings at pp. 48--49 (statement of
Senator Proxmire). Given the extensive and spirited discussion of
states' rights throughout the legislative history of sections 521 and
525, if Congress had intended to carve out state common law from the
preemptive sweep of section 521, one would expect that intent would
have been mentioned somewhere in that history. We have located no such
reference.
Our conclusion that the preemptive effect of Section 521 is
coextensive with that of section 85 is further reinforced by the
identity of relevant statutory language in subsection (b) of section
521 (12 U.S.C. 1831d(b)), and that in 12 U.S.C. 86 ("section
86"), the counterpart remedial provision in the National Bank Act.
Section 86 and subsection 521(b)
{{4-29-94 p.4755}}
both provide that knowingly "taking, receiving, reserving, or
charging" interest greater than that allowed by federal law (in the
case of national banks, section 85, and in the case of FDIC-insured
state banks, section 521(a)) will be "deemed a forfeiture of the
entire interest which the note, bill, or other evidence of debt carries
with it." Both statutes then limit a borrower's recovery to twice
the amount of interest paid, and both contain a two year statute of
limitations.
It has long been settled that section 86 provides the exclusive
remedy for challenging the interest charged by a national bank.
See, e.g., First Nat'l Bank in Mena v. Nowlin, 509 F.2d 872,
881 (8th Cir. 1975) ("[S]ince Congress has provided a penalty for
usury, that action preempts the field and leaves no room for varying
state penalties."). Similarly, at least one court has held that
section 521(b) "must be interpreted as an exclusive federal remedy
for usury claims [including claims based on credit card late charges
and overlimit fees] against federally insured, state-chartered
banks." Hill v. Chemical Bank, supra, 799 F. Supp. at
952. As the Hill opinion noted, the operative language in
section 86 and subsection 521(b) is substantially similar, and
"subjecting state banks to the many and various state law remedies
while national banks are subject only to the federal remedy would
disrupt the level playing field' Congress envisioned in enacting
§ 521.'' Id. That consideration, of course, applies with
particular force in the case of state common law remedies, and
buttresses our conclusion that section 521, like section 85, preempts
both statutory and common law claims.
Finally, an interpretation of section 521 which would subject
the interest charges of FDIC-insured state banks to the limitations
imposed by the common law of foreign borrowers' states would conflict
with the unambiguous language of section 521, which empowers state
banks to charge "interest . . . at the rate allowed by the laws of
the State . . . where the bank is located." 12 U.S.C.
§ 1831d(a). In Marquette Nat'l Bank of Minneapolis v. First of
Omaha Serv. Corp., 439 U.S. 299 (1978), the Supreme Court
unanimously interpreted the identical language in section 85 to mean
that on an interstate loan, the laws of the state where the bank is
located--not the laws of the borrower's state--determine the rate of
interest which may be charged. Because section 85 is section 521's
"direct lineal ancestor", Greenwood Trust Co., supra,
971 F.2d at 830, prior judicial interpretations of language
transplanted from the former to the latter--including the language at
issue here--should be controlling. See Greenwood Trust Co.,
supra, 971 F.2d at 827.
The same conclusion was reached by the court in Gilbert v.
Greenwood Trust Co., [Current] Fed. Banking L. Rep. (CCH)
¶ 89,412 at 8231 (Court of Common Pleas, Phila. County, Pa. March 11,
1993), which held that "in enacting Section 521 of DIDA,
Congress intended to preempt all state law, including state
common law, which would intrude into the federal pale' of
DIDA." (emphasis added) (internal citation omitted). For the reasons
stated herein, we concur with the result in the Gilbert case
which, to the best of our knowledge, is the only written opinion
addressing the issue.
This letter sets forth our interpretation of section 521. It is
possible, of course, that a court in a particular jurisdiction may
adopt a contrary position, notwithstanding our interpretation.
Accordingly, you should independently review the state of the law in
each pertinent jurisdiction when advising our client on the issues
discussed in this letter.
1There can be little doubt that the purpose of section 521 was
to ensure such parity. See, e.g., Greenwood Trust Co. v.
Massachusetts, 971 F.2d 818, 830 (1st Cir. 1992), cert.
denied, 113 S. Ct. 974 (1993) (Section 521 "was enacted in
order to strike a competitive balance between state and national
lending institutions by giving them equal power in charging interest
rates. Allowing state banks to charge the same or similar fees in
connection with the extension and maintenance of credit as national
banks are allowed to charge ensures parity between the two types of
institutions"); Hill v. Chemical Bank, 799 F. Supp. 948,
951 (D. Minn. 1992) ("As the language and legislative history of
§ 521 make clear, Congress enacted § 521 to create parity between
national and state banks with respect to usury limitations.''). The
operative language of section 521 and section 85 is virtually
identical. Moreover, the text of section 521 itself states that it was
enacted "[i]n order to prevent discrimination against
State-chartered insured depository institutions. . . ." 12 U.S.C.
1831d(a). Go Back to Text
2Compare section 521 with 15 U.S.C. 1397(k) (saving
common law actions); 15 U.S.C. 4406(c) (saving state common law and
statutory liability actions); 29 U.S.C. 653(b)(4) (saving certain
common law and statutory liabilities); 49 U.S.C. App. § 1506 (saving
common law and statutory remedies). Go Back to Text
3See, e.g., Stamps v. Collagen Corp., 984 F.2d 1416
(5th Cir. 1993); King v. Collagen Corp., 983 F.2d 1130, 1133
(1st Cir. 1993). Go Back to Text
4It is clear that section 85 preempts all contrary state law
(including, without limitation, state common law). That proposition has
not, to our knowledge, been seriously questioned. The substantive
language of section 85, the exclusive remedy for challenging interest
charged by a national bank in 12 U.S.C. 86, and the ease with which
section 85 could be circumvented if it did not preempt state common law
all compel the conclusion that section 85 displaces all contrary state
law. The discussion of the implied preemption of contrary state common
law by the substantive provisions of section 521, infra,
applies with equal force to implied preemption of common law by
section 85. Go Back to Text
5See, e.g., Usury Lending Limits: Hearing Before the
Committee on Banking, Housing, and Urban Affairs, United States Senate,
on S. 1988, to Equalize Competition Between State and National Banks
and for Other Purposes, 96th Cong., 1st Sess. (1979) (the
"S.1988 Hearings") at 18 (Arkansas usury limit set forth in state
constitution adopted in 1874); 145 (Texas usury limit set forth in
state constitution); and 161--169 (discussing usury statutes, some of
which dated back 100 years). Go Back to Text
6Section 525 of DIDA provided in pertinent part: "The
amendments made by sections 521 through 523 of this title shall apply
only with respect to loans made in any state during the period
beginning on April 1, 1980, and ending on the date, on or after April
1, 1980, on which such State adopts a law or certifies that the voters
of such State have voted in favor of a provision, constitutional or
otherwise, which states explicitly and by its terms that such State
does not want the amendments made by such sections to apply with
respect to loans made in such State." Section 525 has never been
incorporated into the U.S. Code itself, but the substance of its
provisions is set out as a note to 12 U.S.C. 1831d. Go Back to Text
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