4000 - Advisory Opinions
Interest Rates for Loans Made to Out-of-State Bank Customer
March 17, 1981
Kathy A. Johnson, Attorney
As per your request I have enclosed a copy of the letter written by our General Counsel, Mr. Frank L. Skillern, Jr., regarding most favored lender status under section 521 of the Depository Institutions Deregulation and Monetary Control Act. ("section 521"). During our telephone conversation you also posed the question of which rate would apply when a state bank makes a loan to an out-of-state customer. Since that question is not specifically addressed in the enclosed letter, I will attempt to answer it here.
The best guidance I can find to answer this question comes from a Supreme Court interpretation of 12 U.S.C. 85 in Marquette National Bank v. First of Omaha Service Corp., 439 U.S. 299 (1978). Since section 521 employs virtually identical language as that found in 12 U.S.C. 85, the Supreme Court's interpretation of the latter statute is relevant to an interpretation of section 521. As you know, the issue in this case was whether, under 12 U.S.C. 85, a national bank located in Nebraska could charge interest at the rates allowed under Nebraska law on credit-card loans made to customers who resided in Minnesota, even though such rates would be usurious under Minnesota law. The Court held that the bank could charge the Nebraska rates because under 12 U.S.C. 85 it could charge the rate allowed by the laws of the state in which it is located. The Court found that under 12 U.S.C. 85 the bank was "located" in the state named in its organization certificate. The Court found added support of this conclusion in the following facts: (1) finance charges on unpaid balances were assessed in that state, (2) payment was remitted to the bank in that state, and (3) credit cards were issued after credit assessments were made by the bank in that state. Id. at 310-312. Based on the Supreme Court's holding it would seem safe to say that a state bank could charge interest on loans at the rate allowed in the state in which it is organized even though that rate would be usurious in the state where the borrower resides.
The other side of this issue is more difficult. The question is whether a state bank organized in state X can charge a rate of interest allowed by the laws of state Y on a loan made to a resident of state Y when that rate is usurious under the laws of state X. In my research I have not come across a case with this particular fact pattern. However the holding in Marquette seems sufficiently broad to encompass this situation. The Court said that
If the location of the bank were to depend on the whereabouts of each credit-card transaction, the meaning of the term "located" would be so stretched as to throw into confusion the complex system of modern interstate banking. A national bank could never be certain whether its contacts with residents of foreign states were sufficient to alter its location for purposes of § 85. We do not choose to invite these difficulties by rendering so elastic the term "located.'' Id. at 312.
Thus the conservative approach to this issue would be that a bank, making an interstate loan, would determine the permissible interest rates under 12 U.S.C. 85 or section 521 by referring only to the laws of the state in which it is "located" (i.e., chartered), and not to the state in which the borrower resides or any other state.
It is interesting to note that the Seventh and Eighth Circuits have come to contrary conclusions in Fisher v. First National Bank of Chicago, 538 F.2d 1284 (7th Cir. 1976) and Fisher v. First National Bank of Omaha, 548 F.2d 255 (8th Cir. 1977). Since these cases predate the Marquette case and deal with the fact pattern dealt with in Marquette and not with the hypothetical situation described above, their weight, if any, in a court today is questionable. However, the arguments made in those cases may be of some interest to you.
As a caveat I would note that the above analysis assumes that section 521 is in effect under the laws of both states involved in the interstate loan. Should one of these states override the provisions of section 521 (as provided for under section 525 of the Monetary Control Act) a suit on the grounds of usury brought in that state would be subject to the choice of law provisions of that state. The outcome of such suit would therefore be unpredictable.
I hope this information is sufficient to answer your questions. If I can be of further assistance please feel free to contact me.