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4000 - Advisory Opinions

12 U.S.C. § 1831d Preempts Contrary State Common Law Restrictions on Credit Card Loans


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 "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 851 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 action2 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 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 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)

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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