Preemption of State Law for State Banks

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Preemption of State Law for State Banks

• Prepared by Robert C. Fick, Esq., FDIC
• Presented by Joe DiNuzzo, Esq., FDIC

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The Financial Services Roundtables Petition

• In December 2004 the Roundtable asked the FDIC to
  issue Rules that would effectively preempt
  certain State laws for State-chartered banks.
• Purpose to provide parity between State banks
  and national banks in interstate operations

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The Financial Services Roundtables Petition

• The Roundtable argued that State banks were at a
  significant competitive disadvantage to national
  banks.
• National banks single set of laws and
  regulations
• State banks different set of laws for each
  State

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The Financial Services Roundtables Petition

• The Roundtable cites this competitive imbalance
  as one reason why there has been a migration of
  assets to the national bank charter.

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The Financial Services Roundtables Petition

• Remedy
• FDIC to issue rules that would permit State banks
  to operate interstate under a single set of laws
  and regulations to the same extent that a
  national bank can.

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The Financial Services Roundtables Petition

• Specifically, they suggested rules that
• provide that a State bank can operate interstate
  under its Home State law to the same extent that
  a national bank can under the NBA and OCC regs,
  and
• preempt Host State usury laws for State banks in
  a manner parallel to the OCCs preemption of Host
  State usury laws for national banks.

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May 2005 FDIC Public Hearing

• 34 witnesses
• 16 testified in person and
• 18 by written statement
• Bankers, trade associations, public interest
  groups, State regulators, Members of Congress,
  and State AGs

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FDIC Board Action

• At its October 6th meeting the Board authorized
  publication of a Notice of Proposed Rulemaking
  that would implement sections 24 (j) and 27 of
  the FDI Act.
• 70 Fed. Reg. 60019 (October 14, 2005).

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Sections 24(j) and 27 of the FDI Act

• Section 24 (j), 12 U.S.C. 1831a(j), generally
  describes which Host State laws apply to branches
  of out-of-State, State banks
• Section 27, 12 U.S.C. 1831d, generally
  describes the interest rates that State banks may
  charge.

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Section 24(j)(1)

• The laws of a host State . . . 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 .
  . . pursuant to the preceding sentence, home
  State law shall apply to such branch.

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FDICs Proposed Rules

• Proposed New Subpart F to
• 12 C.F.R. Part 362
• Implementing section 24(j)
• Proposed New Part 331
• Implementing section 27

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Proposed New Subpart F

• Definitions
• Activity conducted at a Branch
• activity of, by, through, in, from, or
  substantially involving, a Branch.
• Home State, Host State, Out-of-State Bank

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Proposed New Subpart F

• A Host State law does not apply to an activity
  conducted at a branch of an out-of-State State
  bank, to the same extent that a Federal Court or
  the OCC has determined in writing that the
  particular Host State law does not apply to the
  activity conducted at a branch of an out-of-State
  national bank.

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Proposed New Subpart F

• If a particular Host State law does not apply to
  such an activity of an out-of-State, State bank
  because of the preceding sentence, then the
  banks Home State law applies.

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Proposed New Subpart F

• Generally, a State bank that has a branch in a
  Host State may conduct any activity at such a
  branch that is permissible under its Home State
  law if it is permissible either
• For a branch of an out-of-State national bank or
• For a bank chartered by the Host State.

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Proposed New Part 331

• Section 27
• Generally provides that a State bank can charge
  interest at the rates allowed by the law of the
  State where the bank is located.

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Proposed New Part 331

• 331.2 defines interest
• Any payment compensating a creditor or
  prospective creditor for
• an extension of credit,
• making available a line of credit, or
• any default or breach of a condition to the
  extension of credit.

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Proposed New Part 331

• Examples of interest include
• Numerical periodic rates
• Late fees
• Creditor-imposed NSF fees
• Overlimit fees
• Annual fees
• Cash advance fees and
• Membership fees

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Proposed New Part 331

• Interest does not include
• Appraisal fees
• Premiums and commissions on repayment insurance
• Finders fees
• Document preparation fees
• Notarization fees, or
• Credit report fees

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Proposed New Part 331

• Most-favored-lender status
• An insured state bank can charge interest at the
  maximum rate permitted to any state-chartered or
  licensed lending institution by the law of the
  state where the bank is located.

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Proposed New Part 331

• An insured state bank can charge corporate
  borrowers any rate agreed upon by the parties.

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Proposed New Part 331

• 331.4 A state bank is located
• in the state where it is chartered (its Home
  State) and
• in each state where the bank maintains a branch
  (Host State(s)).

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Proposed New Part 331

• 331.3 Location of non-interstate banks and
  insured branches
• A state bank that does not have interstate
  branches or operates exclusively through the
  Internet is located in the state that issued the
  charter.
• An insured branch of a foreign bank is located in
  the state that issued the license.

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Proposed New Part 331

• 331.4 Location and permissible interest rates for
  State banks located in more than one State
• The State where all three of the non-ministerial
  functions occur, or
• The Home State, if the non-ministerial functions
  either do all not occur in one State or any of
  them occur in a State where the bank does not
  have a branch.
• A Host State where a non-ministerial function
  occurs, if there is a clear nexus.

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Proposed New Part 331

• The location of the non-ministerial functions
• Where the person charged with making final
  approval or denial decision is located,
• Where the bank disburses the loan funds,
• Where the bank makes its first communication of
  final approval of the loan.

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Comments on the Proposed Rules

• 57comments received
• 23 from banks and trade associations
• 11 from public interest groups
• 7 regulators
• 1 state legislator
• 11 in favor as proposed, 20 opposed
• Race to the Bottom consumer protection
• Written determination requirement

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Questions?