July 21, 2003 **Interpretive Letter #974**

**September 2003**

**12 USC 85**

Dear **\[ \]**:

This is in response to your inquiry of June 10, 2003 on behalf of **\[
\]** (the Bank) and its operating subsidiaries, **\[** *OpSub1* **\]**
and **\[** *OpSub2* **\]** (the Operating Subsidiaries). In that letter,
you request confirmation that the Operating Subsidiaries may originate
mortgage loans and charge and export interest, including fees that
constitute interest as defined in 12 C.F.R. § 7.4001, as authorized by
12 U.S.C. § 85 and applicable Indiana law to borrowers residing in all
states and without regard to the site of the real property securing the
loan. For the reasons described below, the Operating Subsidiaries may
impose and export Indiana interest charges under the same terms and
conditions applicable to the Bank.

The Bank has its main office in **\[** *State* **\]** and no branches in
any other state. The Operating Subsidiaries are wholly owned by the
Bank. The Operating Subsidiaries originate first and subordinate secured
mortgage loans in their own names on a nationwide basis secured by real
property consisting of one to four family residential dwellings. You
note that the Operating Subsidiaries are subject to examination and
supervision by the OCC and operate in compliance with requirements and
limitations imposed by Section 85 and OCC regulations and
interpretations regarding Section 85. The Bank seeks confirmation that
it may establish, through the Operating Subsidiaries, nationwide lending
programs with pricing policies consistent with the laws of the parent
bank's home state, Indiana.

The Operating Subsidiaries are authorized operating subsidiaries of the
Bank, approved by the OCC under 12 C.F.R. § 5.34. As such their
activities are subject to the same terms and conditions that apply to
the Bank. As stated in the relevant OCC regulations \--

> *Examination and supervision*. An operating subsidiary conducts
> activities authorized under this section pursuant to the same
> authorization, terms and conditions that apply to the conduct of such
> activities by its parent national bank.[^1]

Elsewhere, our regulations specify that "\[s\]tate laws apply to
national bank operating subsidiaries to the same extent that those laws
apply to the parent national bank."[^2] Legislation also recognizes the
permissibility of national banks engaging in activities through
operating subsidiaries. In the Gramm-Leach-Bliley Act, Congress
expressly acknowledged that national banks may own subsidiaries that
engage "solely in activities that national banks are permitted to engage
in directly and are conducted subject to the same terms and conditions
that govern the conduct of such activities by national banks."[^3]
Operating subsidiaries are often described as equivalent to a department
or division of their parent bank, and our regulations ensure that
operating subsidiaries will be subject to the same Federal laws and
standards that govern their parent bank, including any state laws and
standards that are made applicable to the parent bank by Federal
law.[^4]

One such law is section 85 governing the rate of interest a national
bank may charge. Under section 85, the rate of interest a national bank
is authorized to charge is based on the laws of the State in which the
bank is located.[^5] OCC regulations provide that:

> A national bank located in a state may charge interest at the maximum
> rate
>
> permitted to any state-chartered or licensed lending institution by
> the law of that state.[^6]

This "most favored lender" lender status permits a national bank to
contract with borrowers in any state for interest at the maximum rate
permitted by the law of the state in which the national bank is located.
Generally, that is the state in which the main office of the national
bank is located, and the bank may impose rates of interest without
regard to the law of the state where the borrower resides.[^7]

Accordingly, pursuant to 12 C.F.R. §§ 5.34(e)(3) and 7.4006, the amount
of interest the Operating Subsidiaries may charge is governed by section
85 to the same extent as section 85 is applicable to its parent
bank.[^8] Thus, the permissible rates of interest authorized for the
Operating Subsidiaries are based on **\[** *State* **\]** law, as are
the Bank's.

I hope the foregoing is helpful in your analysis of your client's
lending programs. Please do not hesitate to contact my office at (202)
874-5200; MaryAnn Nash, Counsel, at (202) 874-5090; Jerome L. Edelstein,
Senior Counsel, at (202) 874-5300; or Coreen Arnold, District Counsel,
at (312) 360-8805, if you have any questions or if you need any
additional information.

Sincerely,

/s/ Julie L. Williams

Julie L. Williams

First Senior Deputy Comptroller and Chief Counsel

[^1]: 12 C.F.R. § 5.34(e)(3).

[^2]: 12 C.F.R. § 7.4006.

[^3]: Pub. L. No. 106-102, § 121, 113 Stat. at 1378, *codified at* 12
    U.S.C. § 24a(g)(3).

[^4]: Letter from Charles F. Byrd, Assistant Director, Legal Advisory
    Services Division to (October 30, 1977), *reprinted in* \[1978-1979
    Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 85,051 (national bank
    operating subsidiaries are in effect incorporated departments of the
    bank). *See also Wells Fargo v. Boutris,* No. Civ. S-03-0157, 2003
    U.S. Dist. WL 21277203 at \*6 (E.D.Cal. May 9, 2003); (operating
    subsidiary is "treated as department or division of its parent bank
    for regulatory purposes"); *National City Bank of Indiana v.
    Boutris,* No. Civ. S-03-0655 (E.D. Cal. July 2, 2003) (same).

[^5]: 12 U.S.C. § 85.

[^6]: 12 C.F.R. § 7.4001(b).

[^7]: *Marquette National Bank of Minneapolis v. First of Omaha Service
    Corp,* 439 U.S. 299 (1978). Under certain circumstances, national
    banks with branches in more than one state may be required to impose
    interest rates permitted by the law of a state in which they have a
    branch. That would happen in circumstances where three functions \--
    loan approval, communication of loan approval, and disbursal of loan
    proceeds \-- all occur in a branch or branches in the same branch
    state. OCC Interpretive Letter No. 822 (Feb. 17, 1998), *reprinted
    in* \[1997-1998 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶
    81-265. Absent this set of circumstances, a national bank may impose
    rates permitted by the state where its main office is located. This
    issue does not arise with respect to the Bank because it has no
    branches outside of Indiana.

[^8]: *See* OCC Interpretive Letter 954, December 16, 2002, *reprinted
    in* \[Current Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 81-479;
    OCC Interpretive Letter by Julie L. Williams, First Senior Deputy
    Comptroller and Chief Counsel, to L. Richard Fischer (February 12,
    2003) (both letters determining that an operating subsidiary of
    national bank could rely on section 85 to the same extent that the
    parent bank could rely on section 85). This position was first
    expressed by the OCC in a 1979 letter. *See* OCC Interpretive Letter
    by John Shockey, Chief Counsel (May 18, 1979). *See also Moss v.
    Southtrust Mobile Services, Inc*[.]{.underline}, No. CV-95-P-1647-W,
    1995 U.S. Dist. LEXIS 21770 (N.D. Ala. Sept. 22, 1995) (court
    concluded, without analysis, that section 85 applied to the
    subsidiary in question pursuant to 12 C.F.R. § 5.34 because it was
    an operating subsidiary of a national bank).

    We also confirm your conclusion that, as to loans secured by first
    liens on residential property, section 85 provides national banks
    with an alternative source of interest rate authority from that
    provided by 12 U.S.C. § 1735f-7a, which preempts state interest
    limitations on such loans. Section 1735f-7a, however, does not apply
    where a state has opted out of this federal preemption and it does
    not preempt state limits on prepayment fees and late charges. In
    adopting section 1735f-7a, however, Congress provided that where
    that section and section 85 apply to the same loan or mortgage, the
    loan or mortgage may be made at the highest possible rate. 12 U.S.C.
    § 1735f-7a note (Choice of Highest Applicable Interest Rate).