# O

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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

#### Interpretive Letter #1004

August 4, 2004 **August 2004**

#### 12 USC 85

Subject: Prepayment fees

Dear **\[ \]**,

This is in response to your letter seeking confirmation that a national
bank located in Michigan may charge prepayment fees consistent with a
state parity statute that applies to loan-related charges imposed by
state banks and which section 85 incorporates and applies to national
banks.[^1]

Section 85 allows a national bank to charge on any loan or other
evidence of debt the rate of interest fixed by state laws for lenders
generally, or a greater rate if permitted by state law for state banks.
[^2] This "most favored lender" status permits a national bank to
contract with borrowers in any state for interest at the maximum rate
permitted by the laws of the state in which the national bank is
located. "Interest" for purposes of section 85 has been defined by OCC
regulation to include "any payment compensating a creditor or
prospective creditor for an extension of credit, making available a line
of credit, or any default or breach by a borrower of a condition upon
which credit was granted."[^3] Under this definition, the OCC has
determined that prepayment fees are interest for purposes of section
85.[^4]

In your request, you cite several Michigan statutes that impose
limitations on prepayment fees.[^5]

However, you also cite a provision of Michigan law that provides:

> A bank may collect interest and charges on loans and extensions of
> credit as permitted by the laws of this state or of the United States
> to any person.[^6]

You then cite regulations of the Office of Thrift Supervision ("OTS")
that state that federal savings associations may impose loan-related
fees, including prepayment fees, without regard to state laws that
impose limitations on these fees.[^7] As a result, you seek confirmation
of your analysis that national banks, pursuant to 12 U.S.C. 85, may
impose prepayment fees to the same extent that Michigan banks may impose
prepayment fees based on the state law parity provision which, read
literally, incorporates any authority provided to federal savings
associations under OTS regulations to assess loan-related fees
notwithstanding any state law limitations.

The cited OTS regulations assert that any state limitations that purport
to regulate loan-related fees, including prepayment fees, do not apply
to federal savings associations.[^8] Thus, it could follow that as a
result of Michigan's parity provision applicable to "interest and
charges on loans," state banks, likewise, could impose prepayment fees,
notwithstanding restrictions otherwise found in Michigan law, to the
same extent that federal savings associations may impose prepayment fees
notwithstanding Michigan law. If Michigan authorities interpret the
parity provision to reach this result with respect to state banks, then
we would we agree that by

operation of section 85, national banks also would be able to impose
prepayment fees notwithstanding restrictions otherwise found in state
law.[^9]

Sincerely,

**signed**

Julie L. Williams

First Senior Deputy Comptroller and Chief Counsel

[^1]: **\[ *Bank* \]** has its main office in **\[ \]** and branches in
    several states including Michigan. Consequently, under certain
    circumstances, **\[ *Bank* \]** may impose interest in accordance
    with section 85 and applicable Michigan law incorporated into
    section 85. *See* OCC Interpretive Letter No. 822, February 17,
    1998, *reprinted in* \[1997-98 Transfer Binder\] Fed. Banking L.
    Rep. (CCH) para. 81-265.

[^2]: *Tiffany v. National Bank of Missouri,* 85 U.S. 409 (1885). This
    "most favored lender" doctrine is incorporated into the OCC's
    regulations that implement section 85. *See* 12 C.F.R. 7.4001(b).

[^3]: 12 C.F.R. 7.4001(a).

[^4]: *See* OCC Interpretive Letter 744, August 21, 1996, *reprinted in*
    \[1996-1997 Transfer Binder\] Fed. Banking L. Rep. (CCH) para.
    81-109. Federal law and regulations, however, provide additional
    flexibility and authority for national banks to impose prepayment
    fees, a specific type of interest charge, with respect to
    adjustable-rate mortgages (ARM loans), a specific type of loan. As
    pointed out in footnote 2 of Interpretive Letter 744, the OCC's ARM
    regulation was adopted under the authority of 12 U.S.C. 371, which
    authorizes national banks to make real estate loans subject to
    "restrictions and requirements that the OCC may prescribe by
    regulation or order." The statute in its current form was adopted by
    Congress for the purpose of providing "national banks with the
    ability to engage in more creative and flexible financing." Pursuant
    to this statute, the OCC's ARM regulation specifically provides,
    with certain limited exceptions, that "a national bank offering or
    purchasing ARM loans may impose fees for prepayment notwithstanding
    any State law limitations to the contrary." 12 C.F.R. 34.23;
    Interpretive Letter by Eric Thompson, Director, Bank Activities and
    Structure, to Greg Pulles, General Counsel, TCF Financial
    Corporation (November 4, 1999) (unpublished). This regulation, which
    was originally adopted in 1981 and which then included a limited
    preemption of state restrictions on prepayment fees, was upheld by
    the Court of Appeals for the District of Columbia Circuit in 1983 as
    a valid exercise of the OCC's authority under section 371.
    *Conference of State Bank Supervisors v.* *Conover,* 710 F. 2d 878
    (D.C. Cir.1983).

[^5]: For instance, you cite Mich. Comp. Laws 438.31c(2)(c) which
    provides, with certain exceptions, that lenders making loans
    primarily secured by a first lien on a single family dwelling may
    not charge a prepayment fee or penalty above 1% of the amount of any
    prepayment made within three years of the date of loan and,
    thereafter, may impose no prepayment fee.

[^6]: Mich. Comp. Laws 487.14201(1)(2001 & Supp. 2004). This memorandum
    refers to this provision of the Michigan code as "the parity
    provision." We note that for purposes of the parity provision,
    "person" is defined as "any individual, partnership, corporation,
    limited liability company, governmental entity, or any other legal
    entity." *Id.* at 487.11202(r).

[^7]: 12 C.F.R. 560.2(b)(5).

[^8]: *Id.*

[^9]: In response to your inquiry, we also note that this determination
    applies to the same extent that Michigan banks can impose prepayment
    fees under the parity provision notwithstanding the lien priority of
    the mortgage, whether the mortgage contains a fixed or adjustable
    rate (except that prepayment fees on ARM loans may be assessed in
    accordance with 12 C.F.R. 34.23), or whether the note is a
    closed-end or open-end note.