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[Federal Register Volume 63, Number 74 (Friday, April 17, 1998)]
[Notices]
[Pages 19258-19259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10181]

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FEDERAL DEPOSIT INSURANCE CORPORATION

General Counsel's Opinion No. 10; Interest Charges Under Section 
27 of the Federal Deposit Insurance Act

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of General Counsel's Opinion No. 10.

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SUMMARY: The FDIC's Legal Division has received a request for guidance 
regarding the types of charges that constitute ``interest'' for 
purposes of section 27 of the Federal Deposit Insurance Act. This 
General Counsel's Opinion is being provided for the benefit of the 
public, as well as institutions subject to section 27, because the 
statute speaks only in terms of ``interest'' but does not define the 
term. It is the Legal Division's opinion that the term ``interest,'' 
for purposes of section 27, includes those charges that a national bank 
is authorized to charge as interest under section 85 of the National 
Bank Act (NBA).

FOR FURTHER INFORMATION CONTACT: Barbara I. Taft, Assistant General 
Counsel, (202) 898-6830 or Rodney D. Ray, Counsel, (202) 898-3556, 
Federal Deposit Insurance Corporation, Legal Division, 550 17th Street, 
N.W., Washington, D.C. 20429.

Text of General Counsel's Opinion

    General Counsel's Opinion No. 10; Interest Charges Under Section 27 
of The Federal Deposit Insurance Act.

    By: William F. Kroener, III, General Counsel.

Background

    Federal statutes establish the maximum amounts of interest that 
insured depository institutions may charge their customers. The 
interest charges are governed by section 85 of the National Bank Act 
(NBA) (12 U.S.C. 85) for national banks; section 27 of the Federal 
Deposit Insurance Act (FDI Act) (12 U.S.C. 1831d) for state-chartered 
insured depository institutions and insured branches of foreign banks; 
and section 4(g) of the Home Owners' Loan Act (HOLA) (12 U.S.C. 
1463(g)) for savings associations.1 Although contained in 
different parts of the United States Code, the latter two provisions 
are patterned after section 85 of the NBA and generally authorize 
interest to be charged on loans to customers at the greater of:
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    \1\ See also section 501 of the Depository Institutions 
Deregulation and Monetary Control Act of 1980 (DIDMCA) (12 U.S.C. 
1735f-7a) which addresses interest rates on certain types of 
residential real estate loans, and section 528 of the DIDMCA (12 
U.S.C. 1735f-7a note (Choice of Highest Applicable Interest Rate)).
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    (1) A rate not more than one percent above the discount rate on 90-
day commercial paper in effect at the Federal Reserve Bank for the 
federal reserve district in which the lender is located; or
    (2) At the highest rate allowed by the laws of the state where the 
lender is located.
    Congress initially addressed the issue of the maximum rates of 
interest that national banks could charge borrowers by enacting section 
85 of the National Bank Act. That statute was enacted to foster a 
strong national banking system and protect national banks from 
potentially anti-competitive state legislation. Tiffany v. National 
Bank of Missouri, 85 U.S. 409, 412-13 (1873).
    Currently, section 85 authorizes national banks to charge their 
customers interest rates allowed by the laws of the state where the 
bank is located.2 The statute has been construed to 
authorize national banks to charge interest at rates authorized by 
state law for competing state institutions (the ``most favored lender 
doctrine''). Tiffany, 85 U.S. at 413.3 It also has been 
construed to authorize the use of interest rates authorized by the 
state where the lender is located no matter where the borrower resides. 
Marquette Nat'l Bank v. First Omaha Serv. Corp., 439 U.S. 299 (1978).
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    \2\ Section 85 also contains several alternative interest rate 
formulations which are not relevant to this opinion.
    \3\ See also 12 CFR 7.4001(b) (1997) (National bank may charge 
the maximum rate permitted to any state-chartered or licensed 
lending institution by the law of the state where the national bank 
is located).
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I. Construction of Section 27

    In the high interest rate environment of the late 1970s Congress 
recognized that section 85 of the NBA provided national banks with a 
distinct competitive advantage over state-chartered lending 
institutions, whose interest rates were constrained by state laws. 
4 To establish competitive equality between state-chartered 
banks, savings associations, and national banks, section 27 was added 
to the FDI Act by section

[[Page 19259]]

521 of the Depository Institutions Deregulation and Monetary Control 
Act of 1980 (DIDMCA), Pub. L. 96-221, 94 Stat. 132 (1980). Section 27 
was intended to give state-chartered banks the benefit of section 85 
and purposefully engrafted, at several points, language from the NBA. 
5 Greenwood Trust Co. v. Commonwealth of Massachusetts, 971 
F.2d 818, 826 (1st Cir.), cert. denied, 506 U.S. 1052 (1993).
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    \4\ See 126 Cong. Rec. 30665 (1979) (statements of Senators 
Pryor and Bumpers).
    \5\ See 126 Cong. Rec. 6900 (1980) (statement of Sen. Proxmire); 
126 Cong. Rec. 6907 (1980) (statement of Sen. Bumpers).
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    Because similar language and concepts appear in both statutes they 
frequently have been cited and discussed together in court opinions and 
construed in pari materia. See e.g., Greenwood Trust, 971 F.2d at 827; 
Hill v. Chemical Bank, 799 F. Supp. 948, 953 (D. Minn. 1992); Stoorman 
v. Greenwood Trust Co., 908 P.2d 133, 135 (Colo.), cert. denied, 116 
S.Ct. 2498 (1996); Copeland v. MBNA America Bank, N.A., 907 P.2d 87, 93 
(Colo.), cert. denied, 116 S.Ct. 2498 (1996); Hunter v. Greenwood Trust 
Co., 272 N.J. Super. 526, 532-38, 640 A.2d 855 (N.J. Super. 1994), 
reinstated, 146 N.J. 65, 679 A.2d 652 (N.J. 1996). The FDIC's practice 
also has been to construe the two provisions similarly. See FDIC 
Advisory Opinion No. 81-3, February 3, 1981, reprinted in [1988-1989 
Transfer Binder] Fed. Banking L. Rep. (CCH) P 81,006 (state-chartered 
banks have the same ``most favored lender'' status under section 27 as 
national banks have under section 85 of the NBA); FDIC Advisory Opinion 
No. 81-7, March 17, 1981, reprinted in [1988-1989 Transfer Binder] Fed. 
Banking L. Rep. (CCH) P 81,008 (state-chartered banks have the same 
right to export interest rates under section 27 as national banks have 
under section 85 of the NBA).

II. Charges Constituting Interest

    While neither section 85 nor section 27 defines what charges 
constitute ``interest,'' court decisions have not limited the scope of 
the term solely to a state's numerical percentage rate, but have 
broadly construed the term to include various other types of credit 
charges. See e.g., Smiley v. Citibank (South Dakota), N.A., 116 S.Ct. 
1730, 1734 (1996) (deferring to the Office of the Comptroller of the 
Currency's (OCC) regulation interpreting ``interest,'' for purposes of 
section 85, as including payments compensating a creditor for making a 
loan, extending a line of credit, or any default or breach by a 
borrower of a condition upon which credit was extended, but excluding 
other types of payments, such as, payments to reimburse a creditor for 
loan processing fees, collateral insurance, or appraisal fees); 
Greenwood Trust, 971 F.2d at 824 (late payment fees and kindred charges 
may constitute ``interest'' under section 27); Fisher v. First Nat'l 
Bank of Omaha, 548 F.2d 255, 258-61 (8th Cir. 1977) (cash advance 
fees); Watson v. First Union Nat'l Bank, 837 F. Supp. 146, 150 (D.S.C. 
1993) (overlimit fees); Tikkanen v. Citibank (South Dakota) N.A., 801 
F. Supp. 270, 278-79 (D. Minn. 1992) (late payment, over the limit 
fees, and similar charges); Hill, 799 F. Supp. at 954 (over the limit 
fees); Stoorman, 908 P.2d at 136 (late payment fees); Copeland, 907 
P.2d at 94 (late payment fees); Sherman v. Citibank (South Dakota), 
N.A., 272 N.J. Super. 435, 640 A.2d 325 (N.J. Super. 1994), reinstated, 
146 N.J. 65, 679 A.2d 652 (N.J. 1996) (late payment fees); Hunter, 272 
N.J. Super. at 537 (late payment fees).

III. Other Agency Interpretations

    The OCC has defined ``interest'' for purposes of the NBA by 
interpretive ruling as follows: ``The term `interest' as used in 12 
U.S.C. 85 includes any payment compensating a creditor or prospective 
creditor for an extension of credit, making available of a line of 
credit, or any default or breach by a borrower of a condition upon 
which credit was extended. It includes, among other things, the 
following fees connected with credit extension or availability: 
numerical periodic rates, late fees, not sufficient funds (NSF) fees, 
overlimit fees, annual fees, cash advance fees, and membership fees. It 
does not ordinarily include appraisal fees, premiums and commissions 
attributable to insurance guaranteeing repayment of any extension of 
credit, finders' fees, fees for document preparation or notarization, 
or fees incurred to obtain credit reports.'' 12 CFR 7.4001(a) (1997). 
Virtually the same definition also has been adopted by the Office of 
Thrift Supervision in connection with section 4(g) of the HOLA for 
savings associations. 6 See 12 CFR 560.110 (1997).
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    \6\  The statutory language contained in section 4(g) of HOLA 
was enacted in section 522 of DIDMCA and was originally codified as 
section 414 of the National Housing Act (NHA)(12 U.S.C. 1730g (a)). 
The language was later transferred from the NHA to section 4(g) of 
HOLA by section 301 of the Financial Institutions Reform, Recovery 
and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73, 103 Stat. 
183, 282 (1989).
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    Although the OCC's interpretive ruling was only recently published 
in the Code of Federal Regulations, the ruling is consistent with the 
OCC's earlier legal interpretation of the term 7 and the 
United States Supreme Court has determined that it constitutes a 
reasonable interpretation of the statute. Smiley, 116 S.Ct. at 1736.
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    \7\ See, OCC Interpretive Letter No. 670, February 17, 1995, 
reprinted in [1994-1995 Decisions] Fed. Banking L. Rep. (CCH) P 
83618.
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Conclusion

    Section 27 and section 85 of the NBA have been and should be, in 
the Legal Division's opinion, construed in pari materia because section 
27 is patterned after section 85 and the provisions embody similar 
terms and concepts. Congress also clearly intended to establish 
competitive equality between state-chartered lending institutions and 
national banks with regard to interest rates by enacting section 27. In 
addition, the OCC and OTS have adopted similar regulatory definitions 
of ``interest'' for purposes of section 85 of the NBA and section 4(g) 
of HOLA, respectively. Therefore, it is the Legal Division's opinion 
that the term ``interest'', for purposes of section 27, includes those 
charges that a national bank is authorized to charge under section 85 
of the NBA. See 12 CFR 7.4001(a) (1997).

    Authorized to be published in the Federal Register by Order of 
the Board of Directors, dated at Washington, D.C., this 24th day of 
March, 1998.

Federal Deposit Insurance Corporation.
James D. LaPierre,
Deputy Executive Secretary.
[FR Doc. 98-10181 Filed 4-16-98; 8:45 am]
BILLING CODE 6714-01-P
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