[Federal Register Volume 63, Number 95 (Monday, May 18, 1998)]
[Notices]
[Pages 27282-27286]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13084]


=======================================================================
-----------------------------------------------------------------------

FEDERAL DEPOSIT INSURANCE CORPORATION


General Counsel's Opinion No. 11, Interest Charges by Interstate 
State Banks

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of General Counsel's Opinion No. 11.

-----------------------------------------------------------------------

SUMMARY: The FDIC has received inquiries regarding the application of 
section 27 of the Federal Deposit Insurance Act to State banks 
operating interstate branches. This General Counsel's Opinion sets 
forth the Legal Division's conclusions regarding where such banks are 
``located'' for purposes of section 27; when host state, as opposed to 
home state, laws will provide the appropriate interest rates for loans 
to customers; how various functions related to making loans to 
customers should be defined and the impact that they will have on the 
application of a particular state's interest rates to those loans; and 
the need for appropriate disclosure of the laws governing the loan to 
bank customers.

FOR FURTHER INFORMATION CONTACT: Barbara I. Taft, Assistant General 
Counsel, (202) 898-6830, Rodney D. Ray, Counsel, (202) 898-3556 or 
Robert C. Fick, Counsel, (202) 898-8962, Federal Deposit Insurance 
Corporation, Legal Division, 550 17th Street, NW, Washington, DC 20429.

Text of General Counsel's Opinion

General Counsel's Opinion No. 11; Interest Charges by Interstate Banks

By William F. Kroener, III, General Counsel

Background

    Section 27 of the Federal Deposit Insurance Act (``FDI Act'') (12 
U.S.C. 1831d) \1\ (``section 1831d'') establishes the maximum rates 
that insured state-chartered depository institutions and state-licensed 
insured branches of foreign banks (collectively, ``State banks'') may 
charge their customers for most types of loans. Section 1831d is 
patterned after and has been construed in pari materia with section 
5197 of the Revised Statutes (12 U.S.C. 85) (``section 85'' of the 
National Bank Act (``NBA'')). Like section 85, section 1831d has been 
construed to provide State banks with ``most favored lender'' status 
and to permit State banks to ``export'' interest charges allowed by the 
state where the lender is located to out-of-state borrowers.
---------------------------------------------------------------------------

    \1\ For the convenience of the reader, the initial reference to 
a provision of the FDI Act or interstate branching legislation will 
be made to the citation, as enacted, followed by the United States 
Code citation. Thereafter, the provision will be referred to by the 
section number contained in the United States Code. For example, the 
initial citation of section 27 of the FDI Act will be followed by 
the United States Code citation (12 U.S.C. 1831d) and the section 
will subsequently be referred to as ``section 1831d''.
---------------------------------------------------------------------------

    Since the enactment of the Riegle-Neal Interstate Banking and 
Branching Efficiency Act of 1994, Pub. L. 103-328, 108 Stat. 2338 
(1994)(``Riegle-Neal Act'') and the Riegle-Neal Amendments Act of 1997, 
Pub. L. 105-24, 111 Stat. 238 (1997) (``Riegle-Neal Amendments 
Act'')(collectively, ``Interstate Banking Statutes'') questions have 
arisen regarding the appropriate state law for purposes of section 
1831d that should govern the interest charges on loans made to 
customers of a State bank that is chartered in one state (the bank's 
home state) but has a branch or branches in another state (the host 
state) (an ``Interstate State Bank''). These questions have not 
previously been addressed by the Legal Division. Therefore, this 
General Counsel's Opinion sets forth the Legal Division's 
interpretation of section 1831d as it relates to the Interstate Banking 
Statutes to provide guidance in this area to State banks and the 
public.\2\
---------------------------------------------------------------------------

    \2\ This opinion is not intended to address these issues with 
regard to national banks. The Office of the Comptroller of the 
Currency (``OCC''), which has regulatory jurisdiction over national 
banks, has issued several Interpretive Letters addressing these 
issues, in the context of national banks and section 85. See, OCC 
Interpretive Letter No. 686, September 11, 1995, reprinted in [1995-
1996 Transfer Binder] Fed. Banking L. Rep. (CCH) P 81-001 
(``Interpretive Letter No. 686''); OCC Interpretive Letter No. 707, 
January 31, 1996, reprinted in [1995-1996 Transfer Binder] Fed. 
Banking L. Rep. (CCH) P 81-022 (``Interpretive Letter No. 707''); 
OCC Interpretive Letter No. 782, May 21, 1997, reprinted in [Current 
Binder] Fed. Banking L. Rep. (CCH) P 81-209 (``Interpretive Letter 
No. 782''); OCC Interpretive Letter No. 822, February 17, 1998, 
reprinted in [Current Binder] Fed. Banking L. Rep. (CCH) P 81-265 
(``Interpretive Letter No. 822'').
---------------------------------------------------------------------------

    The Riegle-Neal Act established, for the first time, a 
comprehensive federal statutory scheme for interstate branching by 
state and national banks. In doing so, Congress recognized the 
potential efficiencies to be gained by an interstate branch banking 
structure as well as the complications that could arise in determining 
when an interstate bank should look to the laws of its home

[[Page 27283]]

state or a host state to determine the interest rates that the bank may 
permissibly charge its customers.

1. Where May an Interstate State Bank Be Located for Purposes of 
Section 1831d?

    Section 1831d(a) establishes the maximum interest charges that 
State banks may charge their customers for most types of loans. The 
interest charges are established by reference to the location of the 
lender. The statute provides:

    In order to prevent discrimination against State-chartered 
insured depository institutions, including insured savings banks, or 
insured branches of foreign banks with respect to interest rates, if 
the applicable rate prescribed in this subsection exceeds the rate 
such State bank or insured branch of a foreign bank would be 
permitted to charge in the absence of this subsection, such State 
bank or such insured branch of a foreign bank may, notwithstanding 
any State constitution or statute which is hereby preempted for 
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 a rate of not more than 1 per centum 
in excess of the discount rate on ninety-day commercial paper in 
effect at the Federal Reserve bank in the Federal Reserve district 
where such State bank or such insured branch of a foreign bank is 
located or at the rate allowed by the laws of the State, territory, 
or district where the bank is located, whichever may be greater. 
(Emphasis added.) \3\

    \3\ The alternative interest rate that is tied to the discount 
rate on 90-day commercial paper in effect at the Federal Reserve 
Bank is not tied to state law but it, like the rate allowed by state 
law, also requires a determination of where the lender is 
``located''.
---------------------------------------------------------------------------

    While the FDI Act does not specifically address where a lender is 
located for purposes of section 1831d, the same reference to interest 
rates where the bank is located is contained in section 85 of the NBA, 
upon which section 1831d is based.\4\
---------------------------------------------------------------------------

    \4\ Section 85 states, in relevant part: ``Any association may 
take, receive, reserve, and charge on any loan or discount made, or 
upon any notes, bills of exchange, or other evidence of debt, 
interest at the rate allowed by the laws of the State, Territory, or 
District where the bank is located, or at a rate of 1 per centum in 
excess of the discount rate on ninety-day commercial paper in effect 
at the Federal reserve bank in the Federal reserve district where 
the bank is located, . . . .'' (Emphasis added.)
---------------------------------------------------------------------------

    Prior to the enactment of section 1831d, the United States Supreme 
Court recognized that a national bank, pursuant to section 85, could 
``export'' interest charges allowable in the state where the bank was 
located to debtors domiciled outside the bank's home state.\5\ In 
Marquette the Court determined that the national bank was ``located'' 
for purposes of section 85 in the state designated in its organization 
certificate and could charge interest to residents of other states at 
rates permitted under the laws of the state so designated.\6\ Section 
85 has been recognized to be the ``direct lineal ancestor'' of section 
1831d, which was enacted as part of the Depository Institutions 
Deregulation and Monetary Control Act of 1980, Pub. L. 96-221, 94 Stat. 
132 (1980). Congress made a conscious choice to pattern section 1831d 
after section 85 to achieve competitive equality in the area of 
interest charges between state and national banks.\7\
---------------------------------------------------------------------------

    \5\ Marquette Nat'l Bank v. First Omaha Serv. Corp., 439 U.S. 
299 (1978) (``Marquette'').
    \6\ See also Cades v. H & R Block, 43 F.3d 869 (4th Cir.), cert. 
denied, 515 U.S. 1103 (1995); Christiansen v. Beneficial Nat'l Bank, 
972 F. Supp. 681 (S.D. Ga. 1997); Basile v. H & R Block, 897 F. 
Supp. 194 (E.D. Penn. 1995).
    \7\ See Greenwood Trust Co. v. Commonwealth of Massachusetts, 
971 F.2d 818, 826-827 (1st Cir.), cert. denied, 506 U.S. 1052 (1993) 
(``Greenwood'').
---------------------------------------------------------------------------

    Reading the two provisions in pari materia because of their 
historical background, the court in Greenwood determined that section 
1831d provided a state bank with the ability to export interest charges 
to out-of-state borrowers from the state in which it was chartered 
(recognizing the state where the bank was chartered, Delaware, as the 
place where the bank was ``located'' for purposes of section 1831d).\8\ 
Therefore, prior to the enactment of the Interstate Banking Statutes, 
the state where a State bank was chartered had been established as the 
state in which a bank was ``located'' for purposes of exporting 
interest rates under section 1831d(a).
---------------------------------------------------------------------------

    \8\ Greenwood, at 829; see also Venture Properties, Inc. v. 
First Southern Bank, 79 F.3d 90 (8th Cir. 1996) (Arkansas bank 
located in Arkansas for purposes of section 1831d).
---------------------------------------------------------------------------

    Following enactment of the Interstate Banking Statutes it is 
possible for an Interstate State Bank to make loans to customers either 
from the state in which it is chartered or from an out-of-state branch. 
Although the courts do not appear to have addressed the issue of 
whether an Interstate State Bank may be located for purposes of section 
1831d in the state where it is chartered and in each state where it 
maintains one or more branches the OCC has recently issued several 
Interpretive Letters indicating that an interstate national bank may be 
``located'' for purposes of section 85 in the state where its main 
office is located, as well as in the state or states where it maintains 
branches. See Interpretive Letter Nos. 686, 707, 782 and 822.
    Similarly, in my view an Interstate State Bank also may be 
``located'' for purposes of section 1831d in its home state and in each 
state where it maintains out-of-state branches. There are at least 
three reasons for this view. First, the Riegle-Neal Amendment Act's 
applicable law clause for State banks <SUP>9</SUP>, discussed in 
greater detail below, is an indication of Congress' recognition that 
maintaining a branch within a state, except as otherwise provided in 
section 1831a(j), constitutes a sufficient presence (i.e., location) in 
the state to subject the branch to host state laws, including the host 
state's consumer protection laws (which include applicable usury 
ceilings). Second, the OCC also has observed, most recently in 
Interpretive Letter No. 822, that there is a clear and direct 
relationship between section 94 of the NBA, addressing the ``location'' 
of a national bank for venue purposes, and section 85, addressing the 
``location'' of a bank for usury purposes, based upon court decisions 
construing the two provisions. The language of section 1831d, which is 
based largely upon sections 85 and 86 <SUP>10</SUP> of the NBA, has 
been recognized to include judicial interpretations of those 
provisions.<SUP>11</SUP> Finally, there is an evident congressional 
intent to provide State banks with competitive equality with national 
banks in enacting section 1831d <SUP>12</SUP> and to provide parity 
between State banks and national banks in enacting the Riegle-Neal 
Amendments Act.<SUP>13</SUP>
---------------------------------------------------------------------------

    \9\ 12 U.S.C. 1831a(j)(1).
    \10\ Section 86 of the NBA provides the remedy for violations of 
section 85. Section 1831d(b) is the statutory counter-part contained 
in the FDI Act.
    \11\ See Greenwood, at 827; Hill v. Chemical Bank 799 F. Supp. 
948, 952 (D. Minn. 1992) (``Hill'') (``The key language of (section 
1831d) is substantially identical to language in sections 85 and 86 
of the National Bank Act, the federal usury provisions governing 
national banks. Generally, similar language should be interpreted 
the same way, unless context requires a different interpretation. 
Further, Congress is presumed to be aware of judicial 
interpretations of statutory language when it intentionally 
incorporates the language of one statute into another statute.'')
    \12\ See 126 Cong. Rec. 6900 (1980) (statement of Senator 
Proxmire); 126 Cong. Rec. 6907 (1980) (statement of Senator 
Bumpers); see also Hill, at 952 (``Given the similarity in language 
and clearly expressed intent of Congress to create parity between 
state and national banks, (section 1831d) should be interpreted 
consistently with sections 85 and 86.'')
    \13\ See 143 Cong. Rec. H3089 (daily ed. May 21, 1997) 
(statement of Representative Roukema).
---------------------------------------------------------------------------

2. If a State Bank is Located in More Than One State, Which State's 
Usury Provisions Govern the Loans From the Bank?

    Given that a State bank can be located in more than one state, the 
next question is what state's usury provisions should govern loans made 
by an Interstate State Bank.

[[Page 27284]]

    The answer to this question requires reference to the applicable 
law and usury savings clauses contained in the Riegle-Neal Act, the 
Riegle-Neal Amendments Act, which subsequently amended the applicable 
law clause for State banks, and to the legislative history underlying 
these provisions.
The Applicable Law Clause for State Banks
    With the introduction of nationwide interstate branching, questions 
arose as to the appropriate law to be applied to out-of-state branches 
of interstate banks. Congress addressed this matter for national banks 
in section 102(b)(1) of the Riegle-Neal Act, which amended section 36 
of the NBA to add a new subsection (f), which included 12 U.S.C. 
36(f)(1)(A)(''the applicable law clause for national banks''), and 
addressed this matter for State banks in section 102(b)(3)(B) of the 
Riegle-Neal Act, which amended section 1831a of the FDI Act to add a 
new subsection (j), which included 12 U.S.C. 1831a(j)(1)(''the 
applicable law clause for State banks'').
    As originally enacted by the Riegle-Neal Act, the applicable law 
clause for national banks provided for the inapplicability of specific 
host state laws to a branch of an out-of-state national bank under 
specified circumstances, including where Federal law preempted such 
state laws for a national bank.<SUP>14</SUP> No similar provision, 
however, was contained in the applicable law clause for State 
banks.<SUP>15</SUP> This made branches of out-of-state State banks 
subject to all of the laws of the respective host state. In contrast, a 
national bank operating with branches in various states benefitted from 
preemption, and hence greater uniformity than a State bank, with regard 
to those host state laws specified in section 36(f)(1)(A) <SUP>16</SUP> 
that affected their operations. This led to concerns that the nation's 
dual banking system might be jeopardized because State banks might opt 
to convert from state to national bank charters to avoid compliance 
with a multitude of different state laws in each state in which State 
banks wished to operate through interstate branches.
---------------------------------------------------------------------------

    \14\ Section 36(f)(1)(A)(ii) also provided for preemption of 
host state law where the Comptroller determines that state law 
discriminates between an interstate national bank and an interstate 
state bank.
    \15\ Section 36(f)(1)(A)reads in relevant part as follows:
    The laws of the host State regarding community reinvestment, 
consumer protection, fair lending, and establishment of intrastate 
branches shall apply to any branch in the host State of an out-of-
State national bank to the same extent as such State laws apply to a 
branch of a bank chartered by that State, except--
    (i) when Federal law preempts the application of such State laws 
to a national bank * * *
    In the context of the law applicable to branches of out-of-state 
State banks, however, section 1831a(j)(1) read in relevant part as 
follows:
    The laws of a host State, including laws regarding community 
reinvestment, consumer protection, fair lending, and establishment 
of intrastate branches, 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 of a bank chartered by that State. (Emphasis 
added.)
    \16\ The reference to ``applicable usury ceilings'' in the 
Riegle-Neal Act Conference Report's (``Conference Report'') 
discussion of host state consumer protection laws clearly indicates 
that the statute's reference to consumer protection laws of host 
states included any applicable host state usury ceilings. See H.R. 
Rep. No. 651, 103d Cong., 2d Sess., 51 (1994).
---------------------------------------------------------------------------

    On June 1, 1997, the interstate branching provisions of the Riegle-
Neal Act became fully effective. Shortly thereafter, on July 3, 1997, 
section 1831a(j) was amended by the Riegle-Neal Amendments Act to 
revise the applicable law clause for State banks. As amended by the 
Riegle-Neal Amendments Act, section 1831a(j)(1) provides:

    The laws of a host State, including laws regarding community 
reinvestment, consumer protection, fair lending, and establishment 
of intrastate branches, 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 to a branch of an 
out-of-State State bank in such host State pursuant to the preceding 
sentence, home State law shall apply to such branch. (Emphasis 
added.) <SUP>17</SUP>

    \17\ Pub. L. 105-24, 111 Stat. 238 (1997).
---------------------------------------------------------------------------

    As explained by the legislation's sponsor, Representative Roukema, 
the purpose of the legislation was to provide parity between State 
banks and national banks. In describing the amendment's effect on host 
state consumer protection laws, she indicated:

    * * * Moreover, it recognizes the importance of host State laws 
by requiring all out-of-State banks to comply with host State laws 
in four key areas, community reinvestment, consumer protection, fair 
lending, and intrastate branching, unless the State law has been 
preempted (with respect to) national banks. In that instance the law 
of the State which issued the charter will prevail.<SUP>18</SUP>

    \18\ 143 Cong. Rec. H3089 (daily ed. May 21, 1997).
---------------------------------------------------------------------------

    Therefore, under section 1831a(j)(1), the laws of a host state 
apply to branches of out-of-state State banks to the same extent such 
state laws would apply to a branch of an out-of-state national bank. If 
the laws of the host state would be inapplicable to a branch of an out-
of-state national bank they are equally inapplicable to a branch of an 
out-of-state State bank and the home state law will generally apply to 
the branch of an out-of-state State bank.<SUP>19</SUP>
---------------------------------------------------------------------------

    \19\ Section 1831a(j)(3)(B), however, requires that the 
applicable law clause for State banks not be construed to affect the 
applicability of Federal law to State banks and State bank branches 
in a home or host state. Therefore, the reference to home state law 
in the applicable law clause for State banks may not dictate the 
result in all circumstances regarding interest charges on loans to 
bank customers if reference to other federal law, such as section 
1831d, the usury savings clause, or the rules regarding exportation 
of interest charges, would lead to a different result.
---------------------------------------------------------------------------

The Usury Savings Clause
    The next question is when the host state interest provisions will 
apply to a branch of an out-of-state State bank. For that issue, it is 
necessary to consider the Riegle-Neal Act's usury savings clause and 
the pertinent portions of the statute's legislative history.
    Section 111 of the Riegle-Neal Act (the usury savings clause), was 
added to the legislation prior to its enactment by an amendment 
sponsored by Senator Roth to address the effect of the Riegle-Neal Act 
on sections 85 and 1831d. The amendment was introduced by Senator Roth 
in response to uncertainty expressed by the Acting Chairman of the FDIC 
and one of the Governors of the Federal Reserve Board regarding the 
effect that pending drafts of the interstate banking legislation might 
have on the exportation of interest rates by a bank to borrowers 
residing in states where the bank also operated an out-of-state 
branch.<SUP>20</SUP> See 140 Cong. Rec. S12789 (daily ed. Sept. 13, 
1994) (remarks of Senator Roth).
---------------------------------------------------------------------------

    \20\ See Nationwide Banking and Branching and the Insurance 
Activities of National Banks: Hearings Before the Senate Committee 
on Banking, Housing, and Urban Affairs, 103d Cong., 1st Sess. 272 
(1993) (Response to Written Questions of Senator Roth from Andrew C. 
Hove, Jr.); (Response to Written Questions of Senator Roth from John 
P. LaWare), id. at pp. 280-81.
---------------------------------------------------------------------------

    The usury savings clause provides, in pertinent part:

    No provision of this title and no amendment made by this title 
to any other provision of law shall be construed as affecting in any 
way--
* * * * *
    (3) The applicability of (section 85) or (section 1831d) of the 
Federal Deposit Insurance Act. <SUP>21</SUP>

    \21\  12 U.S.C. 1811 (note).
---------------------------------------------------------------------------

    Therefore, Congress did not intend for the Riegle-Neal Act to 
affect the applicability of section 1831d to State banks.

[[Page 27285]]

Harmonization of the Applicable Law Clause for State Banks with the 
Usury Savings Clause
    While the usury savings clause could conceivably be read to 
conflict with the language of the applicable law clause,<SUP>22</SUP> 
reference to the Riegle-Neal Act's legislative history allows the 
provisions to be harmonized and placed in proper context.<SUP>23</SUP>
---------------------------------------------------------------------------

    \22\ As enacted by the Riegle-Neal Act, as indicated earlier, 
the applicable law clause for State banks made branches of out-of-
state State banks subject to the laws of the host state. Also, as 
indicated earlier, concerns had been expressed over the impact that 
the application of host state laws regarding consumer protection 
might have on the ability of an out-of-state bank to export interest 
charges authorized by its home state to a state where the bank 
maintained a branch.
    \23\ In this respect, the analysis tracks that employed by the 
courts. See Weinberger v. Hynson, 412 U.S. 609, 631-32 (1973) (``It 
is well established that our task in interpreting separate 
provisions of a single Act is to give the Act `the most harmonious, 
comprehensive meaning possible' in light of the legislative policy 
and purpose. (Citations omitted).''); Dierksen v. Navistar 
Internat'l Transportation Corp., 912 F. Supp. 480, 486 (D. Kansas 
1996) (``A primary rule of construction of a statute is to find the 
legislative intent from its language, and where the language used is 
plain and unambiguous and also appropriate to an obvious purpose the 
court should follow the intent as expressed by the words used. 
(citation omitted). It is the duty of the court, insofar as 
practical, to reconcile different statutory provisions so as to make 
them consistent, harmonious and sensible. (Citation omitted). 
Allegedly repugnant statutes are to be read together and harmonized, 
if at all possible, to the end that both may be given force and 
effect. (Citation omitted).'')
---------------------------------------------------------------------------

    In discussing the usury savings clause, the Conference Report 
states:

    Section 111(3) specifically states that nothing in Title I 
affects sections (85) or (1831d). Accordingly, the amendments made 
by the (Riegle-Neal Act) that authorize insured depository 
institutions to branch interstate do not affect existing authorities 
with respect to any charges under section (85) or (1831d) imposed by 
national or state banks for loans or other extensions of credit made 
to borrowers outside the state where the bank or branch making the 
loan or other extension of credit is located.<SUP>24</SUP> (Emphasis 
added.)
---------------------------------------------------------------------------

    \24\ H.R. Rep. No. 651, 103d Cong., 2d Sess., 63 (1994).

    Senator Roth explained this section of the Conference Report as 
---------------------------------------------------------------------------
follows:

    The statement of the managers expressly refers to the potential 
of a ``branch making the loan or other extension of credit * * *'' 
This language underscores the widespread congressional understanding 
that, in the context of nationwide interstate branching, it is the 
office of the bank or branch making the loan that determines which 
state law applies. The savings clause has been agreed to for the 
very purpose of addressing the FDIC's original concerns and making 
clear that after interstate branching, section (85) and section 
(1831d) are applied on the basis of the branch making the 
loan.<SUP>25</SUP>
---------------------------------------------------------------------------

    \25\ 140 Cong. Rec. S12789 (daily ed. Sept. 13, 1994).

    According to Senator Roth, for purposes of determining where a loan 
is ``made'' the managers of the Conference Committee recognized that in 
the new interstate banking environment banks with a branch or branches 
in other states could involve those branches in some but not all 
aspects of a loan transaction without the state law where the branch 
was located becoming applicable to the loan. In explaining the 
provisions Senator Roth distinguished ``ministerial functions'' 
<SUP>26</SUP> from other functions (subsequently referred to as ``non-
ministerial functions'' <SUP>27</SUP>) related to the loan. To further 
explain the importance of these distinctions, in the context of the 
appropriate state law to apply to an interstate bank loan, Senator Roth 
indicated:
---------------------------------------------------------------------------

    \26\ These include providing loan applications, assembling 
documents, providing a location for returning documents necessary 
for making a loan, providing loan account information, and receiving 
payments.
    \27\ The non-ministerial functions are the decision to extend 
credit, the extension of credit itself, and the disbursal of the 
proceeds of the loan.

    (It) is clear that the conferees intend that a bank in State A 
that approves a loan, extends the credit, and disburses the proceeds 
to a customer in State B, may apply the law of State A even if the 
bank has a branch or agent in State B and even if that branch or 
agent performed some ministerial functions such as providing credit 
card or loan applications or receiving payments.<SUP>28</SUP>
---------------------------------------------------------------------------

    \28\ 140 Cong. Rec. S12789-12790 (daily ed. Sept. 13, 1994).

    Senator Roth's comments, considered in the context of the 
applicable law clause for State banks, are indicative of congressional 
intent to recognize a parallel between existing law and the law that 
should be applied if a loan was made in a branch or branches of a 
single host state. Existing law already recognized the effect of home 
state law on the state laws of a borrower's residence when loans were 
made by national banks and State banks, respectively, to out-of-state 
borrowers. In the context of interstate branching, however, Congress 
intended to strike a balance between the application of host state and 
home state interest provisions by applying the same exportation 
principle previously recognized by the courts to loans made in a host 
state because the three non-ministerial functions occurred in a branch 
or branches of the host state.
    Therefore, under the Riegle-Neal Act's usury savings clause the 
ability of an out-of-state State bank to export the interest charges 
that are permissible in the home state are preserved, even if a branch 
or branches of the same bank is located in the same state as the 
borrower. If all of the non-ministerial functions involved in making 
the loan are performed by a branch or branches located in a host state, 
however, the host state's interest provisions should be applied to the 
loan.
Non-Ministerial Functions Occur in Multiple States or Outside of 
Banking Offices
    There are some situations that are not addressed by the Interstate 
Banking Statutes. These include loans where the three non-ministerial 
functions occur in different states or where some of the three non-
ministerial functions occur in an office that is not considered to be 
the home office or branch of the bank (collectively, ``banking 
offices''). The OCC recently addressed these issues in Interpretive 
Letter 822. With regard to loans where the three non-ministerial 
functions occur in banking offices located in different states and the 
loans cannot be said to have been ``made'' in a host state under the 
criteria discussed in the legislative history of the Riegle-Neal Act, 
the OCC concluded that the law of the home state could always be chosen 
to apply to the loans because such a result will avoid throwing 
``confusion'' into the complex system of modern interstate banking by 
having no rate to apply and because the bank is always the lender, 
regardless of where certain functions occur.
    The other situation addressed in Interpretive Letter 822 is where 
any of the non-ministerial functions occur in a host state but not in a 
branch. This could occur, for example, where a loan is approved in a 
back office but the proceeds of the loan are disbursed in a branch in a 
host state.
    In these and similar situations, the OCC concluded that home state 
rates may be used. Alternatively, in those situations the interest 
rates permitted by the host state where a non-ministerial function 
occurs may be applied, if based on an assessment of all of the facts 
and circumstances, the loan has a clear nexus to the host 
state.<SUP>29</SUP>
---------------------------------------------------------------------------

    \29\ The non-ministerial functions, according to Senator Roth's 
discussion of the Conference Report, are factors to be considered in 
determining which state's law should be applied to a loan. See Roth 
statement, at S12789:
    The rationale for this conference amendment (substituting loan 
servicing for disbursal of loan proceeds in the agency authority 
contained in section 101) is that the actual disbursal of proceeds--
as distinguished from delivering previously disbursed funds to a 
customer--is so closely tied to the extension of credit that it is a 
factor in determining, in an interstate context, what State's law to 
apply. (Emphasis added.)

---------------------------------------------------------------------------

[[Page 27286]]

    I agree with the OCC Chief Counsel's analysis on these issues and 
her observations in Interpretive Letter 822 regarding the significance 
of an appropriate disclosure to customers that the interest to be 
charged on the loan is governed by applicable federal law and the law 
of the relevant state which will govern the transaction.
The Non-Ministerial Functions
    The OCC identified three non-ministerial functions for national 
banks in Interpretive Letter No. 822 based upon the Riegle-Neal Act's 
legislative history. An inquiry is required to determine the location 
where each of the non-ministerial functions occur. Briefly stated, the 
OCC determined that ``approval'' (i.e., the decision to extend credit) 
occurs where the person is located who is charged with making the final 
judgment of approval or denial of credit, and the site of the final 
approval is the location where it is granted. ``Disbursal'' means 
actual physical disbursal of the proceeds of a loan, as opposed to the 
delivery of previously disbursed funds to the customer. Disbursal can 
occur in various ways, including delivery to the customer in person or 
crediting proceeds to the customer's account at a branch, but does not 
include delivering the funds to an escrow or title agent who, in turn, 
disburses them to the customer or for the customer's benefit. 
``Extension of credit'' means the site from which the first 
communication of final approval of the loan occurs.
    While the need for such inquiries as to non-ministerial functions 
may not be initially apparent, I believe that Senator Roth's 
distinction for purposes of the ``disbursal'' function between ``the 
actual disbursal of proceeds'' and ``delivering previously disbursed 
funds to a customer'' is indicative of the type of inquiry Congress 
intended in order to identify non-ministerial functions which effect 
where a loan is made for purposes of determining the state law to be 
applied to a loan. The same definitions should be equally applicable to 
State banks under section 1831d.

Conclusion

    An Interstate State Bank can be ``located'' for purposes of section 
1831d in the state in which it is chartered, as well as the states 
where the bank's out-of-state branch or branches are located. The 
Interstate Banking Statutes do not affect the ability of an Interstate 
State Bank to export interest rates on loans made to out-of-state 
borrowers from that bank's home state, even if the bank maintains a 
branch in the state where the borrower resides. If an out-of-state 
branch or branches of an Interstate State Bank in a single host state 
performs all the non-ministerial functions (approval of an extension of 
credit, extension of the credit, and disbursal of loan proceeds to a 
customer) related to a loan, it ``makes'' the loan to the customer for 
purposes of the Interstate Banking Statutes and the loan should be 
governed by the usury provisions of the host state. If the three non-
ministerial functions occur in different states or if some of the non-
ministerial functions occur in an office that is not considered to be 
the home office or branch of the bank, then home state rates may be 
used. Alternatively, in those situations the interest rates permitted 
by the host state where a non-ministerial function occurs may be 
applied, if based on an assessment of all of the facts and 
circumstances, the loan has a clear nexus to the host state. To avoid 
uncertainty regarding which state's interest rates apply to a loan 
Interstate State Banks should make an appropriate disclosure to the 
customer that the interest to be charged on the loan is governed by 
applicable federal law and the law of the relevant state which will 
govern the transaction.
    Authorized to be published in the Federal Register by Order of the 
Board of Directors dated at Washington, DC, this 9th day of May, 1998.

Federal Deposit Insurance Corporation,
Robert E. Feldman,
Executive Secretary.
[FR Doc. 98-13084 Filed 5-15-98; 8:45 am]
BILLING CODE 6714-01-P