Opinion ID: 409484
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Heading: Effective Rate of Interest

Text: 26 12 U.S.C. § 86 penalizes banks that charge an interest rate higher than that specified by 12 U.S.C. § 85. Section 85 allows a bank to charge interest at the rate allowed by the laws of the state where the bank is located. In American Timber I, we held that the Bank Act adopts state usury law insofar as it fixes the rate of interest. 511 F.2d at 983. Whether the compensating balance requirement resulted in usury depends upon whether, as a matter of law, the compensating balance is viewed as reducing the net loan principal and therefore increasing the effective rate of interest charged on the loan. It is unclear whether the determination of the actual effective interest rate on a particular loan is governed by state law, or whether state law fixes only the allowable maximum rate. 6 It is unnecessary in this case to decide whether state or federal law governs the determination of the effective interest rate. There is little Oregon law on any of the compensating balance/effective rate issues, and our conclusions on these issues would be the same under federal law or our interpretations of Oregon law. 27 A required compensating balance will ordinarily be treated as diminishing the amount of loan proceeds-thus raising the effective interest rate-if the borrower does not have the right to withdraw the compensating balance, or if the deposits are treated by the bank as its own property. In one early Bank Act case, the court held that a 20% compensating balance requirement raised the effective interest rate, saying that it has not even the merit of being an ingenious device ... (t)he usury is plain and palpable.... Planters' National Bank v. Wysong & Miles Co., 177 N.C. 380, 99 S.E. 199, (1919) reprinted in 12 A.L.R. 1412, 1416. See also Annot., Leaving Part of Loan on Deposit with Lender as Usury, 92 A.L.R.3rd 769 (1979); 45 Am.Jur.2d, Interest and Usury § 113. The Eighth Circuit has held that a compensating balance requirement is suspect because the lender stands to make an overall gain on the transaction of more than the legal rate of interest. McAdoo, 535 F.2d at 1053 (refusing to disturb the jury's finding of no intent); see also Grundel v. Bank of Craig, 515 S.W.2d 177 (Mo.App.1974) (effective interest rate increased when amount of compensating balance never available to the borrowers); Miller v. First State Bank, 551 S.W.2d 89, 96 (Tex.Civ.App.1977), aff'd as modified, 563 S.W.2d 572 (Tex.1978) (compensating balance requirement usurious when the borrower required by the loan agreement to maintain compensating deposits). But see Deposit Guaranty National Bank v. Shipp, 205 So. 101, 105 (La.App.1968) (no usury where compensating balance amounts remained the property of the borrower and were eventually applied to repayment of the loan); cf. Spanish Village, Ltd. v. American Manufacturing, 586 S.W.2d 195, 201 (Tex.Civ.App.1979) (true loan principal is the stated amount less initial financing fee). The only reported Oregon case discussing a similar issue characterized the arrangement as usurious on its face, although it also found that usurious intent was lacking. Prudential Savings & Loan Association v. Stevens, 144 Or. 298, 23 P.2d 901, 903 (Or.1933). Lenrich and Columbia were required to maintain and actually did maintain compensating balances. 7 The funds which they kept on deposit with First National in those balances were not available for their use and the net amount of funds made available by the loans was reduced. The district court therefore properly computed the effective interest rate on the basis of the reduced loan amounts. Thus the compensating balance requirement raised the effective interest rate on those loans.