Preemption of State Law for State Banks Prepared by: Robert C. Fick, Esq., FDIC Presented by: Joe DiNuzzo, Esq., FDIC

The Financial Services Roundtable’s Petition In December 2004 the Roundtable asked the FDIC to issue Rules that would effectively preempt certain State laws for State-chartered banks. Purpose: to provide parity between State banks and national banks in interstate operations

The Financial Services Roundtable’s Petition The Roundtable argued that State banks were at a significant competitive disadvantage to national banks. National banks – single set of laws and regulations State banks – different set of laws for each State

The Financial Services Roundtable’s Petition The Roundtable cites this competitive imbalance as one reason why there has been a migration of assets to the national bank charter.

The Financial Services Roundtable’s Petition Remedy: FDIC to issue rules that would permit State banks to operate interstate under a single set of laws and regulations to the same extent that a national bank can.

The Financial Services Roundtable’s Petition Specifically, they suggested rules that provide that a State bank can operate interstate under its Home State law to the same extent that a national bank can under the NBA and OCC regs, and preempt Host State usury laws for State banks in a manner parallel to the OCC’s preemption of Host State usury laws for national banks.

State Bank Utah (Home State) Arizona (Host State) State Bank Branch National Bank Branch

May 2005 FDIC Public Hearing 34 witnesses: 16 testified in person and 18 by written statement Bankers, trade associations, public interest groups, State regulators, Members of Congress, and State AGs

FDIC Board Action At its October 6 th meeting the Board authorized publication of a Notice of Proposed Rulemaking that would implement sections 24 (j) and 27 of the FDI Act. 70 Fed. Reg (October 14, 2005).

Sections 24(j) and 27 of the FDI Act Section 24 (j), 12 U.S.C. § 1831a(j), generally describes which Host State laws apply to branches of out-of-State, State banks Section 27, 12 U.S.C. § 1831d, generally describes the interest rates that State banks may charge.

Section 24(j)(1): The laws of a host State... 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... pursuant to the preceding sentence, home State law shall apply to such branch.

FDIC’s Proposed Rules Proposed New Subpart F to 12 C.F.R. Part 362 Implementing section 24(j) Proposed New Part 331 Implementing section 27

Proposed New Subpart F Definitions “Activity conducted at a Branch” “activity of, by, through, in, from, or substantially involving, a Branch.” Home State, Host State, Out-of-State Bank

Proposed New Subpart F A Host State law does not apply to an activity conducted at a branch of an out-of-State State bank, to the same extent that a Federal Court or the OCC has determined in writing that the particular Host State law does not apply to the activity conducted at a branch of an out-of-State national bank.

State Bank Utah (Home State) Arizona (Host State) State Bank Branch National Bank Branch

Proposed New Subpart F If a particular Host State law does not apply to such an activity of an out-of- State, State bank because of the preceding sentence, then the bank’s Home State law applies.

Proposed New Subpart F Generally, a State bank that has a branch in a Host State may conduct any activity at such a branch that is permissible under its Home State law if it is permissible either For a branch of an out-of-State national bank or For a bank chartered by the Host State.

State Bank Utah (Home State) Arizona (Host State) State Bank Branch National Bank Branch

Proposed New Part 331 Section 27: Generally provides that a State bank can charge interest at the rates allowed by the law of the State where the bank is located.

Proposed New Part defines “interest” Any payment compensating a creditor or prospective creditor for an extension of credit, making available a line of credit, or any default or breach of a condition to the extension of credit.

Proposed New Part 331 Examples of “interest” include: Numerical periodic rates Late fees Creditor-imposed NSF fees Overlimit fees Annual fees Cash advance fees and Membership fees

Proposed New Part 331 “Interest” does not include: Appraisal fees Premiums and commissions on repayment insurance Finder’s fees Document preparation fees Notarization fees, or Credit report fees

Proposed New Part 331 Most-favored-lender status: An insured state bank can charge interest at the maximum rate permitted to any state-chartered or licensed lending institution by the law of the state where the bank is located.

Proposed New Part 331 An insured state bank can charge corporate borrowers any rate agreed upon by the parties.

Proposed New Part A state bank is located in the state where it is chartered (its Home State) and in each state where the bank maintains a branch (Host State(s)).

Proposed New Part Location of non-interstate banks and insured branches A state bank that does not have interstate branches or operates exclusively through the Internet is located in the state that issued the charter. An insured branch of a foreign bank is located in the state that issued the license.

Proposed New Part Location and permissible interest rates for State banks located in more than one State The State where all three of the non- ministerial functions occur, or The Home State, if the non-ministerial functions either do all not occur in one State or any of them occur in a State where the bank does not have a branch. A Host State where a non-ministerial function occurs, if there is a clear nexus.

Proposed New Part 331 The location of the non-ministerial functions: Where the person charged with making final approval or denial decision is located, Where the bank disburses the loan funds, Where the bank makes its first communication of final approval of the loan.

State Bank Utah (Home State) Arizona (Host State) State Bank Branch National Bank Branch

Comments on the Proposed Rules 57comments received 23 from banks and trade associations 11 from public interest groups 7 regulators 1 state legislator 11 in favor as proposed, 20 opposed “Race to the Bottom” & consumer protection Written determination requirement

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