Amicus Curiae Brief — Smiley v. Citibank (South Dakota), NA

Petitioner,

Crrrmpanx (SourH DAKoTA), N.A.,

Respondent.

On Writ of Certiorari to the

California Supreme Court

BRIEF OF THE STATES OF

COLORADO, DELAWARE, GEORGIA,

ILLINOIS, MONTANA, NEBRASKA,

NEVADA, NEW YORK, OHIO, SOUTH DAKOTA, AND

UTAH, THE COMMONWEALTHS OF PENNSYLVANIA

AND VIRGINIA, THE ARIZONA STATE BANKING

canines AND THE LOUISIANA OFFICE OF

FINANCIAL INSTITUTIONS, AS AMICI CURIAE

IN SUPPORT OF RESPONDENT

Betty D. MONTGOMERY

Ohio Attorney General

Jerrrey S. SUTTON *

State Solicitor

DIANE R. RICHARDS

Chief, Chief Counsel Section

State Office Tower

30 East Broad Street

Columbus, OH 43215-8428

(614) 466-8980

BEST AVAILABLE COPY

TABLE OF CONTENTS

STATEMENT OF INTEREST OF AMICI CURIAE

SUMMARY OF ARGUMENT

ARGUMENT

SECTION 85 RECOGNIZES THE CENTRAL-

ITY OF STATE LAW IN BANKING REGULA-

TION ..

I.

Il.

ITl.

A.

B.

Section 85 Provides A Uniform National

Choice Of Law Rule For Interstate Loans

Petitioner’s Construction Of The Scope Of

The Choice Of Law Rule In Section 85 Would

Lead To Uncertainty And Confusion In The

Interstate Loan Market ...

UNDER SETTLED RULES OF STATUTORY

CONSTRUCTION, THE JUDGMENT OF THE

CALIFORNIA SUPREME COURT SHOULD

BE AFFIRMED

A.

Deference To The OCC’s Interpretation Of

Section 85 Is Appropriate And Essential To

Ensuring The Safety And Soundness Of

Banks Within Our Borders .

The State Court’s Construction Of Section 85

Furthers Congress’ Purposes In adil The

National Bank Act ......... ee

’. The California Supreme Court’s Construction

Of Section 85 Is Consistent With The Eco-

nomics Of Credit Pricing And Thus Consti-

tutes A Common Sense Approach To Apply-

ing The Statute ............. =

SECTION 85 PROMOTES BOTH THE INTER-

ESTS OF CONSUMERS AND THE ABILITY

OF EACH STATE TO PROTECT ITS RESI-

DENTS AS IT SEES FIT

CONCLUSION

l

on

ul

10

14

20

23

29

ii

TABLE OF AUTHORITIES

Cases Page

American Timber & Trading Co. v. First Nat'l

Bank, 690 F.2d 781 (9th Cir. 1982) ...................... 17

Babcock Vv. Jackaom, \91 N.E.2d 279 (N.Y. 1963) .... 12

Cades Vv. H & R Stlovk, Inc., 48 F.3d 869 (4th Cir.

1994), cert. denied, 115 S. Ct. 2247 (1995) —....... 17

Chevron U.S.A. Ine. Vv. Natural Resources Defense

Council, Inc., 467 U.S. 887 (1984) 16

Choate, Hall & Stewart v. SCA Servs., Inc., 392

N.E.2d 1045 (Mass. 1979) ........................--...-..-. 12

Cippollone v. Liggett Group, Inc., 505 U.S. 504

Se as 10

Collins Radio Co. v. Bell, 623 P.2d 1089 (Okla. Ct.

Bat TER cccnntimmantimintnigtiie 13

Commercial Credit Equip. Corp. v. West, 677

S.W.2d 669 (Tex. Ct. App. 1984) .................... 13

Commercial Credit Plan, Inc. Vv. Parker, 263 S.E.2d

QU, IEEE SE 18, 27

Connecticut Nat'l Bank v. Kommit, 577 N.E.2d 639

FD yyy 13

D.P. Technology Corp. Vv. Sherwood Tool, Inc., 751

F. Supp. 1088 (D. Conn. 1990) ......................... 13

Dassault Falcon Jet Corp. Vv. Oberflez, Inc., 909

F. Supp. 345 (M.D.N.C. 1996)................................ 18

Duncan Vv. Cesena Aircraft Co., 665 S.W.2d 414

. oo a 12

Erie R.R. v. Tompkins, 304 U.S. 64 (1988) ............ 14

Finance Am. Corp. Vv. Moyler, 494 A.2d 926 (D.C.

ee ee ee 13

First Nat'l Bank Vv. Nowlin, 509 F.2d 872 (8th Cir.

ee a ee 22

Fisher Vv. First Nat'l Bank, 548 F.2d 255 (8th Cir

| 17

Gibbons Vv. Ogden, 22 U.S. (9 Wheat.) 1 (1824)... 9

Greenwood Trust Co. V. Massachusetts, 971 F.2d

818 (ist Cir. 1992), cert. denied, 506 U.S. 1052

> _ se eee poe 17

Gregory V. Ashcroft, 501 U.S. 452 (1991) 10

Lilienthal Vv. Kaufman, 395 P.2d 543 (Or. 1964) ...... 12

iii

TABLE OF AUTHORITIES—Continued

Page

Marquette Nat'l Bank v. First of Omaha Serv.

Corp., 489 U.S. 299 (1978) ccc. passim

Maryland Vv. Louisiana, 451 U.S. 725 (1981)... 9

McBride Vv. Minstar, Inc., 662 A.2d 592 (N.J.

Super. Ct.), aff'd sub nom. McBride v. Raichle

Molitor, USA, 662 A.2d 567 (N.J. Super. Ct.

SO Pe 13, 27

Nationsbank of North Carolina, N.A. Vv. Variable

Annuity Life Ins. Co., 115 8. Ct. 810 (1995) 16

Northway Lanes Vv. Hackley Union Nat'l Bank &

Trust Co., 464 F.2d 855 (6th Cir. 1972)... 17

OFS Equities, Inc. v. Conde, 421 So. 2d 651 (Fila.

§ eS Fee a a 13

Reich v. Purcell, 482 P.2d 727 (Cal. 1967)... 12

TVA V. Hill, 487 U.S. 158 (1978) ... 29

Train V. Natural Resources Defense Council, Ine.,

— 8 8 Se es ee 19

Walker Vv. Associates Fin. Serve. Corp., 588 S.W.2d

EE ee 13, 27

Zenith Radio Corp. Vv. United States, 487 U.S. 443

(1978) .......... SE Se ae ee 19

Constitutional and Statutory Provisions

U.S. Const. art. IV, § 1... ical head ecem 7 13

REE a 16

eee ee 16

REE eee eae eae 16

ee 8,9

EE See ee eee ee 9

ee passim

EE ee 8

EE one ~

§ 481... - - = 16

OC a 5

Ee 5

Depository Institutions Deveguiaticn and Mone-

tary Control Act of 1980 (“DIDA”), 12 U.S.C.

§ 1831d asthacietianinemtiiiees: 5

iv

TABLE OF AUTHORITIES—Continued

The Federal Truth In Lending Act, 15 U.S.C.

I A OO. sacnstitiniincnashinatemtinttnaldtnelaitidiining

Cal. Fin. Code § 4001 (a) (1) (C) 0...

Colo. Rev. Stat. § G-B-B0G .n..............--nceeeccevesceesceeceeess

ei cirentatitiitenectininnentiitigiies

Kan. Stat. Ann. § 16a-2-502(2) ......... oe

Me. Rev. Stat. tit. 9-A, § 2-501(1) (G) —..............

Mass. Gen. L. ch. 140, § 114B ..0

EE EE

N.J. Stat. Ann. § 17:16C-42(a) ._... pnpepletngiatamaiiiretiinis

N.Y. Banking Law § 108(5) (e) —........ sedinnaitintartiiitad ies

N.Y. Pers. Prop. Law § 413(5) (b) .............................

Ohio Rev. Code § 1107.262(A) en

Okla. Stat. tit. 14A, § 3-208 (5)

Pa. Stat. Ann. tit. 7, § 8322(d) (v) ...........................

A ID dilittnrecrittinitenennitien

RE en

Utah Code § TO0C-2-102 (1) 2... -ccnncnencecceeeceneeeeeee

Va. Code Ann. § 6.1-830.78.A.1 —...........-.----------------

Wis. Stat. § 422.202(2m) (a) ................ eciteninnatiiiei

Regulatory Authorities

61 Fed. Reg. 4849 (Feb. 9, 1996) (to be codified

A EE 17

Letter of Harry Quillian, Acting General Counsel,

FHLBB (June 27, 1986), attached to Letter of

Karen Solomon, Deputy Chief Counsel, Office of

Thrift Supervision (Sept. 29, 1994) in Current

Developments, Fed. Banking L. Rep. (CCH)

. f ¢ | Fees cece 17

Advisory Op. No. FDIC-92-47, [1992-98 Transfer

Binder] Fed. Banking L. Rep. (CCH) % 81,534

gg SD: ES a 17

Letter of William P. Bowden, Jr., OCC Chief Coun-

sel, 1992 WL 136390 (OCC) (Feb. 4, 1992) ....... 17

OCC Interpretive Ltr. No. 452, [1988-89 Transfer

Binder] Fed. Banking L. Rep. (CCH) cna

A S( yy 17

TTTITTICTTITT TTT Trt .

v

TABLE OF AUTHORITIES—Continued

Page

Letter from Richard V. Fitzgerald, Director, OCC

Legal Advisory Services Division (Nov. 24,

RS dn ee Re a a Sa 17

Other Authorities

William F. Baxter, Section 85 of the National

Bank Act and Consumer Welfare, 1995 Utah L.

EE a Se passim

Christopher C. DeMuth, The Case Against Credit

Card Interest Regulation, 3 Yale J. on Reg. 201

CE Se passim

William C. Dunkeleberg, Litigation Concerning

Late Charges is Major Threat to Credit Card

Business, Banking Pol’y Rep. (Prentice Hall),

RE ES LE 20, 25

David S. Evans & Richard L. Schmalensee, The

Economics of the Payment Card Industry

i Re a A I 23, 25, 29

John Jay Knox, A History of Banking in the United

States (1908, 1969 reprint) — 7

Restatement (Second) of Conflict of Laws §§ 188,

RE ER aS ERE aS 6

Emmanuel N. Roussakis, Commercial Banking in

an Era of Deregulation (2d ed. 1989) . 5

Eugene F. Scoles & Peter Hay, Conflict of Laws

Ee 12

Kenneth E. Scott, The Dual Banking System, 30

Stan. L. Rev. 1 (1977) .. 5

2B Norman J. Singer, Sutherland on Statutes and

Statutory Construction § 49.07 (5th ed. 1992). 19

Cass R. Sunstein, Law and Administration After

Chevron, 90 Colum. L. Rev. 2071 (1990) ........... 16

STATEMENT OF INTEREST OF AMICI CURIAE

Amici curiae, the States of Colorado, Delaware, Georgia,

Illinois, Montana, Nebraska, Nevada, New York, Ohio,

South Dakota, and Utah, and the Commonwealths of

Pennsylvania and Virginia, through their respective At-

torneys General, the Arizona State Banking Department,

through its Superintendent, and the State of Louisiana

Office of Financial Institutions, through its Commis-

sioner (the “States”), support the position of respond-

ent Citibank (South Dakota), N.A. (“Citibank”) in urg-

ing aflirmance of the judgment of the California Supreme

Court.’ The States believe that the California Supreme

Court correctly held that the term “interest” in section 85

of the National Bank Act, 12 U.S.C. § 85, includes late

payment fees charged by national banks on credit card

balances and other loans. The decision in this case will

necessarily address at least two interests of great impor-

tance to the States and our residents: consumer welfare

and the safety and soundness of banks.

The States have an important interest in promoting

consumer welfare. Our consumers depend on credit

cards every day, and they benefit from policies that pro-

mote broad access to credit, low credit card costs, and

the ability to choose freely from the broadest possible

range of different packages of rates and charges that are

offered by credit card issuers.

The States also have an important interest in promot-

ing the safety and soundness of banks located within our

borders, and in ensuring predictability in the banking

industry. Events of recent years have demonstrated that

when banks sustain large and unexpected losses (such as

those that they potentially face in this lawsuit and similar

suits across the country), the well-being of the general

! Pursuant to Court Rule 37.3, this brief is filed with the consent

of the parties. Letters of consent have been filed with the Clerk's

Office.

2

economy may suffer, to the detriment of all of our

residents.

Affirmance of the judgment of the California Supreme

Court would further the interests of our consumers and

would also protect the safety and soundness of banks

in our States. Reversal, however, would have precisely

the opposite, profound effects. Consumers in our States

and elsewhere would be significantly injured by decreased

access to credit, higher costs of credit, and fewer options

in the credit card market. In addition, banks in our

States and throughout the country would be exposed to

the potential of staggering damage awards that could

threaten the safety and soundness of the banking system

and, with it, the health of the entire economy. Reversal

would also upset the settled expectations that support

the smooth functioning of the national banking system

that has served the country well for decades.

The States endorse the arguments made by respondent

Citibank. Those arguments will not be repeated here.

Rather, this brief focuses. on the practical significance of

this case to the States, to our consumers, and to the banks

iocated within our borders. The States believe that our

distinct perspective on the issues presented will materially

assist the Court in resolving this case properly.

SUMMARY OF ARGUMENT

This is not, as petitioner and her amici suggest, a con-

ventional preemption case. Section 85 effectively oper-

ates in the context of this case as a choice of law rule.

In interstate credit card transactions, there is always an

inherent conflict of laws problem. The home state of the

bank, the state of the borrower’s residence, and even the

state in which the purchase or cash advance is made, each

has a connection with, and potentially an interest in, the

proper lega! standards that govern the transaction. Sec-

tion 85 resolves one source of conflict by providing, as

a matter of federal law, a clear and uniform rule that the

3

propriety of the “interest” charged by a bank is deter-

mined by the substantive law of the bank’s home state.

Consequently, although this case has enormous prac-

tical significance to all segments of the economy of our

States, at bottom it presents nothing more than a straight-

forward quesion of statutory interpretation of the meaning

of the term “interest” in section 85 of the National Bank

Act. Based upon the widespread use of that term in

nineteenth century judicial opinions and today, it is clear

that “interest,” as used by Congress in 1864, includes

late charges. However, even assuming for the sake of

argument that the term, at least viewed in isolation, were

potentially ambiguous, the construction of section 85

reached by the California Supreme Court (and the vast

majority of other courts) should nonetheless be affirmed.

Under settled rules of statutory construction, this Court

should look to whether the Office of the Comptroller of

the Currency (“OCC”)—the federal agency charged with

administering the National Bank Act—has issued an

authoritative interpretation of the meaning of this lan-

guage. For years, the OCC has in letter rulings expressed

the view that the term “interest” in section 85 includes

late fees. More recently, the OCC promulgated a final

rule, following a notice and comment period, formalizing

its interpretation of section 85. The Court should defer

to this reasonable and long-standing construction of the

relevant language in section 85.

There are particularly strong reasons for according def-

erence to the OCC’s interpretation of the term “interest”

in section 85. Bank regulators in our States rely upon

and obtain substantial guidance from the interpretations of

the National Bank Act and other federal banking laws

issued by the OCC, the FDIC, and other federal regula-

tory agencies. Moreover, in reliance upon the OCC’s

publicly stated position, banks in our States have loaned

literally hundreds of billions of dollars to consumers across

the country. In interpreting a potentially ambiguous stat-

4

ute, great weight should be accorded to those reliance

interests. Given the amounts at stake in this case, accept-

ing petitioner's argument would have a potentially de-

vastating effect on banks in our States. That harm to the

banking industry could, in turn, have a profoundly harm-

ful effect on the entire economy of each of our States,

on our businesses, aud on our consumers.

In addition, construing “interest” in section 85 to in-

clude late fees promotes consumer welfare. Consumers

benefit from broad access to credit, lower credit costs, and

above all the ability to choose from the broadest possible

range of competing credit cards in the marketplace. The

conclusion reached by the California Supreme Court fur-

thers those interests. Affirmance would enable consumers

in our States to continue to choose from a broad array

of credit cards, some of which will be offered by banks

in states with little regulation and others of which will

be offered by banks in states with greater regulation.

The Federal Truth In Lending Act, 15 U.S.C. § 1601

et seq., aS well as state disclosure laws and antifraud

protections, ensure that consumers throughout the country

will have access to the competitive information necessary

for them to make informed choices as to what type of

credit arrangement best suits their needs.

Finally, affirmance of the judgment of the California

Supreme Court would protect the traditional prerogative

of the States to set the terms upon which banks located

within our borders may lend money. In stark contrast,

our States have comparatively little interest in regulating

the terms of a transaction in which our residents vol-

untarily have made the choice to borrow money from

a national bank in another state, leaving behind the rate

limitations of our States. Because section 85 as inter-

preted by the OCC and the California Supreme Court

implements this basic balancing of the relevant interests

of the States, the judgment of the California Supreme

Court should be affirmed.

5

ARGUMENT

I. SECTION 85 RECOGNIZES THE CENTRALITY OF

STATE LAW IN BANKING REGULATION.

In our country’s dual system of banking, banks have

historically been regulated by their chartering authority—

national banks by the federal government, and state banks

by the state governments that charter them. See Em-

manuel N. Roussakis, Commercial Banking in an Era

of Deregulation 60 (2d ed. 1989); Kenneth E. Scott,

The Dual Banking System, 30 Stan. L. Rev. 1, 5 (1977).

This structure of regulation and oversight has applied

generally to banks regardless of whether the banks are

engaged in intrastate or interstate transactions.

Section 85 of the National Bank Act, 12 U.S.C. § 85,

provides that national banks may charge “interest at the

rate allowed by the laws of the State . . . where the bank

is located” (emphasis added). Thus, when a national

bank makes a loan (intrastate or interstate), the interest

charges that it may assess are determined by the law of

the bank’s home state. The location of the borrower’s

residence—whether next-door to the bank, in the same

state as the bank, in a different state, or even in a differ-

ent country—is irrelevant. All customers who borrow

from a particular national bank, therefore, are treated

the same, regardless of their state of residence.’

2 Section 85 of the National Bank Act applies to national banks,

such as respondent Citibank. In addition, virtually all state-

chartered banks are federally insured, and federally insured state

banks are subject to section 521 of the Depository Institutions

Deregulation and Monetary Control Act of 1980 (“DIDA”), 12

U.S.C. 8 1831d, which was modeled on 12 U.S.C. $85. See 12

U.S.C. §183ld(a) (stating, in pertinent part, that a federally

insured state bank may charge interest “at the rate allowed by the

laws of the State, territory, or district where the bank is located”’).

Similar statutory provisions apply to all federally chartered and

federally insured state-chartered saving associations, 12 U.S.C.

§ 1463(g)(1), and all federally chartered and federally insured

state-chartered credit unions, 12 U.S.C. § 1785(g) (1). As a result,

6

A. Section 85 Provides A Uniform National Choice Of

Law Rule For Interstate Loans.

This is not, as petitioner and her amici contend, a

conventional preemption case. The effect of section 85

in this case is not to displace substantive state law with

substantive federal law. Rather, section 85 operates in

this context as a choice of law statute. Section 85, in

effect, provides a uniform national choice of law rule

for interstate loans. Thus, rather than arrogating power

to the federal government to impose special federal rules,

section 85 takes a different approach that acknowledges

the centrality of state concerns and state law, and resolves

what might otherwise be complex questions as to which

State’s law is applicable to a particular interstate loan.

In interstate bank loans (including credit card loans),

there are always at least two states potentially interested

in the transaction, namely the bank’s home state and the

borrower’s home state.* In the absence of section 85, the

roles of the law of the bank’s home state and the bor-

rower’s home state would have to be resolved according

to general choice of law principles. See, e.g., Restatement

(Second) of Conflict of Laws §§ 188, 195 (1971).

Because the application of conflict of laws principles all

too often varies with the eye of the beholder, reliance

upon those principles would ensure disuniformity in the

the Court’s construction of section 85 in this case will directly

affect almost all financia) institutions in the country.

* A third state, the state in which the credit card purchase or

cash advance is made, may also have an interest in the transaction.

See William F. Baxter, Section 85 of the National Bank Act and

Consumer Welfare, 1995 Utah L. Rev. 1009, 1024 & n.50 (1995).

As a result, even a relatively simple series of transactions—in

which, for example, a California resident makes two telephone

calls from home and, with a credit card issued by a bank in Ohio,

purchases an airline ticket (on a carrier with its main office in

Texas) and makes a reservation in a hotel (in a chain with its

main office in Illinois) for a ski holiday in Utah—has the potential

for raising difficult and complex conflict of laws issues.

7

law. In such a situation, the courts would routinely be

called upon to resolve those conflicts.

Section 85 resolves that problem for loans made by

national banks. Section 85 states, in plain terms, that a

national bank may charge on its loans “interest at the

rate allowed by the laws of the State . . . where the bank

is located” (emphasis added). Thus, section 85 effectively

provides a uniform national choice of law rule. As a

matter of federal law, the law of the bank’s home state

determines the interest charges that a national bank may

assess on all of its loans, both intrastate and interstate.*

In enacting section 85, Congress sought to preserve the

already established prerogatives of the states to determine

the interest that banks located within their borders could

charge. Section 85 recognizes the historic importance of

substantive state law in determining permissible interest

charges. Ascertaining which lending charges constitute

“interest” under section 85 is a matter of federal law.

Once that determination is made, however, the substan-

tive law of the bank’s home state determines whether the

bank’s “interest” charges are permissible.

Of course, Congress was not required to preserve the

historic prerogatives of the states. In the exercise of its

plenary authority over interstate commerce, Congress

could have enacted a standard preemption statute that

imposed a single, uniform limit on lending rates for na-

tional banks across the country and displaced all state

law. Indeed, the House of Representatives originally ap-

proved such a preemption provision, imposing a uniform

maximum interest rate of seven percent for all loans

(intrastate or interstate) made by national banks. See

*The States recognize that section 85 has a number of other

purposes, provisions, and effects that have different federalism

implications. Those other aspects of section 85 are not implicated

in this case, and are therefore not addressed in this brief. Rather,

the States address in this brief only the provision of section 85

that is pertinent to the facts of this case.

Marquette Nat'l Bank vy. First of Omaha Serv. Corp., 439

U.S. 299, 318 n.31 (1978) (citing Cong. Globe, 38th

Cong., Ist Sess. 1866 (1864) ).

In the Senate, however, the bill was amended, and the

current language of section 85 was added. See John Jay

Knox, A History of Banking in the United States 255-

56 (1903, 1969 reprint); Citibank Br. at 33-35. That

decision was critically important. Mindful of basic

principles of federalism, Congress rejected a rigid pre-

emption approach to the regulation of national banks

that would have trampled upon the traditional preroga-

tives of all of the states. Instead, Congress reserved to

each state the power to make its own policy judgment on

the interest limitations that would best serve the objec-

tives of that state. Congress decided that, as a matter

of federal law, the law of the bank’s home state would

determine the interest that a national bank may charge,

even when the borrower resides in a different state.’

Thus, in the context of this case, section 85 does not

operate at all like a conventional preemption statute. In a

conventional preemption case, there is a conflict between

* Congress has also recognized the importance of state banking

law in provisions subsequently added to the National Bank Act.

See, e.g., 12 U.S.C. §36(c) (providing that a national bank may

“within the approval of the Comptroller of the Currency, establish

and operate new branches” within geographical limits “if such

establishment and operation are at the time expressly authorized

to State banks by the law of the State in question”); 12 U.S.C.

§ 90 (upon deposit of funds by a state or state government agency,

a national bank may “give security for the safekeeping and prompt

payment of the funds so deposited to the same extent and of the

same kind as is authorized by the law of the State in which [the

national bank] is located in the case of other banking institutions

in the State”) ; 12 U.S.C. § 92a (Comptroller of the Currency may

grant a national! bank the power “to act as trustee, executor, admin-

istrator, .. . or in any other fiduciary capacity in which State

banks, trust companies, or other corporations which come into com-

petition with national banks are permitted to act under the laws

of the State in which the national bank is located’’).

9

substantive federal and substantive state law. Under the

Supremacy Clause, U.S. Const. art. VI, cl. 2, the federal

law displaces the state law, and the state law is rendered

entirely void and “without effect.” Maryland v. Louisiana,

451 U.S. 725, 746 (1981); Gibbons v. Ogden, 22 USS.

(9 Wheat.) 1, 211 (1824).

In this case, however, the effect of section 85 is not

to displace substantive state law with substantive federal

law. Rather, as described above, section 85 serves to de-

termine which state’s law determines the permissible inter-

est on an interstate loan transaction.

Moreover, Section 85 does not render the substantive

law of California or any other state null and void. To the

contrary, section 85 effectively preserves state law. Under

section 85, the law of California determines the interest

charges that a national bank located in that state may

assess——whether its loans are made to residents of Cali-

fornia or elsewhere.*

To be sure, section 85 does cause some displacement of

state law: in an interstate loan, the law of the borrower's

home state is displaced by the law of the bank’s home

state. But that displacement, alone, does not transform

section 85 from a choice of law statute into a preemption

statute. Rather, the displacement of the law of one state

by the law of another is inherent in any conflict of laws

determination. In any conflict of laws case, the law of one

state “wins” and the law of another state “loses.” That

®* This Court recognized in Marquette National Bank that a con-

sumer who borrows money from an out-of-state bank is deemed

to have travelled to the bank to obtain the loan. 439 U.S. at 311.

That is consistent with the structure of the National Bank Act,

which prohibits a national bank from making loans at any location

other than its home office or its branches. 12 U.S.C. §§ 36(j), 81

It is therefore unremarkable that Congress would determine in

section 85 that the loan transaction should be governed by the

law of the state in which the lender resides and in which the

transaction occurs.

10

occurs without impairing state sovereignty or implicating

conventional preemption concerns.”

Accordingly, conventional preemption concerns are sim-

ply not present in this case. This is not a case in which

“the historic police powers of the States [are being] super-

seded by [a] Federal Act.” Cippollone v. Liggett Group,

Inc., 505 U.S. 504, 516 (1992) (quoting Rice v. Santa

Fe Elevator Corp., 331 U.S. 218, 230 (1947)). Nor is

this a case in which the historic prerogatives of the states

are in need of “protection . . . against intrusive exercises

of Congress’ Commerce Clause powers.” Gregory v. Ash-

croft, 501 U.S. 452, 464 (1991). If it were, our States

would not be before this Court urging affirmance of the

decision of the California Supreme Court.

In adopting section 85, Congress chose to preserve the

historic prerogatives of the states in determining the in-

terest charges that banks located within their borders could

assess. Congress did not enact a uniform set of national

standards for the lending practices of national banks de-

signed to preempt all contrary state law. Rather, Congress

decided (as a matter of federal law) to incorporate the

law of the bank’s home state on this subject, thereby pre-

serving to a great extent the traditional role of the states

in bank regulation.

B. Petitioner's Construction Of The Scope Of The

Choice Of Law Rule In Section 85 Would Lead To

Uncertainty And Confusion In The Interstate Loan

Market.

This Court has previously had an opportunity to review

the meaning and scope of section 85. In the landmark de-

cision in Marquette National Bank, supra, the respondent,

7 For this reason, petitioner's argument that section 85 is an

unconstitutional delegation of legislative power is incorrect. Any

time a resident of California enters into a transaction with the

resident of another state, there is the possibility—under standard

conflict of laws rules—that the law of California may be displaced

by the law of another state.

law, but violated Minnesota law. 439 U.S. at 302. In a

unanimous opinion, the Court upheld the bank’s loan

charges. The Court cited the plein language of section 85

and held that the statute permits a national bank to charge

all of its borrowers the APR permitted by the law of the

bank’s home state, even if that APR violates the law of

the borrower’s home state. /d. at 313.

made in the home state of the

Mi

country. As the Court obecrved, “cities of one State”

ceive credit at foreign interest rates.” Jd. at 318.*

In Marquette National Bank, the loan charge at issue

was the APR. Here, the question is whether section 85

also applies to late fees.

The California Supreme Court held that the term “in-

terest” in section 85 includes late fees, and therefore that

the rule in section 85 applies to those late fees. The state

court’s holding regarding the scope of section 85 is cor-

rect and benefits both borrowers and banks by providing

certainty and predictability to interstate loan transactions.

* The holding of Marquette National Bank is sometimes described

as the “exportation” of the law of the bank’s home state to the

borrower's home state. That is not, however, quite accurate. Be-

cause the loan is actually made at the bank, the application of the

law of the bank’s home state does not require the “exportation” of

any law. To the contrary, exportation would have occurred in fact

only if Marquette National Bank had held that the law of the

borrower's state governed a transaction in the bank’s home state.

States are always involved in interstate loans, a difficult

choice of law issue would arise that would need to be re-

solved through litigation in each of the 50 states, with

each state applying its own conflict of laws rules. Until

that issue were conclusively resolved in each of the 50

states, a virtual impossibility,’ banks and card holders

would not know whether the law of the bank’s home state

or the state of the card holder’s residence—or potentially

even the law of the state in which the purchase or cash

advance was made—would apply.

Almost certainly, in the absence of the uniform choice

of law rule provided by section 85, the states would reach

* The conflict of laws issue will never be truly “conclusively

resolved,” as states’ approaches to conflicts of law questions may

change over time. See, e.g., Eugene F. Scoles & Peter Hay, Conflict

of Laws 11-44 (2d ed. 1992) (describing evolution of general

choice of law standards in the United States); Duncan v. Cessna

Aircraft Co., 665 S.W.2d 414, 421 (Tex. 1984) (rejecting tradi-

tional contract law rule of le# loci contractus, which applied the

law of the state in which the contract was made, in favor of a rule

applying the law of the state with the “most significant relation-

ship” to the transaction); Choate, Hall & Stewart v. SCA Servs.,

Inc., 392 N.E.2d 1045, 1048-49 (Mass. 1979) (also rejecting lez

loci contractus rule); Lilienthal v. Kaufman, 395 P.2d 543, 545-47

(Or. 1964) (same); Babcock v. Jackson, 191 N.E.2d 279, 283-84

(N.Y. 1968) (rejecting traditional tort law rule of lez loci delicti

commissi, which applied the law of the state in which the tort was

committed, in favor of an approach comparing the interests of the

competing states); Reich v. Purcell, 4832 P.2d 727, 729-31 (Cal.

1967) (also rejecting lex loci delicti commissi rule).

13

different results through their choice of laws analysis. Some

States, depending on their views of interests of the

competing states in governing the transaction and the

lending charge at issue, would likely apply the law of the

state of the borrower’s residence to late charges."” Others

1° See, e.g., Commercial Credit Equip. Corp. v. West, 677 S.W.2d

669, 674 (Tex. Ct. App. 1984) (applying law of consumer's state

in case involving purchase financing) ; Dassault Falcon Jet Corp. V.

Oberflez, Inc., 909 F. Supp. 345, 353 (M.D.N.C, 1995) (applying

law of consumer’s state in case involving sale of goods); D.P.

Technology Corp. Vv. Sherwood Tool, Inc., 751 F. Supp. 1088, 1040

(D. Conn. 1990) (applying law of commercial purchaser’s state) ;

Collins Radio Co. Vv. Bell, 623 P.2d 1039, 1045-48 (Okla. Ct. App.

1980) (same).

1! See, e.g., Connecticut Nat’l Bank vy. Kommit, 577 N.E.2d 639,

640-41 (Mass. App. Ct. 1991) (enforcing choice of law clause in

credit card agreement providing that law of bank’s home state

governs transaction); Finance Am. Corp. v. Moyler, 494 A.2d

926, 928-30 (D.C. 1985) (applying law of finance company’s home

state in consumer loan case); OFS Equities, Inc. v. Conde, 421

So, 2d 651, 653 (Fla. Dist. Ct. App. 1982) (applying law of lender's

home state under “validation principle”) ; Commercial Credit Plan,

Inc. V. Parker, 263 S.E.2d 220, 222 (Ga. Ct. App. 1979) (applying

law of finance company’s home state in consumer loan case) ; Walker

v. Associates Fin. Servs. Corp., 588 $.W.2d 416, 417-18 (Tex. Ct.

App. 1979) (same); cf. McBride v. Minstar, Inc., 662 A.2d 592,

598-99 (N.J. Super. Ct.) (holding that Massachusetts law governs

both contract and tort claims of New Jersey resident who pur-

chased ski equipment from retailer in Massachusetts), aff'd sub

nom. McBride Vv. Raichle Molitor, USA, 662 A.2d 567 (N.J. Super.

Ct. App. Div. 1995).

‘2 1f, for example, a court of Illinois determined, applying its

conflict of laws rules, that Illinois law applies when a resident of

Illinois borrows money from a bank in Ohio, courts in Ohio would

of course be required to give full faith and credit to the final judg-

ment of the Illinois court. U.S. Const. art. IV, §1. In a case in-

volving the same issues but different parties, however, the courts

of Ohio would be free to reach a different result.

14

The inevitable result would be forum shopping with its

devastatingly harmful effects on the administration of

justice. See, e.g., Erie R.R. v. Tompkins, 304 US. 64,

74-77 (1938) (condemning forum shopping). This struc-

tural (and perpetual) uncertainty would impose unneces-

sary costs on both banks and card holders and would

further no one’s legitimate interests.

Regardless of how the individual states were to resolve

these difficult choice of law issues, the result of petitioner's

construction of section 85 would be to balkanize the regu-

lation of banks. The States would lose our historic pre-

rogative to set the terms upon which the banks located

within our borders may lend money. Instead, the interest

charges on loans made by banks located within our bor-

ders would be regulated in part by our States and in part

by the law of each state in which the credit card holder

resides or the credit card purchase is made. This is an

intolerable situation that could only be justified by the

clearest evidence of congressional intent.

Il. UNDER SETTLED RULES OF STATUTORY CON-

STRUCTION, THE JUDGMENT OF THE CALIFOR-

NIA SUPREME COURT SHOULD BE AFFIRMED.

This case presents a straightforward question of statu-

tory construction. As explained above, section 85 oper-

ates here in effect as a choice of law rule, not as a

statute preempting substantive state law, and does not

raise the states’ rights or federalism concerns normally

associated with conventional preemption statutes. Ac-

cordingly, this case should not be governed by the prin-

ciples of statutory interpretation that apply in the context

of preemption. See, e.g., Pet. Br. at 12-18. Rather, the

standard and settled rules of statutory construction should

apply. The judgment of the California Supreme Court

should be affirmed because its interpretation of section 85

is consistent with (1) the language of the statute as inter-

15

preted in the formally adopted rule of the OCC, the

federal agency charged with administering the National

Bank Act, (2) the policies and purposes of Congress in

enacting the National Bank Act, and (3) economic reality

and this Court’s prior rulings.

A. Deference To The OCC’s Interpretation Of Section

85 Is Appropriate And Essential To Ensuring The

Safety And Soundness Of Banks Within Our

Borders.

Numerous nineteenth century statutes and cases define

or use the word “interest” in a broad sense, to include all

payments for the use of funds, including damages for

the detention of funds past the maturity date of the loan.

See Citibank Br. at 16-21, 25-30. Thus, the plain meaning

of the statute in 1864 and today is a sufficient basis in

itself to affirm the decision below.

In arguing for a different interpretation of section 85,

petitioner is unable to demonstrate that the language of

the statute compels the conclusion that late charges must

be excluded from its sweep. In her opening brief, peti-

tioner concedes as much, acknowledging that “interest”

in section 85 is not limited to the APR, but may also in-

clude other fees in certain circumstances. See, e.g., Pet.

Br. at 30-31 & n.14. At bottom, all that petitioner at-

tempts to show is that the term “interest” in section 85,

read in isolation, is potentially ambiguous.

The proper resolution of this case, however, is the

same whether the statutory language is deemed to be plain

or ambiguous. That is because when a statute is ambig-

uous, the first rule of federal statutory interpretation di-

rects courts to determine whether the federal agency

charged with administering the statute has issued an

authoritative interpretation of the relevant language. As

the Court has explained:

When a court reviews an agency's construction of the

Statute which it administers, it is confronted with

16

two questions. First, alway, is the question whether

Congress has directly spoken to the precise question

at issue. If the intent of Congress is clear, that is

the end of the matter... . If, however, .. . the

statute is silent or ambiguous with respect to the

specific issue, the question for the court is whether

the agency’s answer is based on a permissible con-

struction of the statute.

Chevron U.S.A. Inc. v. Natural Resources Defense Coun-

cil, Inc., 467 U.S. 837, 842-43 (1984); see also, e.g., Na-

tionsbank of North Carolina, N.A. Vv. Variable Annuity

Life Ins. Co., 115 S. Ct. 810, 813 (1995) (“It is well

settled that courts should give great weight to any reason-

able construction of a regulatory statute adopted by the

agency charged with the enforcement of that statute.”).

The OCC is charged with administering the National

Bank Act. 12 U.S.C. §§ 1, 26-27, 481; Nationsbank, 115

S. Ct. at 813. The OCC’s interpretation of any ambiguity

in the National Bank Act is therefore entitled to deference

by the courts, and any reasonable interpretation of the

Act by the OCC is conclusive of the issue. /d. This def-

erence is based, in part, on the fact that Congress has

delegated this policy-laden task to an administrative

agency and, in part, on the recognition that administrative

agencies develop a high level of expertise in their com-

plex regulatory fields. See, e.g., Chevron, 467 U.S. at

864-66; Cass R. Sunstein, Law and Administration After

Chevron, 90 Colum. L. Rev. 2071, 2086-90 (1990). It

is neither institutionally appropriate nor wise policy for

federal courts to interfere with the judgments made by

the OCC,

The OCC recently promulgated a final rule expressly

interpreting the word “interest” in section 85. The OCC’s

rule states:

The term “interest” as used in 12 U.S.C. § 85 in-

cludes any payment compensating a creditor or pros-

pective creditor for an extension of credit, making

17

available of a line of credit, or any default or breach

by a borrower of a condition upon which credit was

extended. /t includes, among other things, . . . late

a

61 Fed. Reg. 4849, 4869 (Feb. 9, 1996) (emphasis

added) (to be codified at 12 C.F.R. § 7.4001(a)). This

rule is consistent with opinion letters issued by the OCC

in 1980, 1988 and 1992," with statements issued by

other federal banking agencies,"* and with the overwhelm-

ing majority of lower court cases holding that the term

“interest” in section 85 and in section 521 of the DIDA

includes late fees and other charges incident to the exten-

sion of credit.”

As respondent ably demonstrates, the conditions for

deference to the OCC are met in this case. Citibank Br.

18 Letter of William P. Bowden, Jr., OCC Chief Counsel, 1992

WL 136390 (OCC) (Feb. 4, 1992) ; OCC Interpretive Ltr. No. 452,

[1988-89 Transfer Binder] Fed. Banking L. Rep. (CCH) { 85,676

(Aug. 11, 1988); Letter from Richard V. Fitzgerald, Director,

OCC Legal Advisory Services Division (Nov. 24, 1980).

™ Letter of Harry Quillian, Acting General Counsel, FHLBB

(June 27, 1986), attached to Letter of Karen Solomon, Deputy Chief

Counsel, Office of Thrift Supervision (Sept. 29, 1994), in Current

Developments, Fed. Banking L. Rep. (CCH) {82,852 (Dec. 16,

1994); Advisory Op. No. FDIC-92-47, [1992-93 Transfer Binder)

Fed. Banking L. Rep. (CCH) { 81,534 (July 8, 1992).

B.g., Cades vV. H & kh Block, Inc., 43 F.3d 869 (4th Cir. 1994)

(flat $29 charge for tax refund anticipation loans), cert. denied,

115 S. Ct. 2247 (1995); Greenwood Trust Co. v. Massachusetts,

971 F.2d 818, 829 (1st Cir. 1992) (noting that courts construing

section 85 “have had little trouble in construing the term ‘interest’

to encompass a variety of lender-imposed fees and financial require-

ments which are independent of a numerical percentage rate’),

cert. denied, 506 U.S. 1052 (1993); American Timber & Trading

Co. Vv. First Nat'l Bank, 690 F.2d 781 (9th Cir. 1982) (charges in-

curred under compensating balance requirements) ; Fisher v. First

Nat'l Bank, 548 F.2d 255 (8th Cir. 1977) (credit card cash fees) ;

Northway Lanes v. Hackley Union Nat'l Bank & Trust Co., 464

F.2d 855 (6th Cir. 1972) (closing costs).

18

at 35-41. Accordingly, under the principles of Chev-

ron and its progeny, the Court should defer to the author-

itative interpretation of the National Bank Act promul-

gated by the OCC.

In addition, there are particularly compelling reasons

here for according deference to the OCC’s interpretation of

the National Bank Act. First, banking officials in our

States are involved on a daily basis in the supervision, ex-

amination, and regulation of state-chartered banks. State

banking officials rely as a matter of course upon the of-

ficial pronouncements of the OCC, the FDIC, and other

federal bank regulatory agencies in interpreting the myriad

federal statutes that apply to state banks. That ‘Teliance

promotes certainty and efficiency in bank regulation, and

accords proper respect to the role assigned by Congress to

the expertise developed by the federal agencies in this

field.

Specifically in this case, bank regulators in our States

relied upon the OCC’s interpretation of the National Bank

Act to ensure that banks subject to our regulatory jurisdic-

tion were in full compliance with applicable laws. If the

OCC or FDIC had taken a different position regarding the

meaning of section 85, our bank regulators would have

reexamined the issue to ensure that the state-chartered

banks located in our States were complying with the law.

Reversing the OCC’s interpretation of the National

Bank Act, however, would upset the settled and reason-

able expectations regarding the meaning of section 85 in

the industry and would undermine the certainty and ef-

ficiency interests set forth above. If the OCC’s interpre-

tation of section 85 were discarded, then the ability of

state regulators to assume the validity of stated interpre-

tations of federal banking statutes issued by federal bank-

ing agencies would be severely diminished, if not elimi-

nated altogether.

Second, the banks within our borders also rely upon the

statements of federal banking agencies in ensuring that

- 19

their practices are in accordance with the law. In re-

liance upon the OCC’s interpretation of the National Bank

Act, banks in our States have loaned literally hundreds

of billions of dollars to consumers across the country.

Given the amount of money at stake in “his case, accepting

petitioner’s interpretation of the National Bank Act would

have a seriously harmful effect on banks in our States.

Individual banks would suddenly and unexpectedly be

exposed to significant damage claims. Collectively these

claims could readily exceed billions of dollars.

Moreover, the harm would not be limited to the bank-

ing industry. Rather, the potentially massive liability of

banks could have an adverse effect on the entire economy

of most, if not all, of the States. The ultimate impact

could be loss of jobs, loss of tax revenues, and an overall

tightening of credit. As a result, businesses, consumers,

and all residents in this nation would suffer.

In interpreting section 85, great weight should be ac-

corded to justifiable reliance interests. The substantial

history of reliance, and the potential widespread harm

that would result from undermining the reliance interests,

counsel strongly against the adoption of a new, unsup-

ported interpretation of the National Bank Act. See, e.g.,

Zenith Radio Corp. v. United States, 437 U.S. 443, 457-

58 (1978) (“In light of these substantial reliance in-

terests, the longstanding administrative construction of

the statute should ‘not be disturbed except for cogent

reasons.’”); Train v. Natural Resources Defense Council,

Inc., 421 U.S. 60, 87 (1975) (deferring to EPA’s interpre-

tation of Clean Air Act in part because “there has undoubt-

edly been reliance upon [the EPA’s] interpretation by

the States and other parties affected by the Act”); 2B

Norman J. Singer, Sutherland on Statutes and Statutory

Construction § 49.07, at 62 (Sth ed. 1992) (one reason

for sustaining a long-standing statutory interpretation “is

the fact that the public has relied on the interpretation”).

20

B. The State Court’s Construction Of Section 85 Fur-

thers Congress’ Purposes In Enacting The National

Bank Aet.

Interstate lending was a well-established practice in this

country long before the National Bank Act was adopted.

Marquette Nat'l Bank, 439 U.S. at 317. Through the

National Bank Act, “Congress intended to facilitate ...a

‘national banking system,’” id. at 314-15, to create “a

banking system of great regional interdependence,” id.

at 316, and to promote interstate lending generally, id.

at 314-18. The California Supreme Court's construction

of the National Bank Act furthers the Act’s manifest

purposes.

First, the state court’s ruling provides certainty and

predictability to interstate lending. Banks may lend money

to borrowers in other states knowing with certainty that

only the law of the bank’s home state, not the law of any

other state, will govern the transaction.

Acceptin titioner’s interpretation of the National

Re om A nearer would, as already demonstrated

(supra, pp. 12-14), have precisely the opposite effect, caus-

ing substantial uncertainty. In the face of that uncer-

tainty, banks would be likely to adopt conservative lend-

ing practices that would increase the cost of credit and

would restrict access to credit. Moreover, banks that con-

tinued to make interstate loans and to issue credit cards

to out-of-state customers would risk incurring enormous

liability in class actions, such as this one, if they were to

predict wrongly which state’s law applied to certain loan

charges. See William C. Dunkelberg, Litigation Concern-

ing Late Charges is Major Threat to Credit Card Busi-

ness, Banking Pol’y Rep. (Prentice Hall), Apr. 6, 1992,

at 1, 15-16. No prudent lender will take that risk.

Second, the California Supreme Court’s construction of

the National Bank Act promotes efficiency and reduces

costs in interstate lending. Under the state court’s ruling,

banks need to monitor statutory, regulatory, and judicial

21

developments in banking law in only one state—the

bank’s home state. The cost of administering interstate

loans and credit card accounts remains low, because all

loans and accounts are governed by one set of laws.

Petitioner’s interpretation of the statute, however, would

impose substantial administrative burdens on banks. To

engage in interstate lending, banks would be required to

design and maintain a system that would incorporete all

Statutory, regulatory, and judicial law relating to loan

charges in all 50 states—and to monitor the statutory,

regulatory, and judicial changes in the law in each state

—in order to ensure that each borrower was being as-

sessed the correct charges for each loan. See William F.

Baxter, Section 85 of the National Bank Act and Con-

sumer Welfare, 1995 Utah L. Rev. 1009, 1024

(1995). Requiring banks to comply with myriad, conflict-

ing laws in each jurisdiction where their credit card hold-

ers and other borrowers reside would undermine certainty

and predictability in interstate lending, and could, as this

Court has stated, “throw into confusion the complex sys-

tem of modern interstate banking.” Marquette Nat'l Bank,

439 U.S. at 312. At the very least, accepting petitioner’s

argument would cause an increase in the cost of inter-

state lending and a reduction in the amount of interstate

lending—precisely the opposite of what Congress intended

when it adopted the Act.

C. The California Supreme Court’s Construction Of

Section 85 Is Consistent With The Economics Of

Credit Pricing And Thus Constitutes A Common

Sense Approach To Applying The Statute.

Banks typically charge a number of closely related fees

for credit cards. The most prominent of these fees is the

APR. Other fees include the late charges at issue in this

case, as well as annual fees, over-the-limit fees, and fees

for returned checks used to pay off a credit card balance.

All of these fees, in the aggregate, constitute the “price”

of the credit card to the consumer.

22

The application of section 85 to one of these fees—the

APR—was settled by this Court in Marquette National

Bank. As noted above, the Court held that section 85

allows a national bank to charge the APR permitted by

the law of its home state, even if that APR violates the

law of the borrower’s home state. 439 U.S. at 313.

The instant case involves late fees, and not the APR.

But late fees and APR are simply two components of

the price of credit to the card holder. There is no basis

in logic or economics to treat the loan differently, or to

apply a different choice of law rule, simply because a late

fee, rather than the APR, is at issue. Indeed, one court

has aptly stated that the definition of “interest” in section

85 should be governed by “{w]hat affects the borrower's

pocketbook . . . , not semantics.” First Nat'l Bank v.

Nowlin, 509 F.2d 872, 878 (8th Cir. 1975).

Moreover, as noted above, Congress’ intent in enacting

the National Bank Act was to promote interstate banking

while at the same time preserving the states’ historic pre-

rogatives with regard to bank regulation. The intent that

petitioner imputes to Congress, however, is wholly im-

plausible. According to petitioner, Congress actually in-

tended in 1864 to preserve the states’ traditional role in

controlling certain loan charges, but at the same time in-

tended to deprive the states of that role with regard to

other, closely related loan charges.”* There is no evidence

and no reason to assume that Congress intended to create

such an illogical and unworkable regulatory scheme.

16 As respondent shows, in the context of intrastate loans by a

national bank, the term “interest” must include late charges.

Because there is no reason to believe that the term should have a

different meaning for interstate loans, “interest’”’ must also include

late charges on interstate loans. Citibank Br. at 35.

23

III. SECTION 8 PROMOTES BOTH THE INTERESTS

OF CONSUMERS AND THE ABILITY OF EACH

STATE TO PROTECT ITS RESIDENTS AS IT SEES

FIT.

Consumers in our States and across the country benefit

from broad access to credit, low credit card costs, and

the ability to choose from the broadest possible range of

competing credit cards, offering the broadest possible

range of packages of rates and charges, in the market-

place. The Truth In Lending Act, 15 U.S.C. § 1601

et seq., state disclosure laws, and state anti-fraud protec-

tions ensure that credit card issuers must disclose all ma-

terial terms so that consumers are able to make informed

choices among competing credit card products. Any state

that is dissatisfied with existing protections can enhance

its own disclosure and anti-fraud laws. It is no solution

to make a substantive shambles of the interstate banking

system, which has served the nation well for decades.

With the broadest possible range of choices in the mar-

ket and the extensive disclosures required by the Truth

In Lending Act, consumers are able to obtain credit cards

that fit their individual usage and payment preferences.

For example, consumers who pay the outstanding balance

in full each month are likely to choose a credit card that

does not charge an annual fee and that offers perquisites

such as airline frequent flier miles or no-cost insurance

on rental cars, even if the card also charges a relatively

high APR and imposes late fees. In contrast, consumers

who plan to use a card for easy access to unsecured credit

are likely to choose a card that offers a low APR and no

late charges, even if the card also charges an annual fee

and offers no “perks.” See David S. Evans & Richard

L. Schmalensee, The Economics of the Payment Card

Industry 51, 58-60 (1993); Christopher C. DeMuth, The

Case Against Credit Card Interest Regulation, 3 Yale

J. on Reg. 201, 236, 238-39 (1986).

The California Supreme Court’s construction of section

85 promotes broad competition in the interstate credit

. a to

sumers across the country with the certainty that the

but also late charges. As a result, consumers in

will be able to choose from a broad array of competing

credit cards, some of which will be offered by banks

states which restrict some loan charges and others of

which will be offered by banks in states with no such

restrictions.

For example, Minnesota law severely limits the ability

of banks to charge late fees, Minn. Stat. § 48.185(4), but

banks in Ohio are permitted to offer cards that do charge

late fees, Ohio Rev. Code § 1107.262(A). When com-

peting for customers against Minnesota card issuers—

whether in Ohio, Minnesota, or somewhere else—the

Ohio banks must offer other, more favorable terms (for

example, a low APR or no annual fee) in order to com-

pete with cards from the Minnesota banks that do not

charge late fees. Thus, consumers in every state will be

able to choose between (1) cards from banks in Minne-

sota, which do not assess late charges and (2) cards

from banks in Ohio, which do assess late charges but in

return offer a low APR or no annual fee. Under petition-

er’s construction of section 85, in contrast, consumers

would have fewer choices and would therefore be worse

off. See Baxter, at 1020-21; DeMuth, at 231, 239."

By permitting each state to set its own policy concern-

ing credit card fees and charges that governs its home

17 Contrary to the suggestion of one of petitioner’s amici, nothing

in the California Supreme Court's interpretation of section 85

would give out-of-state national banks a competitive advantage

over local banks, even if by law they are permitted to charge more

than local banks. In the example above, if the Ohio bank charges

late fees without offering a low APR or no annual fee to its Min-

nesota customers, it will be at a competitive disadvantage compared

to Minnesota banks. Consumers in Minnesota will choose to obtain

credit cards from Minnesota banks, which will be offering a lower

overall price for credit cards.

25

banks’ practices, the California Supreme Court's interpre-

tation of section 85 benefits consumers in our States and

throughout the country. It permits banks to offer con-

sumers a wide variety of credit card products in an in-

dustry that is characterized by intense competition. Evans

& Schmalensee, at 68-71; Baxter, at 1013-19; DeMuth,

at 222-26. Armed with a variety of choices offered by

banks and other credit card issuers, and with full disclo-

sure of credit terms, including late fees, mandated by

federal law, consumers will continue to have the credit

card product that best suits their particular needs.

In an attempt to argue that the California Supreme

Court’s interpretation of section 85 will harm consumers,

petitioner and her amici make the broad argument that

late charges are inherently unjust or unfair. But this

argument cannot dictate the proper construction of sec-

tion 85."° Whether banks should be allowed to impose

late charges is a question of policy, better suited for Con-

gress and the state legislatures than for this Court. Some

States choose to prohibit late fees. Other states choose

to permit them. Either choice is rational and within the

traditional prerogative of the states to regulate the lending

practices of banks located within their borders.”

"8 Moreover, petitioner and her amici are simply wrong that late

fees are flatly unjust. States that permit late fees have recognized

that there is no social utility in late payments, that late payments

impose substantial costs on lenders, and that it is therefore “just”

to permit card issuers to require the defaulting cardholders to pay

for the consequences of their actions. If credit card issuers were

not permitted to charge late fees, then those costs would have to be

borne by all card holders—in the form of higher APR’s, higher

annual fees, or fewer perks. See Dunkelberg, at 16. Prohibiting

late fees thus has the unfortunate effect of requiring the vast

majority of cardholders who make their monthly payments on time

each month to subsidize the few who pay late. Jd.; Raxter, at 1025.

Permitting banks to charge late fees, in contrast, compensates the

banks for the costs of late payments (including increased credit

risk) and deters borrowers from making late payments.

Since 1990, the Legislatures of at least 16 states (including

several states that have joined the amicus brief in support of peti-

26

Petitioner’s amici also claim that, under the California

Supreme Court's construction of section 85, “consumers

subjected to unfair or illegal credit and collection prac-

tices by an out-of-state national bank will have no re-

course to their state consumer protection authorities.”

Amici Brief of Mass., et al., at 9. But that is not what

section 85, or this case, is about. Consumer protection

laws (such as the Truth In Lending Act) protect con-

sumers from fraud and deception. Nothing in section 85

interferes in any way with the ability of the Attorneys

General and the various consumer protection agencies of

our States from taking strong and immediate action

against any card issuer that engages in fraudulent or de-

ceptive credit or collection practices.

Moreover, under the California Supreme Court’s con-

struction of section 85, residents of a state are guaranteed

titioner) have recognized that late charges are not inimical to

consumer interests, and have passed new laws either authorizing

credit card late charges or increasing the amount of the late fees

that may be assessed. See Ariz. Rev. Stat. § 44-1205.C.4 (allowing

late charge in any amount agreed to with borrower) ; Cal. Fin. Code

§ 4001(a)(1)(C) (allowing late charge up to $15) ; Colo. Rev. Stat.

§ 5-8-2038 (allowing late charge up to $15); Ind. Code § 24-4.5-3-

203.5(4), as amended by rule, 3 Consumer Cred. Guide (CCH) Ind.

6531 (allowing late charge up to $14.50) ; Iowa Code § 537.2502.8

(allowing late charge of $10); Kan. Stat. Ann. § 16a-2-502(2) (al-

lowing late charge up to $10) ; Me. Rev. Stat. tit. 9-A, § 2-501(1) (G)

(allowing late charge of lesser of $10 or 5 percent of unpaid

balance); Mass. Gen. L. ch. 140, §114B (allowing late charge of

lesser of $10 or 10 percent of unpaid balance); N.J. Stat. Ann.

§ 17:16C-42(a) (allowing late charge up to $10); N.Y. Banking

Law § 108(5)(e); N.Y. Pers. Prop. Law §413(5)(b) (allowing

late charge in any amount agreed to with borrower); Okla. Stat.

tit. 14A, § 3-203(5), as modified by rule, 4 Consumer Cred, Guide

(CCH) Okla. 16901 (allowing late charge up to $15); Pa. Stat.

Ann. tit. 7, §322(d) (v) (allowing late charge of greater of $20 or

10 percent of unpaid balance); S.C. Code §§ 37-3-203, 37-1-109

(allowing late charge of lesser of $12 or 5 percent of unpaid bal-

ance) ; Utah Code § 70C-2-102(1) (allowing late charge of greater of

$20 or 5 percent of unpaid balance) ; Va. Code Ann. § 6.1-330,78.A.1

(allowing late charge in any amount agreed to with borrower) ;

Wis. Stat. § 422.202(2m) (a) (allowing late charge up to $10).

F

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|

:

j

dent’s home state. See, e.g., McBride v. Minstar, Inc.,

662 A.2d 592, 598-99 (N.J. Super. Ct.) (holding under

New Jersey’s choice of law rules that the claims of a

New Jersey resident who purchased allegedly defective ski

equipment from a retailer in Massachusetts are governed

by Massachusetts law) aff'd sub nom. McBride v. Raichle

Molitor, USA, 662 A.2d 567 (N.J. Super. Ct. App.

Div. 1995). Likewise, a state has little interest in reg-

ulating the terms of a transaction when its resident has

made the choice to travel to another state to obtain a

loan from a bank there, leaving behind the interest rate

ceilings of the resident’s home state. See, e.g., Commer-

cial Credit Plan, Inc., v. Parker, 263 S.E.2d 220, 222

(Ga. Ct. App. 1979) (applying South Carolina law to

loan from South Carolina finance company to Georgia

borrower, under terms that were prohibited by Georgia

law, because borrower had travelled to South Carolina to

obtain the loan and “the public policy of [Georgia] . . .

does not extend to the enforcement of valid contracts

made in other states”); Walker v. Associates Fin. Servs.

Corp., 588 S.W.2d 416, 417-18 (Tex. Ct. App. 1979)

(applying Indiana law to loan obtained by Texas resi-

dent by mail from Indiana finance company).”

In addition, as this Court recognized in Marquette National

Bank some “impairment” of the ability of the states to enforce laws

limiting loan charges “has always been implicit in the structure of

the National Bank Act, since citizens of one State were free to visit

28

Another amicus contends that consumers, when choos-

ing from among various credit card options, do not con-

sider components of the price other than APR. This con-

tention defies both common sense and elementary eco-

nomic theory. Moreover, it is contrary to the actual ex-

perience of the credit card industry. In the years after

the Court’s decision in Marquette National Bank, credit

cards issued by banks in heavily regulated states have

been in direct competition with credit cards issued by

banks in less regulated or deregulated states. DeMuth,

at 231. Although banks in regulated states generally offer

a lower APR than banks in deregulated states, the num-

ber of credit cards and amount of credit extended by

banks in deregulated states has grown at a much faster

rate than that of banks in regulated states. /d. at 232-

36. The explanation is not that consumers prefer to pay

a higher APR; rather, the experience of the credit card

industry demonstrates that consumers are willing to pay

a higher APR in order to obtain credit cards that are of

greater value to the consumers because the cards offer

better service, additional features or “perks,” and broader

access to credit. Id. at 236-37.

At bottom, then, petitioner and her amici are not seek-

ing to give effect to the intent of Congress, or to protect

the historic prerogatives of the states, or even to promote

consumer welfare. Rather, petitioner and her amici seek

the assistance of this Court in supporting a category of

products—credit cards offered by banks in highly regu-

lated states—that is losing the battle of competition in

the credit card market. That case should be presented

to Congress, not this Court.

The ultimate effect of accepting petitioner’s interpreta-

tion of section 85 is clear. The cost of credit for con-

a neighboring State to receive credit.” 439 U.S. at 318. As was

true in Marquette National Bank, the plea of petitioner here to

“alter” section 85 in order to enable the states to apply their lending

regulations to interstate Joans is “an issue of legislative policy”

that “is better addressed to the wisdom of Congress than to the

judgment of this Court.” Jd. at 319.

wt 239-41 & n.102. To be sure, Congress would have the

power to adopt such a “silly” law, but it did not do so

in section 85. Cf. TVA vy. Hill, 437 U.S. 153, 194-

95 (1978).

At the end of the day, section 85 (and its analog,

section 521 of the DIDA), as interpreted by the California

Supreme Court, ensures that states retain the ability to

set the terms upon which banks located within our borders

may lend money. In contrast, petitioner’s interpretation of

section 85 interferes with this historic right and would

permit other states to govern the lending activities of banks

within our borders. Our States urge this Court to reject

this intrusion into our legitimate prerogatives.

30

CONCLUSION

For the foregoing reasons, the Court should affirm the

judgment of the California Supreme Court.

CARTER G. PHILLIPS

SIDLEY & AUSTIN

1722 Eye Street, N.W.

Washington, D.C. 20006

(202) 736-8000

JAMES M. HARRIS

STEVEN A. ELLIS

SIDLEY & AUSTIN

555 West Fifth Street

Los Angeles, CA 90013

(213) 896-6000

Counsel for Amici Curiae

March 29, 1996

Respectfully submitted,

Betty D. MONTGOMERY

Ohio Attorney General

JEFFREY S. SUTTON *

State Solicitor

DIANE R. RICHARDS

Chief, Chief Counsel Section

State Office Tower

30 East Broad Street

Columbus, OH 43215-3428

(614) 466-8980

* Counsel of Record