Amicus Curiae Brief — Massachusetts v. Greenwood Trust Co.

No. 92-794

(ae oa =

Oe aa anne

In The

Supreme Court of the United

October Term, 1992

.

COMMONWEALTH OF MASSACHUSETTS, et al.,

Petitioners,

Vv.

GREENWOOD 1RUST COMPANY,

Respondent.

«

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The First Circuit

+

BRIEF OF AMICI CURIAE OF THE STATES OF ALASKA,

ARKANSAS, CALIFORNIA, CONNECTICUT, HAWAII,

IDAHO, INDIANA, IOWA, KANSAS, KENTUCKY, MAINE,

MARYLAND, MICHIGAN, MINNESOTA, MISSISSIPI, NEW

HAMPSHIRE, NEW JERSEY, NORTH CAROLINA, NORTH

DAKOTA, OKLAHOMA, PENNSYLVANIA, SOUTH

CAROLINA, TENNESSEE, TEXAS, VERMONT, WEST

VIRGINIA, WYOMING AND THE DISTRICT OF COLUMBIA

IN SUPPORT OF PETITIONERS

¢

BONNIE J. CAMPBELL

Attorney General of lowa

EvtzaBeTH M. OsENBAUGH

Deputy Attorney General

Counsel of Record

Steve St. CLAIR

Special Assistant Attorney

General

Peter R. KOCHENBURGER

Assistant Attorney General

Consumer Protection Division

Iowa Department of Justice

Hoover State Office Building

Des Moines, IA 50319

(515) 281-5926

Counsel of Amici Curiae

COCKLE LAW BRIEF PRINTING CO,, (800) 225-6964

OR CALL COLLECT (402) 342-2831

List of Attorney’s General and States

Charles E. Cole

Attorney General of Alaska

Winston Bryant

Attorney General of Arkansas

Daniel E. L

Attorney General of California

Richard Blumenthal

Attorney General of

Connecticut

John Payton

Corporation Counsel for the

District of Columbia

Robert A. Marks

Attorney General of Hawaii

Larry EchoHawk

Attorney General of Idaho

Linley E. Pearson

Attorney General of Indiana

Robert T. Stephan

Attorney General of Kansas

Chris Gorman

Attorney General of the

Commonwealth of Kentucky

Michael E. Carpenter

Attorney General of Maine

J. Joseph Curran, Jr.

Attorney General of Maryland

Frank J. Kelley

Attorney General of Michigan

Hubert H. Humphrey, III

Attorney General of Minnesota

Mike Moore

Attorney General of Mississippi

John P. Arnold

Attorney General of

New Hampshire

Robert J. Del Tufo

Attorney General of New Jersey

Lacy H. Thornburg

Attorney General of

North Carolina

Nicholas J. Spaeth

Attorney General of

North Dakota

Susan Brimer Loving

Attorney General of Oklahoma

Ernest D. Preate, Jr.

Attorney General of

Pennsylvania

T. Travis Medlock

Attorney General of

South Carolina

Charles W. Burson

Attorney General of Tennessee

Dan Morales

Attorney General of Texas

Jeffrey L. Amestoy

Attorney General of Vermont

Mario J. Palumbo

Attorney General of

West Virginia

Joseph B. Meyer

Attorney General of

Wyoming

TABLE OF CONTENTS

Page

SOE SE PAPER EE oh Ske weces nda dewnasesvens ii

INTEREST OF THE AMICI CURIAE............... 1

SUMMARY OF THE ARGUMENT ................. 3

REASONS FOR GRANTING THE PETITION ....... 4

I. The Lower Court’s Decision Throws the

Enforcement of State Consumer Credit Laws

SNM a akc nendnxadecdeaababswaecnynn’s 4

Fi. TREND sw ones ce ncanerescdesssonsss 4

B. The Court of Appeals’ sweeping definition of

“interest” threatens to engulf a substantial

portion of state consumer credit laws...... 6

II. The Decision Below Should be Reviewed as it

Improperly Preempts State Law and Mis-

construes the Scope of Section 521........... 8

A. The lower court’s preemption analysis is

inconsistent with decisions of this Court... 8

B. The Court of Appeals’ decision reverses

the federal government’s policy in con-

UE Me 6 66 8-600 we tin wie ccnnwi cers 11

C. The decision below incorrectly determined

that “interest rates” includes late charges or

other terms related to the cost of lending.. 14

CAEN os 0 SRA hs cnc hwneandeg ss 064k Ee Os wae 18

iia i |

ii

TABLE OF AUTHORITIES

Page

CASES

Aldens v. Miller, 610 F.2d 538 (8th Cir. 1979), cert.

denied G66 US. SID Ci eeis cans dtandegnsesccseasss 2

Aldens, Inc. v. Packel, 524 F.2d 38 (3d Cir. 1975),

cert. dented 425 US. 949 CUBVOe.. cass sc ce sncs sence 2

California v. ARC America Corp., 490 U.S. 93 (1989) ..... 9

Cipollone v. Liggett Group, Inc., 112 S.Ct. 2608

(199R) . . .sncanvecuescyuu yee ees 9, 10, 11

City of Burbank v. Lockheed Air Terminal, Inc., 411

US. 626 (3973)... ..0<csccwaneenctee peer eraes casks 9

General Motors Corp. v. Abrams, 897 F.2d 34 (2d Cir.

re ee 9

Hillsborough County v. Automated Medical Laborato-

vies, Inc., 471 US. FOG CIO sence tvcceacsassesess 9

In Re Russell, 72 B.R. 855 (Bankr. E.D. Pa. 1987)..... 14

Marquette National Bank of Minneapolis v. First of

Omaha Service Corp., 439 U.S. 299 (1978) ......... 4,5

New York Department of Social Services v. Dublino,

413 US. GS CSTE) . os ccs nkeuaneweeanauenssenies 9

Perdue v. Crocker National Bank, 702 P.2d 503 (Cal.

1985), appeal dismissed 475 U.S. 1001 (1986)........ 15

Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947) ..... 9

Wisconsin Public Intervenor v. Mortier, 111 S.Ct.

2476 C1991)... 0 0 kioseaeee eee 4

iii

TABLE OF AUTHORITIES - Continued

Page

STATUTES AND REGULATIONS

eS eee ee a eos ey ck wipe ewe cue k ances 4

12 U.S.C. § 1735f-7a(a) (section 501)................. 15

ig US. § 131d (eoction S21) ................. passim

12 U.S.C. § 1831d (Historical Note, under “Effec-

Rg BE.) er 12, 13

The Truth-in-Lending Act, 15 U.S.C. 1601 et seq...12, 16

a a ek nb wands bd bcéwaae weed < 16

The Equal Credit Opportunity Act, 15 U.S.C.

ae iL cans bo 84 Odo 40 OD 12

The Fair Debt Collection Practices Act, 15 U.S.C.

a edn beds 12

The Electronic Fund Transfers Act, 15 U.S.C.

i id ww ome es 12

re ee ee 16

ee a scab eek cc eb tk dee beuees 16

Se I OS OP OR Rg occ ccc is ccucaeweseccn 5, 7

ee 18

LEGISLATIVE MATERIALS

Re I US PUP CEO. occ cwecncccnccsecsacceces 13

S. Rep. No. 368, 96th Cong. 2d Sess. 19 (1979),

reprinted in 1980 U.S. Code Cong. & Admin.

TT Teka eCkG RS daw ah eV ENe es oKs spews se bets 15

iv

TABLE OF AUTHORITIES - Continued

Page

OTHER AUTHORITIES

Credit Card Management, Card Industry Directory:

The Blue Book of the Credit and Debit Card Indus-

Sry te Ge Cees Simiee, WORE OG is cies nec eese... 8

Eckman, The Delaware Consumer Credit Bank Act

and “Exporting” Interest under Section 521 of the

Depository Institutions Deregulation and Monetary

Control Act of 1980, 39 Bus. Law. 1264, 1264-1267

(| SP rrr. Pre Rome pre o, rer ere 4

“Small States Teach a Big Banking Lesson,” Chi-

ge BO A ree ree eee eee 4

Uniform Consumer Credit Code, 1974 Act

we Se he eal pine aoe een 2

No. 92-794

”

In The

Supreme Court of the United States

October Term, 1992

>

COMMONWEALTH OF MASSACHUSETTS, et al.,

Petitioners,

V.

GREENWOOD TRUST COMPANY,

Respondent.

¢

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The First Circuit

¢

BRIEF OF AMICI CURIAE OF THE STATES OF ALASKA,

ARKANSAS, CALIFORNIA, CONNECTICUT, HAWAII,

IDAHO, INDIANA, IOWA, KANSAS, KENTUCKY, MAINE,

MARYLAND, MICHIGAN, MINNESOTA, MISSISSIPI, NEW

HAMPSHIRE, NEW JERSEY, NORTH CAROLINA, NORTH

DAKOTA, OKLAHOMA, PENNSYLVANIA, SOUTH

CAROLINA, TENNESSEE, TEXAS, VERMONT, WEST

VIRGINIA, WYOMING AND THE DISTRICT OF COLUMBIA

IN SUPPORT OF PETITIONERS

,’

vy

INTEREST OF THE AMICI CURAIE

Twenty-seven states and the District of Columbia urge

this Court to grant certiorari because of the nationwide

disruption of state consumer protection laws that will be

caused by the decision of the Court of Appeals for the First

Circuit. This decision directly challenges the states’ ability to

enforce laws regulating late charges in consumer credit

transactions. By interpreting “interest” expansively for pur-

poses of preemption analysis, the decision also places in

doubt the validity of every state’s consumer credit laws. This

unwarranted intrusion into substantive state consumer credit

policy overlooks both the language and history of the federal

statute at issue and the fundamental premise that a state’s

historic police powers can be negated only with a clear

mandate from Congress.

Consumer protection and consumer credit are tradi-

tional and critical areas of state concern. The amici states,

like most other states, have established comprehensive regu-

latory systems to ensure fairness in the relationship between

consumer borrowers and their creditors.! These laws reflect

each state’s own assessment of how to balance protecting

consumers with providing creditors sufficient incentive to

lend profitably to their residents. These statutes are largely

modern enactments; for example, nine of the amici states

have adopted substantial portions of the Uniform Consumer

Credit Code.”

a

' Typical areas of state consumer credit regulation include

limitations on interest rates, restrictions on additional fees such

as late charges, licensing and periodic examinations of lenders,

requirements of truthful advertising, limitations on security

interests and restrictions on debt collection practices. The need

for state regulation in this area has long been judicially noted.

See Aldens, Inc. v. Packel, 524 F.2d 38 (3d Cir. 1975), cert. denied,

425 U.S. 943 (1976); Aldens v. Miller, 610 F.2d 538 (8th Cir. 1979),

cert. denied, 466 U.S. 919 (1980).

2 The Uniform Consumer Credit Code’s stated purposes

include simplifying and modernizing laws governing consumer

credit, providing adequate interest rate ceilings, fostering com-

petition among creditors to ensure access to credit at a reason-

able cost, and protecting consumers against unfair practices by

“some” suppliers of credit. Uniform Consumer Credit Code,

1974 Act (U.L.A.) § 1.102.

SUMMARY OF THE ARGUMENT

Greenwood Trust aspires to a credit card operation

unhampered by state consumer protection laws. In the

lower courts it justified its disregard of these laws by

claiming that section 521 of the federal Depository Insti-

tutions Deregulation and Monetary Control Act of 1980

(DIDA) preempts state limitations on late charges.? How-

ever, the logical extension of the respondent’s argument

is not limited to these charges. If the lower court’s deci-

sion is allowed to stand, credit card issuers will try to rely

on section 521 to eviscerate virtually all state consumer

protection controls in interstate banking transactions.

DIDA cannot support this weight. Its language and

history demonstrate only a careful, very narrow preemp-

tion of state interest rate restrictions, not a comprehen-

sive de-regulatory program that preempts numerous state

statutes and allows one state’s laws to take precedence

over the laws of all other states. The lower court’s deci-

sion supporting Greenwood Trust has seriously impaired

the viability and enforcement of state consumer laws. Its

approach to preemption leaves open to challenge

numerous state laws regulating subject matters only tan-

gentially touched by federal legislation. The decision is

incorrect as a matter of law and policy and should be

reversed.

3 Public L. No. 96-221, 94 Stat. 132. Section 521 is codified in

part at 12 U.S.C. § 1831d.

REASONS FOR GRANTING THE PETITION

I. The Lower Court’s Decision Throws the Enforce-

ment of State Consumer Credit Laws into Disarray.

A. Background

Massachusetts prohibits the assessment of late

charges on credit card accounts when consumers are

delinquent in making payments. Greenwood Trust, the

issuer of the Discover credit card, imposes such charges

on Massachusetts residents. These charges are permitted

in Delaware, where Greenwood Trust is located. Green-

wood Trust bases its authority to “export” its late charge

assessments on section 521 of DIDA, which, under certain

circumstances, preempts state restrictions on interest

rates.

Greenwood Trust’s position stands or falls on how

DIDA is interpreted. However, the respondent, as well as

other lenders, also seek to rely on Marquette National Bank

of Minneapolis v. First of Omaha Service Corp., 439 U.S. 299

(1978), as authority to export these charges throughout

the country. Marquette held that pursuant to 12 U.S.C.

§ 85, national banks may use the rate of interest permit-

ted in the state where they are located even if that rate

exceeds the rate permitted in the cardholder’s state.*

4 After the Marquette ruling several states, including Dela-

ware and South Dakota, abolished most of their consumer credit

protection laws to attract consumer lenders on the theory that

creditors located in their state could “export” deregulation

throughout the country. See “Small States Teach a Big Banking

Lesson,” Chicago Fed Letter, June, 1988; Eckman, The Delaware

Consumer Credit Bank Act and “Exporting” Interest under Section

———eOooO3U

By artificially defining “interest” to encompass all of

Delaware law, Greenwood Trust now contorts the limited

preemption approved in Marquette as authority to export

the entirety of Delaware law throughout its cardholder

base and to disregard contrary consumer protection laws

of the cardholder’s state.5 This effort finds no support in

Marquette, which limited exportation simply to the rate of

interest allowed by the state where a national bank is

located. Nor does DIDA refer to an explicit or implicit

federal policy of preemption by allowing states to set

comprehensive national standards for consumer lending.

The result of the lower court’s decision may be to

enshrine Delaware’s policy of deregulation as a nation-

wide policy, regardless of other state laws to the contrary.

This opinion elevates not federal law but Delaware law

above the laws of each state, regardless of the decisions

made in this area by each state’s elected representatives.

521 of the Depository Institutions Deregulation and Monetary Con-

trol Act of 1980, 39 Bus. Law. 1264, 1264-1267 (1984).

5 Delaware aids this effort by legislatively expanding

“interest” for exportation purposes to include “all terms, condi-

tions and other provisions” of a credit card plan for purposes of

section 521 of DIDA. Del. Code Ann. Tit. 5 § 955. These terms are

declared “material to the interest rate” and, pursuant to the

“most favored lender doctrine,” lenders seek to export them to

other states as part of the interest rate. However, the definition

of “interest” under DIDA is one of federal law; Delaware cannot

usurp Congress’ role by redefining this term.

B. The Court of Appeals’ sweeping definition of

“interest” threatens to engulf a substantial por-

tion of state consumer credit laws.

This Court should review the decision below because

of its nationwide effect on the consumer protection laws

of the other states.© The repercussions are not limited to

disruption of state late charge restrictions. The lower

court’s determination that late charges are sufficiently

“related to a creditor’s cost of lending” and of “process-

ing a loan” to constitute part of the “interest rate” implies

that any state restriction affecting the cost of lending

could be preempted. App. A-25 to 26.”

The lower court’s analysis suggests that annual fees,

over-the-credit-limit fees, replacement card fees and

numerous other charges could be deemed part of the

“interest rate” and therefore exportable under DIDA. In

addition, creditors will assert that state laws which

require grace periods on credit card purchases, establish

“cure periods” before accelerating a late account, and

restrict the assessment of attorney’s fees and collection

costs all affect their economic return and cost of lending

* As noted by the Petitioners, thirty-two states regulate late

charges in credit card transactions. Petition, p. 13. Some states,

such as Idaho, currently do not regulate this particular area.

However, the right to do so effectively in the future is jeopar-

dized by the decision below.

7 The lower court stated: “Suggesting that an additional fee

attached to a delinquent, defaulted account is related to the

creditor’s cost of lending that money does no violence to lan-

guage, to precedent, or, indeed, to logic. Default necessarily

increases the creditor’s cost of processing a loan.”

and could be preempted under the lower court’s expan-

sive reading of DIDA.® Even state laws regulating debt

collection practices arguably relate to the total return of

the creditor; such associated costs could thus be included

within DIDA’s preemptive scope.

As a result, the decision below is inimical to the

enforcement of numerous state consumer credit laws as

they apply to interstate banking transactions. State regu-

lators now face substantial uncertainty over which state

laws regulate terms that could be defined as part of the

“interest rate” and therefore are preempted under DIDA

or the National Bank Act. Regulatory and enforcement

actions will be delayed and state officials hindered in

their efforts to enforce these laws. State legislatures

reviewing consumer credit policy cannot reliably deter-

mine the extent to which they may continue to regulate in

this area, regardless of the specific problems or concerns

that may exist in their states.

The uncertainty surrounding the construction of sec-

tion 521 also affects consumers and lenders. Consumers

pay credit card issuers hundreds of millions each year in

late fees and other charges not included within the

finance charge. Petition, pp. 16-17. Many of these con-

sumers reside in states prohibiting or limiting these

charges; payment of these fees transfers an enormous

8 This conclusion is not speculative. As noted, Delaware

adopted a broad definition of “material to the interest rate” to

allow lenders to export just such items. See Del. Code Ann. tit. 5

§ 955. In the lower courts Greenwood Trust has taken the posi-

tion that DIDA allows banks to impose on a nationwide basis

any credit terms allowed by the state where the bank is located.

sum of money from consumers to lenders in violation of

their states’ express public policy.

While the credit card industry desires the most

expansive possible definition of “interest rates” for pur-

poses of exportation, the decision below creates substan-

tial uncertainty for them as well. Lenders must guess as

to what other charges and terms, if any, are also export-

able and risk litigation should cardholders or government

agencies disagree with their decisions.

In addition, the Discover credit card, as well as credit

cards issued by other Delaware-based lenders, are sent to

consumers throughout the country.? The decision below

affects not just the relationship between the respondent

and Massachusetts, but also other credit card issuers,

millions of consumer card holders, and the consumer

credit laws of all other states.

Il. The Decision Below Should be Reviewed as it

Improperly Preempts State Law and Misconstrues

the Scope of Section 521.

A. The lower court’s preemption analysis is incon-

sistent with decisions of this Court.

“Consideration of issues arising under the Suprem-

acy Clause ‘start[s] with the assumption that the historic

9 Six of the ten largest credit card issuers are located in

Delaware. In 1991 these six banks accounted for roughly 26% of

the total bank card receivables. Credit Card Management, Card

Industry Directory: The Blue Book of the Credit and Debit Card

Industry in the United States, 1992 ed. at 35, 68-72.

police powers of the States [are] not to be superseded

by . . . Federal Act unless that [is] the clear and manifest

purposes of Congress.’” Cipollone v. Liggett Group, Inc.,

112 S.Ct. 2608, 2617 (1992), citing Rice v. Santa Fe Elevator

Corp., 331 U.S. 218, 230 (1947).!° This axiom is essential to

the states, as appropriate deference to state laws helps

ensure that Congress supersedes state legislative enact-

ments only through deliberate action. Principles of feder-

alism demand no less.'! By finding that state laws may be

preempted by ambiguously worded federal laws, the

lower court’s opinion is incompatible with this Court’s

decisions.

The Court of Appeals examined section 521 and

described at length its lack of clarity, specifically noting

the uncertainty regarding what charges are included

within the definition of “interest rate” and therefore

10 See also Wisconsin Public Intervenor v. Mortier, 111 S.Ct.

2476 (1991), 2481-2482; California v. ARC America Corp., 490 U.S.

93, 100-101 (1989); Hillsborough County v. Automated Medical Lab-

oratories, Inc., 471 U.S. 707, 715-716 (1985); New York Department

of Social Services v. Dublino, 413 U.S. 405, 413 (1973); General

Motors Corp. v. Abrams, 897 F.2d 34, 41-42 (2d Cir. 1990)

(“Because consumer protection law is a field traditionally regu-

lated by the states, compelling evidence of an intention to pre-

empt is required in this area.”).

1 As Chief Justice Rehnquist has emphasized: “Unless the

requisite pre-emptive intent is abundantly clear, we should hes-

itate to invalidate state and local legislation for the added rea-

son that ‘the state is powerless to remove the ill effects of our

decision, while the national government, which has the ultimate

power, remains free to remove the burden.’ ” City of Burbank v.

Lockheed Air Terminal, Inc., 411 U.S. 624, 643 (1973) (Rehnquist, J.,

dissenting) (quoting Penn Dairies, Inc. v. Milk Control Comm'n,

318 U.S. 261, 275 (1943)).

10

exportable despite state laws to the contrary. App. A-17

to 22. The Court concluded that the statutory language

and legislative history were “at bottom, inconclusive.”

App. A-41. Nonetheless, after reaching this conclusion,

the Court of Appeals erroneously proceeded to examine

federal common law and state law to derive its own

definition of “interest” for purposes of section 521.

The requirement that preemption be found only

when the intent is clearly communicated applies equally

in determining the extent or scope of express preemptive

language. Construing a preemption clause broadly after

concluding its language is “inconclusive” contradicts the

preemption principles set out in Cipollone. In examining

the express preemption clause in the 1965 Federal Ciga-

rette Labelling and Advertising Act, this Court stated that

the presumption against preemption properly limited the

range of the analysis and “reinforces the appropriateness

of a narrow reading” of express preemption clauses. Cip-

ollone, 112 S.Ct. at 2618.12 Accordingly, ambiguous terms

in express preemption clauses must be interpreted nar-

rowly and in favor of preserving state laws.

12 In a separate opinion joined by Justices Kennedy and

Souter, Justice Blackmun concurred with the majority and

noted: “The principles of federalism and respect for state sover-

eignty that underlie the Court’s reluctance to find pre-emption

where Congress has not spoken directly to the issue apply with

equal force where Congress has spoken, though ambiguously. In

such cases, the question is not whether Congress intended to

pre-empt state regulation, but to what extent. We do not, absent

unambiguous evidence, infer a scope of pre-emption beyond

that which clearly is mandated by Congress’ language.” Cip-

ollone, 112 S.Ct. at 2626. (Emphasis in the original.)

11

Here, the lower court concluded that the relationship

between late charges and interest rates was uncertain for

purposes of preemption. The Court of Appeals should

have then applied the standard clearly set out in Cipollone

and acknowledged that the presumption against preemp-

tion eliminated the ability or necessity to conduct further

review. This approach would have properly limited sec-

tion 521 to its logical meaning — numerical interest rates.

Instead, by forging ahead with a largely irrelevant anal-

ysis of common law usury cases and eventually conclud-

ing that the Massachusetts law was preempted, the

decision misapplied important preemption principles.

Consequently, state laws regulating late charges and

possibly a host of other consumer laws are now pre-

empted for purposes of DIDA, even though neither

DIDA’s language nor legislative history supports this

result. The decision severely damages state authority to

regulate consumer credit and is unsupported by prior

decisions of this Court. Further, the decision’s preemp-

tion approach threatens state laws in other areas jointly

regulated by the states and federal government.

B. The Court of Appeals’ decision reverses the

federal government's policy in consumer credit.

Examining Congress’ traditional approach to regulat-

ing consumer credit helps in discerning Congress’ intent

in section 521. The federal role is noteworthy for its

limited nature and for the deference regularly provided

to state substantive law. Rarely does federal law govern

the actual terms, charges and conditions of consumer

credit transactions; such concerns are generally left to the

12

states. Rather, federal law generally preempts state law

only when it offers either less protection or is inconsistent

with federal law.

For example, the federal Truth-in-Lending Act, 15

U.S.C. § 1601 et seq., regulates consumer lending dis-

closures but explicitly leaves intact substantive state con-

sumer protection laws. See 15 U.S.C. § 1610(b).13 Similar

deference to state law is demonstrated in the Equal Credit

Opportunity Act, 15 U.S.C. § 169id(f), the Fair Debt Col-

lection Practices Act, 15 U.S.C. § 1692n, and the Electronic

Fund Transfers Act, 15 U.S.C. § 1693q. Accordingly, while

section 521 authorizes a limited intrusion into the domain

of state consumer credit policy by preempting state

“interest rate” laws, Congress’ general practice with

regards to consumer credit argues for narrowly reading

the scope of section 521.

DIDA’s “opt-out” provisions further support a nar-

row construction of the Act vis-a-vis state consumer laws.

In section 525 Congress permitted states to negate DIDA’s

preemptive effect entirely if a state legislature passed an

13 This section states in part: “This subchapter does not

otherwise annul, alter or affect in any manner the meaning,

scope or applicability of the laws of any State, including, but not

limited to, laws relating to the types, amounts or rates of

charges, or any element or elements of charges, permissible

under such laws in connection with the extension or use of

CORR 2.5."

13

enactment expressing its intent to do so.'* Senator Prox-

mire described the opt-out provisions on the Senate floor

prior to final passage of the bill:

The presumption [sic] of usury laws does

not derogate State authority. Under the usury

provisions, each State may reimpose its usury

limits, if it so desires. We do not take that away

from the States. They can put those usury laws

back into effect.

126 Cong. Rec. 7070 (1980).

Several of the amici States have opted out of DIDA.'®

The opt-out clause demonstrates the restrained role taken

by Congress in 1980 in preempting certain state usury

laws and its intent that states maintain overall control in

the consumer credit area. This clause also contradicts

Greenwood Trust’s assumption that DIDA was intended

as a vehicle permitting credit card issuers to export one

state’s law throughout the country.

14 The “opt-out” provisions in section 525 were codified as

notes to the relevant DIDA sections, including section 521. See

12 U.S.C. § 1831d (under “Effective Date”).

15 In other litigation, credit card issuers have contended

that a state’s “opt-out” option only applies to lenders located in

the state and is ineffective against banks located in states which

have not opted out. This argument was made in United Missouri

Bank, U.S.A. v. Thomas J. Miller as Attorney General of the State of

Iowa, C.A. 88-1343-E (S.D. lowa 1988), which was settled with-

out a resolution on the merits. Therefore, the lower court’s

decision is of significant concern even to those states which

have opted out of DIDA.

14

C. The decision below incorrectly determined that

“interest rates” include late charges or other

terms related to the cost cf lending.

The states’ ability to legislative effectively to meet the

needs of their citizens is significantly affected by how

DIDA is interpreted. The inconsistency between the

lower court’s ruling and Congress’ intent to narrowly

define “interest” in DIDA for preemption purposes com-

pels review of the decision.

DIDA’s statutory language regarding preemption

consistently modifies “interest” with “rate”; the most

plausible conclusion is that preemption is limited to

numerical interest rates. This interpretation is consistent

with DIDA’s primary purpose of removing unrealistically

low state numerical interest rate restrictions during a

time of significant credit shortages and high inflation.

Even assuming the continuing relevance of this concern

during a period of historically low interest rates, limiting

DIDA to numerical interest rates rather than charges and

terms “related to the creditor’s cost of lending” does not

contradict Congress’ intent to ensure consumers have

sufficient access to credit.'¢

16 As one court noted: “The DIDMCA [DIDA] is hardly a

Congressional expression of distaste with state usury laws gen-

erally, but a compromise with the ideals of such laws — that there

should be limits upon rates of interest that lenders can legally

charge — in a time of crisis. Moreover, the crisis has passed.

Therefore, applying the DIDMCA to any transactions other than

those which it is very clearly provided are within its scope

would fail to recognize the context of this law in the scheme of

the inter-relationship between federal and state law.” In Re

Russell, 72 B.R. 855, 867 (Bankr. E.D. Pa. 1987)

15

DIDA’s legislative history also confirms Congress’

intent to draft DIDA narrowly to preserve state laws. In

section 501, an analogous provision designed to remedy

the shortage of available mortgage credit through pre-

emption of state usury laws, Congress preempted state

laws governing the “rate or amount of interest, discount

points, finance charges, or other charges” assessed in

connection with federally related mortgage loans. 12

U.S.C. § 1735f-7a(a). The report of the Senate Banking

Committee on the bill ultimately passed as DIDA speci-

fically limited the scope of this preemption provision to

“only those limitations that are included in the annual

percentage rate. The Committee does not intend to exempt

limitations on prepayment charges, attorney’s fees, late charges

or similar limitations designed to protect borrowers.” S. Rep.

No. 368, 96th Cong. 2d Sess. 19 (1979), reprinted in 1980

U.S. Code Cong. & Ad. News 236, 255. (Emphasis added.)

This report corroborates that the plain meaning of

DIDA is to preempt only restrictions on numerical interest

rates. The California Supreme Court acknowledged the

significance of this history for purposes of determining

DIDA’s preemptive reach: “Moreover, when in the 1980

Act Congress expressly preempted state usury laws, it

deliberately left in effect other provisions of state law

regulating charges in contracts between banks and bor-

rowers.” Perdue v. Crocker National Bank, 702 P.2d 503,

522-523 (Cal. 1985), appeal dismissed, 475 U.S. 1001

(1986).17

17 The decision below concluded that sections 501 and 521

were only “distant cousins” and therefore dismissed the rele-

vance of section 501’s legislative history. App. A-49 to 50, note

16

Assuming it is necessary to look outside DIDA to

define “interest rates” for purposes of federal law, then

the Truth-in-Lending Act, 15 U.S.C. § 1601 et seq., is

directly on point. This Act exhaustively defines terms

used in consumer credit transactions and clearly differen-

tiates between interest rates and late charges. In Truth-in-

Lending, “finance charges” includes “interest” as one of

its components.'®§ Late charges are specifically excluded

from the definition of “finance charge.” 12 C.F.R.

§ 226.4(c)(2). When determining the finance charge and

annual percentage rate for a transaction, the lender must

exclude from the calculation any late charges which are

assessed. This exclusion was made even more explicit

when Truth-in-Lending was amended in 1988 by the Fair

Credit and Charge Card Disclosure Act. Pub. L. No.

- 100-583, 102 Stat. 2960. This Act established guidelines

for advertising credit card plans and specified that late

charges be disclosed separately from the annual percent-

age rate. 15 U.S.C. § 1637(c); 12 C.FR. § 226.5a(b).

10. The amici states believe this determination is in error. The

applicability of section 501 and its history is apparent. Sections

501 and 521 were enacted as part of Title V of DIDA and address

identical credit concerns. Both sections support a limited dis-

placement of state interest rates and link the term “interest”

with “rate.” There is no reason why the definition of “interest”

in section 501 should explicitly exclude late charges and other

fees, while section 521, by implication, was meant to include

them.

18 In Regulation Z the Federal Reserve Board states that the

definition of finance charges is not limited to “interest” but

includes a variety of other charges, including service, transac-

tion, activity and carrying charges, points, loan fees, assump-

tion fees, finders fees, appraisals, and credit reporting fees. 12

C.F.R. § 226.4.

17

Truth-in-Lending provides the most current example

of how Congress views the relationship between interest

and late charges and provides a much surer ground for

defining “interest” in this case than common law defini-

tions unrelated to credit cards and modern consumer

credit legislation. Limiting “interest” to fixed, numerical

rates as defined in Truth-in-Lending provides a clear-cut

and realistic limitation on DIDA’s preemptive effect on

state consumer credit laws. When the Court of Appeals

found the language and legislative history of section 521

was “at bottom, inconclusive” it should have interpreted

DIDA in this manner and avoided preemption of state

law.

18

CONCLUSION

Contrary to the Court of Appeal’s extended analogy,

this case is not a “train wreck” involving the collision of

state consumer and federal banking laws. App. A-4.

Rather, the dual engines of Mass. Gen. L. ch. 140, § 114B,

and section 521 of DIDA may operate on parallel tracks,

at full efficiency and without crossing each other’s path.

Neither must yield the right of way.

For these reasons twenty-seven states and the District

of Columbia respectfully request this Court to grant the

Commonwealth’s petition for writ of certiorari.

Dated: December 4, 1992

Respectfully submitted,

BONNIE J. CAMPBELL

Attorney General of Iowa

ELIZABETH M. OsENBAUGH

Deputy Attorney General

Counsel of Record

Steve St. CLair

Special Assistant Attorney

General

PETER R. KOCHENBURGER

Assistant Attorney General

Consumer Protection Division

Iowa Department of Justice

Hoover State Office Building

Des Moines, IA 50319

(515) 281-5926

Counsel for Amici Curiae