Interstate bank may use branch state rates with respect to credit card loans where credit card operations, prior to reorganization and following reorganization, were conducted in that state. (05/21/97)

See 61 Fed. Reg. 4849, 4869 (Feb. 9, 1996) (to be codified at 12 C.F.R. § 7.4001).

1

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #782

May 21, 1997

June 1997

12 U.S. C. 85

[ ]

[ ]

[ ]

[ ]

Dear [ ]:

This is in response to your inquiry of April 4, 1997, supplemented by information provided on

May 9, 1997, concerning the use of interest rates permitted by the state where an interstate

national bank (the Bank) has branches (State A) in connection with credit card loans to the

Bank’s credit card holders. The Bank initially became an interstate bank as a result of a

reorganization involving two affiliated banks with main offices previously located in States A

and B.

Prior to the merger, the target bank, which previously had its main office in State A, had made

credit card loans using rates permitted by State A. Your question concerns the impact of the

merger on the Bank’s continuing ability, following the merger, to use interest rates permitted

by the laws of State A with respect to extensions of credit to credit card holders who reside in

State B, the Bank’s current main office state, as well as to credit card holders who reside in

any other states including states where the bank has or will have branches (collectively

referred to as State C).

Thus, the Bank seeks to continue to use the interest rates, as that term is used within the

meaning of 12 U.S.C. § 85 and OCC regulations, permitted by the state where the bank has

1

branches, State A, in connection with credit card loans to out-of-state customers. To avoid

customer confusion regarding the usury laws that govern credit card agreements, the Bank has

represented that it will make clear to each borrower that the interest applicable to extensions

of credit under the credit card program are governed by applicable Federal and State A law.

state where the bank has

1

branches, State A, in connection with credit card loans to out-of-state customers. To avoid

customer confusion regarding the usury laws that govern credit card agreements, the Bank has

represented that it will make clear to each borrower that the interest applicable to extensions

of credit under the credit card program are governed by applicable Federal and State A law.

- 2 -

Because the Bank’s credit card department is simply a business unit within the Bank, for purposes of

2

clarity, this opinion recognizes that its activities, operations, functions and facilities are those of the Bank.

As the OCC has noted, the performance of functions, pursuant to a bank’s direction, by a nonaffiliated

3

vendor, which may be located anywhere, is irrelevant for purposes of section 85. See OCC Interpretive Letter

No. 776 (March 18, 1997) at fns. 5, 8. See also, e.g., Cades v. H.&R. Block, 43 F.3d 869, 874 (4th Cir. 1994),

cert. denied, 115 S. Ct. 2247 (1995).

For the reasons set forth below, we find that the Bank may use the interest rates permitted by

the law of State A with respect to extensions of credit made to holders of credit cards issued

by the Bank regardless of where they reside.

I. Background

A. Structure of the Bank’s credit card program

As mentioned, the credit card operations now conducted by the Bank were conducted by the

target bank from its main office state, State A, prior to the reorganization. The credit card

department has historically operated from a branch location of the target bank in State A and

from a non-branch “back-room office” support center also located in State A. In keeping

2

with modern practices, certain specialized functions are outsourced to an independent service

provider located in another state but the service provider’s operations are directed by the

Bank’s credit card personnel located at the Bank in State A.3

B

ed from a branch location of the target bank in State A and

from a non-branch “back-room office” support center also located in State A. In keeping

2

with modern practices, certain specialized functions are outsourced to an independent service

provider located in another state but the service provider’s operations are directed by the

Bank’s credit card personnel located at the Bank in State A.3

B. Credit card lending activities undertaken in State A

According to your description, the Bank conducts virtually all of its credit card operations in

and from Bank facilities in State A. You represent that key strategic planning and

development functions relating to the Bank’s credit card program take place in State A.

These include:

developing credit and other policies regarding product pricing and terms; and

developing marketing plans and strategies, product plans and product changes,

as well as the customer communications to implement them.

In addition, the Bank conducts virtually all of its credit card operations in and from Bank

facilities in State A. These functions include:

receiving credit card applications mailed by applicants;

approving or denying of the application by the Bank’s underwriters following

the receipt of relevant information. If the Bank’s underwriters determine to

approve an application, the Bank directs the service provider to establish the

- 3 -

Receivables are booked through an on-line system by the processor to the Bank in State A on a daily

4

basis. The processor deposits sales drafts generated through use of the credit cards to the credit of the merchant’s

deposit account and also generates a corresponding charge to be transmitted to the appropriate cardholder’s

account.

The Bank also offers credit cards through its agent Card program, pursuant to which correspondent

5

community banks may arrange through the Bank to have their names embossed on credit cards but otherwise have

no responsibility for the program

rds to the credit of the merchant’s

deposit account and also generates a corresponding charge to be transmitted to the appropriate cardholder’s

account.

The Bank also offers credit cards through its agent Card program, pursuant to which correspondent

5

community banks may arrange through the Bank to have their names embossed on credit cards but otherwise have

no responsibility for the program. Cards issued in this matter are handled similarly to the Bank’s customary

credit card program and the program is administered, as described, from State A. While the community banks

make applications available to their customers, the completed applications are mailed to the Bank in State A,

customer inquiries are referred by the community bank to the Bank in State A, and payments are mailed to the

independent service provider.

account on its system and mail the credit card(s) to customer(s). If the Bank’s

underwriters deny a credit card application, a letter declining to provide a card

is sent to the applicant by the underwriters;

extending credit to the cardholder by honoring merchant sales drafts while

concomitantly charging the cardholder’s account;4

receiving customer inquiries both by mail and by telephone and handling

billing errors by Customer Service representatives;

reviewing delinquent accounts by employees who then make appropriate

contacts and take appropriate action; and

receiving reports of lost or stolen credit cards which are forwarded to the

attention of security personnel who may act to block the account and initiate

follow-up action regarding fraudulent activities.5

C. Credit card activities undertaken at the branches

The role of the Bank’s branches with respect to the credit card program is limited. Branches

make available credit card applications to customers and, on rare occasions when an

application is returned to the branch, the branch may forward the application to the Bank in

State A through the Bank’s interoffice mail system

fraudulent activities.5

C. Credit card activities undertaken at the branches

The role of the Bank’s branches with respect to the credit card program is limited. Branches

make available credit card applications to customers and, on rare occasions when an

application is returned to the branch, the branch may forward the application to the Bank in

State A through the Bank’s interoffice mail system. In addition, the branches refer inquiries

from potential and current cardholders to the Bank facilities in State A. Finally, while the

Bank does not encourage the repayment of credit card balances at branch sites, on the

infrequent occasions when payments are made there, the branch mails the payment to an

independent service provider in another state.

- 4 -

For a more complete discussion of this principal, see Letter No. 776 at Part II.A.

6

There is no need in this letter to reiterate the full analysis set forth Letter No. 686 regarding the

7

location of a bank for purposes of section 85. That analysis is summarized where necessary and fully

incorporated into and relied upon in this letter.

II. Discussion

A. Applicability of the branch state’s rates following the reorganization

It is undisputed that prior to the reorganization of the State A bank into the Bank, that the

State A bank could charge customers in its state and elsewhere interest rates on its credit card

loans in accordance with the rates permitted by the law of State A. See Marquette Nat’l Bank

v. First of Omaha Service Corp., 439 U.S. 299 (1978). You have asked, however, whether

6

following the reorganization, resulting in State B replacing State A as the main office state of

the bank providing credit while State A continues to be the site of bank branches and credit

card operations, State A’s rates can still be utilized if the Bank continues the credit card

lending procedures, described above, that were utilized prior to the reorganization.

1. Statutory requirements and OCC precedent

Title 12 U.S.C

, resulting in State B replacing State A as the main office state of

the bank providing credit while State A continues to be the site of bank branches and credit

card operations, State A’s rates can still be utilized if the Bank continues the credit card

lending procedures, described above, that were utilized prior to the reorganization.

1. Statutory requirements and OCC precedent

Title 12 U.S.C. § 85 provides, in part, that a national bank “may . . . charge on any loan . . .

interest at the rate allowed by the laws of the State . . . where the bank is located.”

As the OCC previously has recognized, for purposes of section 85, a national bank is

“located” in any state in which it has its main office or a branch office. See OCC Interpretive

Letter No. 686, September 11, 1995, reprinted in [1995-96 Transfer Binder] Fed. Banking L.

Rep. (CCH) ¶ 81-001. Having determined that a bank may be located in more than one state

7

for purposes of section 85, the OCC then addressed the question of whether the particular

bank could charge interest under the law of a particular state in which it had a branch with

respect to certain loans made by the bank to residents of various states. The OCC concluded

that, under the facts presented, there was a clear nexus between the branch and the loan,

permitting the bank to charge rates permissible under the laws of the state where the branch

was located. See also OCC Interpretive Letter No. 707, n. 9, January 31, 1996, reprinted in

(1995-1996 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-022. The OCC specifically

stated that because of the particular facts presented, it was not necessary at that time to

address other theories, or facts other than those posed, which may permit a bank to charge

rates permitted by the law of a particular state. In Letter No

terpretive Letter No. 707, n. 9, January 31, 1996, reprinted in

(1995-1996 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-022. The OCC specifically

stated that because of the particular facts presented, it was not necessary at that time to

address other theories, or facts other than those posed, which may permit a bank to charge

rates permitted by the law of a particular state. In Letter No. 686 we stated that “this letter

does not address whether factual circumstances, other than those posed by the Bank, would

establish a nexus” and also noted that an Office of Thrift Supervision opinion “addresses

issues relating to exportation of the home state rate not raised in your inquiry . . . we are not

addressing those issues in this response . . . .” In addition, Letter No. 776, which addressed

the use of rates permitted by the main office state, specifically stated that “because of the

conclusion that we reach under the facts presented we do not at this time address other

- 5 -

Courts have recognized that “Committee Reports represent the most persuasive indicia of

8

congressional intent” and “are powerful evidence of legislative purpose.” See 2A Sutherland, Statutes and

Statutory Construction. § 48.06 (5th ed. 1992 & Supp. 1996).

theories which may permit the Bank to charge rates permitted by the main office state.” See

Letter No. 686 at fns. 7 and 8 and Letter No. 776 at fn. 16. Likewise, the facts that you have

described, involving use of rates permitted by a branch state which has a clear nexus to the

credit card loans, make it unnecessary to explore other theories at this time including theories

that may permit use of main office state rates which are in no way implicated by your inquiry

or this response.

Consequently, we conclude, under the facts presented, that the Bank may continue, under

section 85, to use the interest rates permitted by State A.

2

tate which has a clear nexus to the

credit card loans, make it unnecessary to explore other theories at this time including theories

that may permit use of main office state rates which are in no way implicated by your inquiry

or this response.

Consequently, we conclude, under the facts presented, that the Bank may continue, under

section 85, to use the interest rates permitted by State A.

2. Impact of the Riegle-Neal Act

We further note that this interpretation is consistent with the understanding of Congress with

respect to the applicability of section 85 to loans made by interstate banks following the

adoption of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Pub. L.

No. 103-328, 108 Stat. 2338 (enacted September 29, 1994) (the Riegle-Neal Act) (which for

the first time paved the way for general interstate branching by national banks), Congress

provided in section 111 (the “usury savings clause”) that:

No provision of this title and no amendment made by this title to any

other provision of law shall be construed as affecting in any way--

(3) the applicability of [section 85] or [the usury provisions] of the

Federal Deposit Insurance Act.

Consistent with the plain language of the usury savings clause that section 85 is to be

interpreted without regard to the legal impact of any of the provisions of the Riegle-Neal Act,

the Conference Report stated that the Riegle-Neal Act:

[does] not affect existing authorities with respect to any charges under

[section 85] . . . imposed by national banks . . . for loans or other

extensions of credit made to borrowers outside the state where the bank

or branch making the loan or other extension of credit is located.

See H.R. Rep., No. 651, 103d Cong., 2d Sess., at 63 (1994). Sen

he Conference Report stated that the Riegle-Neal Act:

[does] not affect existing authorities with respect to any charges under

[section 85] . . . imposed by national banks . . . for loans or other

extensions of credit made to borrowers outside the state where the bank

or branch making the loan or other extension of credit is located.

See H.R. Rep., No. 651, 103d Cong., 2d Sess., at 63 (1994). Sen. Roth, the sponsor of this

8

provision, clearly stated the intent underlying the usury savings clause to “preserve the

efficiency of uniformity from the credit-provider’s viewpoint, notwithstanding formal or

structural changes that may occur through mergers within a bank holding company . . . .” See

- 6 -

Likewise, as sponsor of the provision, courts recognize that Sen. Roth’s views may provide a

9

“weighty gloss” on the meaning of legislation. See, e.g., Galvin v. U.L. Press, 347 U.S. 522, 527 (1954).

As the Supreme Court stated:

10

If the location of the bank were to depend on the whereabouts of each credit-card transaction,

the meaning of the term “located” would be so stretched as to throw into confusion the

complex system of modern interstate banking. A national bank could never be certain

whether its contacts with residents of foreign states were sufficient to alter its location for

purposes of § 85. We do not choose to invite these difficulties by rendering so elastic the

term “located.”

140 Cong. Rec. S12789 (daily ed. Sept. 13, 1994). Significantly, the “efficiency of

9

uniformity” embedded in section 85 also has been judicially recognized. See Marquette at p.

312 (determining that the location of a national bank for purposes of section 85 did not

depend on the state of residency of a borrower). The conclusion we reach in this letter is

10

wholly consistent with this underlying Congressional purpose and the language of Marquette

ficantly, the “efficiency of

9

uniformity” embedded in section 85 also has been judicially recognized. See Marquette at p.

312 (determining that the location of a national bank for purposes of section 85 did not

depend on the state of residency of a borrower). The conclusion we reach in this letter is

10

wholly consistent with this underlying Congressional purpose and the language of Marquette.

By enabling the target bank, following its transformation to a branch as a result of a

reorganization, to continue to conduct credit card operations in the manner that it did prior to

the reorganization and rely on the law of the state from which it conducts those credit card

operations, preserves this “efficiency of uniformity” despite the impact of the structural

changes.

III. Conclusion

For the foregoing reasons, based on the facts described herein, we agree that the Bank may

charge interest rates permitted by the law of the branch state -- State A -- to credit card

customers no matter where they may reside.

Sincerely,

/s/

Julie L. Williams

Chief Counsel