Page 3 - John Hundley 2007

Sharp Thinking

No. 2 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. December 2007

State Regulation of Bank Charges Often Preempted

By Mandy Combs, Mcombs@lotsharp.com, 618-242-0246

With the decline in state attempts to limit interest rates through traditional usury regulation, the significance
of federal preemption legislation in that area often is thought to be nil. However, attempts by creative
debtors’ lawyers to attack a variety of bank charges not explicitly imposed as interest are proving that
the federal legislation still has significance – and that the significance is not limited to national banks.

Usury classically is defined as a lender charging a rate of interest higher than allowed by law (BLACK’S
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LAW DICTIONARY (8 ed. 2004)). Throughout most of the nation’s history, states have had laws limiting the
interest rates which may be charged. See, e.g., 815 ILCS 205. However, when the credit crisis of the 1970s
and 1980s meant that credit at traditionally lawful rates often could not be obtained anywhere, many such
statutes were repealed and others amended so as to have little force. See, e.g., 815 ILCS 205/4.

State regulation of interest charged by national banks had long been preempted under §§ 85 and 86 of the
National Bank Act (“NBA”), 12 U.S.C. §§ 85, 86. Those provisions remained on the books during the decline of
open usury regulation – and they were supplemented by provisions giving comparable protection to state
banks insured by the FDIC. 12 U.S.C. § 1831d. Despite the continued decline of open usury laws in the
states, the federal laws recently have been shown to have increased relevance as lawyers have attacked a
variety of bank charges not explicitly expressed as interest, through legal theories not openly expressed as
usury, such as Illinois’ Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505 (“CFDBPA”).

Such was the case late last month when our Appellate Court for the Fifth District decided
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Treadway v. Nations Credit Fin. Serv. Corp., No. 05-06-0425 (5 Dist. Nov. 26, 2007). In Treadway,
plaintiff attacked a number of bank charges under claims for breach of contract, violation of the CFDBPA, and
unjust enrichment. Defendant, a national bank, argued these claims were preempted under the federal usury
law. The court, however, held that plaintiff did not allege that defendant had charged an interest rate
exceeding any legal limit. Instead, it said, the claims were for failure to reduce an interest rate in exchange for
a payment of a loan discount fee, not preempted. The bank has requested rehearing.

The NBA does not define what is included and what is excluded from the term “interest” as used in the
federal law. In 1996, the courts received guidance on this issue from the Office of the Comptroller of Currency
(“OCC”), which issued a regulation providing that interest “includes any payment compensating a creditor
or prospective creditor for an extension of credit, making available a line of credit, or any default or
breach by a borrower of a condition upon which credit was extended.” 12 C.F.R. § 7.4001(a). Under §
7.4001(a), interest includes fees connected with credit extension or availability, such as numerical periodic
rates, late fees, fees charged when a borrower tenders payment with a check drawn on insufficient funds, over-
limit fees, annual fees, cash advance fees and membership fees. On the other hand, interest ordinarily does
not include appraisal fees, premiums and commissions for insurance guaranteeing credit repayment, finders’
fees, fees for document preparation or notarization, or fees incurred to obtain credit reports.

In Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 745 (1996), the U.S. Supreme Court acknowledged that
the OCC's definition draws a reasonable line between (1) payments compensating creditors for extending

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Sharp Thinking is an occasional newsletter of The Sharp Law Firm, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp
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