Page 4 - John Hundley 2007

credit or making a line of credit available, and (2) “all other payments.” The court further held that fees such
as late fees are not excluded from the definition of interest simply because they do not vary depending
on the amount owed or the length of the delay. It rejected the idea that interest is “limited to charges
expressed as a function of time or of amount owing”, because “any flat charge” can “readily be converted to a
percentage charge – which was indeed the basis for 19th-century decisions holding that flat charges violated
state usury laws establishing maximum ‘rates.’” The court concluded it was rational to consider as interest
those expenses “assessed for simply making the loan”.

In 2005, the U.S. Court of Appeals for the Eighth Circuit reviewed prior case law before finding that a loan
origination fee, loan discount fee, underwriting fee and application fees were charged as compensation for
th
extending credit, rendering them interest protected by federal law. Phipps v. FDIC, 417 F.3d 1006 (8 Cir.
2005). The decisions considered had found cash-advance fees, commissions, bonuses, late fees and
th
other “kindred charges” to be interest (Fisher v. First Nat'l Bank, 548 F.2d 255, 258-61 (8 Cir. 1977);
th
st
Greenwood Trust Co. v. Mass., 971 F.2d 818, 825 (1 Cir. 1992); Cronkleton v. Hall, 66 F.2d 384, 387 (8 Cir.
1933)). On the other hand, fax fees and overdraft fees have been found not to be included in “interest”
(Hancock v. Bank of Am., 272 F.Supp.2d 608, 610 (W.D. Ky. 2003); Video Trax v. NationsBank, N.A., 33
F.Supp.2d 1041, 1059 (S.D. Fla. 1998)).
Another case has held that a requirement to maintain compensating balances, which were not available
for use and which reduced the net amount of loan proceeds available, was properly treated as interest. Am.
th
Timber & Trading Co. v. First Nat'l Bank, 690 F.2d 781, 787-88 (9 Cir. 1982). On the other hand, the Seventh
Circuit has said that the addition to a loan balance of the premium for insurance purchased by the bank to
cover the borrower’s vehicle is not imposition of interest, but a mere reimbursement to the bank. Richardson v.
th
Nat’l City Bank of Evansville, 141 F.3d 1228 (7 Cir. 1998).
Although the existence of the federal preemption legislation for national banks is relatively well-
known, owing to its long existence, less recognized is the federal preemption of usury regulation for
federally-insured state banks (12 U.S.C. § 1831d). This legislation was adopted as part of the deregulation
of banking, and hence after the heyday of state usury laws. The intent of the legislation is to place state banks
on a level playing field with national banks for competition purposes. Thus decisions under NBA §§ 85 and 86
have relevance for cases governed by § 1831d, and vice versa. Recently the U.S. Court of Appeals for the
Fourth Circuit held that state-law claims against a state-chartered, federally-insured bank were preempted by §
th
1831d. Discover Bank v. Vaden, 489 F.3d 594 (4 Cir. 2007). The court noted that not only does § 1831d
contain an express preemption clause, it also “incorporates verbatim” language from NBA §§ 85 and 86. See
rd
also In re Community Bank of N. Va., 418 F.3d 277, 295 (3 Cir. 2005). It said that “[w]hen Congress borrows
language from one statute and incorporates it into a second statute, the language of the two acts ordinarily
should be interpreted the same way.” Therefore, preemption can apply to claims against federally-insured
state banks, just as it does to claims against national banks. A recent compilation, 2007 A.L.R. Fed. 3 §§ 14-
21, reports that among charges held to be covered by this statute include discount points, origination fees, late
fees and charges imposed in connection with reverse mortgages and refinancings.

Another often-overlooked aspect is that these statutes impose “complete preemption”, meaning
that when a debtor challenges a practice which is within the federal preemption, the challenge raises a federal
question and the complaint may be removable even if facially based solely on state law. For two local cases
grappling with that issue, compare Forness v. Cross Country Bank, 2006 WL 240535 (S.D. Ill. 2006), with
Patterson v. Regions Bank, 2006 WL 3407852 (S.D. Ill. 2006).
John\Sharp Thinking\#2.doc.
●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●
THE SHARP LAW FIRM, P.C.

1115 Harrison, P.O. Box 906, Mt. Vernon, IL 62864 • Telephone 618-242-0246 • Facsimile 618-242-1170

Business Transactions • Litigation • Financial Law • Problem Finances • Real Estate • Corporate • Commercial Disputes • Creditors’ Rights •
Arbitration & Mediation • Estate Planning • Probate

Terry Sharp: law@lotsharp.com; John T. Hundley: Jhundley@lotsharp.com; Stephen M. Osborne: Sosborne@lotsharp.com;
Meleah Walton: Mwalton@lotsharp.com; Mandy Combs: Mcombs@lotsharp.com; Real Estate Closing and Title Services, see
www.sharptitleservices.com

Advertising Material