Are credit-card late fees 'interest'? Delineating the preemptive reach of Section 85 of the National Bank Act of 1864 and Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980.

• Author: Toh, Kevin G.

Introduction

After the expiration of the Second Bank of the United States in 1836, for nearly three decades, only the states were in the business of chartering and regulating banks. The need to finance the Civil War revived the interest in national banks and prompted Congress in 1863 to pass a bill to create a national banking system. Congress extensively revised and re-enacted the measure in June of the following year.(1)

Section 85 of the resulting National Bank Act of 1864 (NBA)(2) sought to protect the newly established national banks from the state legislatures' probable discrimination by conferring on national banks the so-called most favored lender status. According to the "most favored lender" doctrine, NBA section 85 gives a distinct advantage to national banks over their state-chartered counterparts by enabling national banks located(3) in any state to charge the highest rate that any state-chartered lender in that state may charge for the same class of loans.(4) By allowing national banks sitting in any state to "borrow" the interest rates that the most favored lenders of that state are allowed to charge, Congress, in effect, preempted state interest-rate laws that otherwise would apply to credit transactions of national banks.

The enactment in 1980 of the Depository Institutions Deregulation and Monetary Control Act (DIDA)(5) extended the scope of the most favored lender doctrine. Section 5216 of the DIDA was aimed at creating a competitive, level playing field between national banks and state banks insured by the Federal Deposit Insurance Corp. (FDIC). To achieve this end, Congress duplicated the language of NBA section 85 in wording DIDA section 521 and thus extended the most favored lender status to FDIC-insured state banks.(7)

In Marquette National Bank v. First of Omaha Service Corp.,(8) a case decided two years prior to the passage of the DIDA, the Supreme Court unanimously held that, under section 85 of the NBA, national banks located in one state may charge interest at the rate authorized by the laws of that state even on transactions with residents of another state.(9) In addition, although it did not directly consider the issue of the most favored lender doctrine, the Court implicitly reaffirmed the doctrine.(10) The net result of the decision in Marquette is that national banks sitting in one state may "export"(11) the most favored lender rates allowed by the laws of that state to residents of other states. Furthermore, Congress's duplication of the language of NBA section 85 in DIDA section 521 means that the Marquette holding gives the same privilege to FDIC-insured state banks.

Taking their cue from Marquette, many banks in the early 1980s moved their credit-card operations to a few states - such as Delaware, Nebraska, and South Dakota - that had raised or removed interest-rate ceilings and relaxed other consumer-credit-protection laws in order to attract banks and thereby generate revenues. Marquette thus has enabled banks to conduct their nationwide consumer-credit transactions from very favorable environments. The decision also has put pressure on legislatures in other, less accommodating states to repeal or relax their own interest-rate limits in response to threats by banks to move their credit-card operations elsewhere.(12)

From their protected environments, the credit-card-issuing banks have aggressively conducted their nationwide consumer-credit transactions. These banks, in the process, have been ignoring not only the laws of various states dealing specifically with interest rates - laws that have been preempted expressly by NBA section 85 and DIDA section 521 - but also other state consumer-credit-protection laws. Marquette thus has created a regulatory scheme in which a few states with the weakest consumer-protection laws can veto the consumer-protection laws of other states and dictate the terms by which consumers in all fifty states buy credit. This is a troubling result given that consumers in Massachusetts or Colorado are unable to lobby in the legislative halls of Delaware or South Dakota.

A series of class-action suits in recent years has challenged the assumption, widely held by banks, that the preemptive reach of NBA section 85 and DIDA section 521 extend beyond state interest-rate laws, to various state consumer-credit-protection laws. In Greenwood Trust Co. v. Massachusetts,(13) a federal district court in Massachusetts ruled that an FDIC-insured, Delaware-chartered bank cannot impose late fees(14) as permitted by Delaware law on credit-card transactions with residents of Massachusetts because of a Massachusetts usury-law provision prohibiting such fees. A year later, the First Circuit reversed the district court's decision, holding that section 521 of the DIDA preempted the Massachusetts usury law regulating late fees as well as Massachusett's cap on numerical percentage rates of interest.(15) The First Circuit's decision, however, did not stem the tide of state law-based consumer class-action suits filed across the country against both national and FDIC-insured state banks issuing credit cards.(16) As the First Circuit recognized,(17) the ultimate issue at stake in these lawsuits is the delicate and increasingly uncertain balance between the regulatory powers of the federal government and the states in our dual banking system.(18)

This Note argues that neither section 85 of the NBA nor section 521 of the DIDA preempts state consumer-credit-protection laws regulating late fees on credit-card transactions. Part I discusses the three approaches that the Supreme Court has devised and used over the years to determine when a federal law preempts state law: express preemption, implied preemption, and conflict preemption. Part II applies express preemption analysis and asserts that the ordinary meaning of DIDA section 521's express preemption language does not evince Congress's intent to preempt state prohibition of late fees. Part III applies implied preemption analysis and argues that neither NBA section 85 nor DIDA section 521 impliedly preempts state laws regulating late fees because Congress did not indicate a clear and manifest purpose to preempt the entire field of consumer-credit protection. Finally, Part IV applies conflict preemption analysis and argues that sustaining state law provisions governing late fees, which are imposed only on contingent occasions of borrower default, does not conflict with the congressional objective in enacting NBA section 85 and DIDA section 521 - achieving lender parity.

1. Three Types of Preemption Analyses: An Overview

   Under the Supremacy Clause of Article VI,(19) Congress can preempt state laws when acting within its delegated powers.(20) The Supreme Court, over the years, has devised and used three types of preemption analysis.(21) First, a federal law expressly preempts a state law when Congress has expressed unmistakably its intent to occupy an entire field of regulation by explicit preemptive language.(22) A federal law impliedly preempts a state law when Congress's intent to occupy an entire subject area can be inferred from the character and objective of the federal law.(23) Finally, even when a federal statute does not occupy an entire field of regulation, a particular state law is supplanted by a conflict preemption when the state law stands as an obstacle to the full execution of the objectives of the federal law.(24)

   In all three cases, whether a federal law preempts a state law is a question of congressional intent(25) and hence largely a matter of statutory construction.(26) The particulars of each case determine which of the three types of preemption analysis provides the best means to fathom the congressional intent. It follows that a state law does not escape the full preemptive reach of a federal law by surviving any one type of preemption analysis. In the following Parts, the preemptive scopes of NBA section 85 and DIDA section 521 are examined under each type of preemption analysis.(27)

2. Express Preemption

   This Part argues that the express preemption provision of DIDA section 521 does not indicate a congressional intent to displace state laws prohibiting credit-card late fees. DIDA section 521, unlike section 85 of the NBA, contains an express preemption provision. The relevant portion of section 521, as amended, states:

   In order to prevent discrimination against State-chartered insured depository institutions ... with respect to interest rates, if the applicable rate prescribed in this subsection exceeds the rate such State bank ... would be permitted to charge in the absence of this subsection, such State bank ... may, notwithstanding, any State constitution or statute which is hereby preempted for the purpose of this section ... charge on any loan ... interest ... at the rate ... allowed by the laws of the State, territory, or district where the bank is located ....(28)

   The question is whether the above express preemption provision clearly manifests Congress's intention to preclude state prohibitions of late fees on credit-card transactions.

   Section II.A summarizes two different approaches that the Supreme Court has used recently to analyze an express preemption provision. This Part then uses the approach that presents a lower barrier to finding preemption. Section II.B argues that the preemption of state usury laws prohibiting credit-card late fees cannot be inferred from the ordinary meanings of the terms interest and interest rate, as they are used in section 521. Section II.C demonstrates that the sparse legislative history of section 521 does not permit a departure from the ordinary meaning of the language of section 521. Similarly, section II.D contends that the case law under NBA section 85 fails to support such a departure.

   1. Two Approaches To Analyzing an Express Preemption

      Provision

      The Supreme Court's recent preemption jurisprudence reveals two competing approaches to analyzing...