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Court Allows Credit Card Loan Interest Rate to Exceed State Usury Rate

by Sam Ott

The United States Court of Appeals for the Eighth Circuit issued an opinion on May 5, 2003 in the case of Jessup v. Pulaski Bank that a section of the Gramm-Leach-Bliley Act, Section 1831u(f), allows an Arkansas bank to charge interest at a rate allowed by the state of any out-of-state bank with a branch office in Arkansas, except when the Arkansas bank has "made" the loan "in any State other than [Arkansas]." [Hard to follow, but its intent is clear - to avoid giving branch offices of out-of-state banks a competitive advantage over in-state institutions.]

Facts
The plaintiff, who was a Texas resident, claimed that the Pulaski Bank (the "Bank") violated both Arkansas and Texas state law when it charged an interest rate on credit card indebtedness that exceeded the usury rate of both states. The Bank argued that section 731 of the Gramm-Leach Bliley Act (12 U.S.C. 1831u(f)) applied and authorized the higher rate. The section allows federally insured state banks to charge interest at a rate allowed by the home state of any out-of- state bank which has a branch office in the state in question, unless the state bank has made the loan in any state other than its home state.

The Bank was a federally insured bank chartered under Arkansas law with its main office and all of its branches located in Arkansas. The Bank issued credit cards from an Arkansas office. All application were received, processed and approved or denied in Arkansas. All correspondence to customers and potential customers was sent from Arkansas and all customers sent their payment to an Arkansas address.

The plaintiff, at all times, resided in Texas. He received a credit card application sent by the Bank from Arkansas to his Texas residence. He responded, was approved, and received a credit card which he used solely in Texas. The credit card application and agreement both disclosed the interest rate and stated all credit card advances would be loans made in Arkansas and subject to Arkansas and federal law, including section 1831 u (f).

The District court granted summary judgment for the Bank and the plaintiff appealed.

Discussion
The Court noted that district court based its decision on the fact that the federal law allowed the Bank to charge any interest rate allowed by the home state of any out-of-state bank with a branch in Arkansas. A federally insured bank chartered under Alabama law maintained branch offices in Arkansas. Since Alabama law allows interest at any rate agreed upon by the parties, the Bank could charge a rate in excess of the state usury rate if the customer agreed. The plaintiff argued that the credit card loans were in fact made in the state of Texas and Texas law should apply.

The Court concluded that Congress did not intend for the application of federal statutes to be dependent on state law. It noted that the federal statute does not define the term "made" and that no cases have interpreted the term. The Court turned to the language of an OCC opinion Letter on the subject interpreting the Riegle-Neal Interstate Banking and Branching Act that a loan was made by a bank's out-of-state branch if the loan was approved, credit was extended, and the loan proceeds were disburse, out of state. The Court reasoned that if the loan had been made by an out-of-state branch of the Bank the federal law would not apply. In this case, however, since the Bank had no out-of-state branches, it could impose the Alabama interest authority without regard to where the borrower resided.

Decision
The Court held that a bank may impose a loan interest rate that exceeds the usury rate in the state where the bank or the customer of the bank is located under certain circumstances.

Summary
The Eighth Circuit Court of Appeals has held that banks in the Eighth Circuit may impose the same loan interest rates which are permitted in the home state of an out-of-state bank that maintains a branch in the state even if the loan rates exceed the usury rate of the states in which the bank or its customers are located.

First published on BankersOnline.com 5/8/03
Copyright, 2003, BankersOnline. All rights reserved.

First published on 05/08/2003

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