[Federal Register Volume 70, Number 198 (Friday, October 14, 2005)]
[Proposed Rules]
[Pages 60019-60031]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-20582]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 331 and 362

RIN 3064-AC95


Interstate Banking; Federal Interest Rate Authority

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The FDIC received a petition for rulemaking to preempt certain 
state laws with the stated purpose of establishing parity between 
national banks and state-chartered banks in interstate activities and 
operations. The petition also requested rulemaking to implement the 
interest rate authority contained in the Federal Deposit Insurance Act. 
Generally, the requested rules would provide that the home state law of 
a state bank applies to the interstate activities of the bank and its 
operating subsidiaries to the same extent that the National Bank Act 
applies to the interstate activities of a national bank and its 
operating subsidiaries. They would also implement the federal statutory 
provisions addressing interest charged by FDIC-insured state banks and 
insured U.S. branches of foreign banks. The FDIC is requesting comments 
on a proposed rule to amend the FDIC's regulations in response to the 
rulemaking petition. Issuance of the proposed rules would serve as the 
FDIC's response to the rulemaking petition.

DATES: Comments must be submitted on or before December 13, 2005.

ADDRESSES: You may submit comments by any of the following methods:
     Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html. Follow the instructions for submitting comments.
     E-mail: [email protected].
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street, NW., Washington, DC 20429.
     Hand Delivered/Courier: The guard station at the rear of 
the 550 17th Street Building (located on F Street), on business days 
between 7 a.m. and 5 p.m.
     Public Inspection: Comments may be inspected and 
photocopied in the FDIC Public Information Center, Room 100, 801 17th 
Street, NW., Washington, DC, between 9 a.m. and 4:30 p.m. on business 
days.
     Internet Posting: Comments received will be posted without 
change to http://www.FDIC.gov/regulations/laws/federal/propose.html, 
including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Robert C. Fick, Counsel, (202) 898-
8962; Rodney D. Ray, Counsel, (202) 898-3556; or Joseph A. DiNuzzo, 
Counsel, (202) 898-7349; Legal Division, Federal Deposit Insurance 
Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. The Petition

    The Financial Services Roundtable, a trade association for 
integrated financial services companies (``Petitioner''), has 
petitioned the FDIC to adopt rules concerning the interstate activities 
of insured state banks and their subsidiaries that are intended to 
provide parity between state banks and national banks. Generally, the 
requested rules would provide that a state bank's home state law 
governs the interstate activities of state banks and their operating 
subsidiaries (``Op Subs'') \1\ to the same extent that the National 
Bank Act (``NBA'') governs a national bank's interstate business. The 
Petitioner requests that the FDIC adopt rules with respect to the 
following areas:
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    \1\ Generally, an operating subsidiary is a majority-owned 
subsidiary of a bank or savings association that engages only in 
activities that its parent bank or savings association may engage 
in.
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     The law applicable to activities conducted in a host state 
by a state bank that has a branch in that state,
     The law applicable to activities conducted by a state bank 
in a state in which the state bank does not have a branch,
     The law applicable to activities conducted by an Op Sub of 
a state bank,

[[Page 60020]]

     The scope and application of section 104(d) of the Gramm-
Leach-Bliley Act (``GLBA'') \2\ regarding preemption of certain state 
laws or actions that impose a requirement, limitation, or burden on a 
depository institution, or its affiliate, and
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    \2\ 15 U.S.C. 6701.
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     Implementation of section 27 of the Federal Deposit 
Insurance Act (``FDI Act'') \3\ (which permits state depository 
institutions to export interest rates) in a manner parallel to the 
rules issued by the Office of the Comptroller of the Currency (``OCC'') 
and the Office of Thrift Supervision (``OTS'').
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    \3\ 12 U.S.C. 1831d.
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    The Petitioner argues that it is both necessary and timely for the 
FDIC to adopt rules that clarify the ability of state banks operating 
interstate to be governed by a single framework of law and regulation 
to the same extent as national banks. According to the Petitioner, over 
the last decade the federal charters for national banks and federal 
thrifts have been correctly interpreted by the OCC and the OTS, with 
the repeated support of the federal courts, to provide broad federal 
preemption of state laws that might appear to apply to the activities 
or operations of federally chartered banking institutions within a 
state. The result, it asserts, is that national banks and federal 
savings associations now can do business across the country under a 
single set of federal rules. In contrast, the Petitioner believes that 
there is widespread confusion and uncertainty with respect to the law 
applicable to state banks engaged in interstate banking activities. 
Furthermore, it argues, this uncertainty produces the potential for 
litigation and enforcement actions, deters state banks from pursuing 
profitable business opportunities, and causes substantial expense to a 
state bank that decides to convert to a national bank in order to gain 
greater legal certainty. Finally, the Petitioner asserts that the FDIC 
has the authority, tools and responsibility to correct this imbalance.

II. The Public Hearing

Overview

    On May 24, 2005, the FDIC held a public hearing on the rulemaking 
petition. As indicated in the FDIC's formal announcement of the hearing 
(70 FR 13,413 (March 21, 2005)) the purpose of the hearing was to 
obtain public insight into the issues presented by the petition 
including how the FDIC should respond to the rulemaking request. The 
notice of the public hearing provided an overview of the rulemaking 
petition, posed general questions raised by the petition, identified 
legal and policy issues raised by the specific aspects of the 
rulemaking petition, and asked for the public's views on these and any 
other issues related to the petition. The notice of public hearing also 
included a copy of the rulemaking petition.
    The sixteen speakers at the hearing presented their views on the 
legal, policy and other issues raised in the petition. The speakers 
also provided written statements. In addition, eighteen others who 
chose not to appear at the hearing submitted written views on the 
petition. The presenters at the hearing consisted of trade group 
representatives, state banking commissioners, representatives of 
consumer groups, and bankers. Those commenting who did not appear at 
the hearing consisted of the same categories of interested parties plus 
members of Congress and state attorneys general. Overall the FDIC 
received thirty-four written statements on the rulemaking petition.\4\
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    \4\ Copies of the petition and all statements we received on the 
petition as well as the transcript of the hearing are available on 
the FDIC's Web site at: http://www.fdic.gov/news/conferences/agency/noticemay162005publichearing.html.
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Summary of Statements in Favor of the Petition

    Those in favor of the petition argued that the requested rulemaking 
would ensure state banks parity with national banks in their interstate 
operations. One speaker, representing a group of state-chartered 
commercial banks, stated that ``[a]t stake is the continued vitality of 
state bank regulation and the structure and dynamics of bank regulation 
at the federal level that have served our nation so well.'' A number of 
state banking commissioners agreed with that statement. One commented 
that the dual banking system is out of balance because of the ``broad 
OCC rulemaking of February 2004 preempting most state laws as they 
relate to national banks and their subsidiaries.'' He argued that 
``most banks do not want the OCC [preemption rules] rolled back but 
want the state charter to have parity with the federal charter'' and 
that an FDIC rulemaking would ``re-establish order'' to preserve the 
dual banking system. A state banking association agreed with these 
views and added that one course for the FDIC would be to issue a rule 
codifying the FDIC's opinions on the Riegle-Neal Interstate Banking and 
Branching Efficiency Act of 1994 (``Riegle-Neal I''), the Riegle-Neal 
Amendments Act of 1997 (``Riegle-Neal II'') \5\ and FDIC General 
Counsel Opinions 10 and 11 \6\ (``GC-10 and GC-11'') on the exportation 
of interest rates, noting that further study might be warranted on the 
other aspects of the petition.
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    \5\ Pub. L. 103-328, 108 Stat. 2338 (1994) (codified to various 
sections of title 12 of the United States Code); Pub. L. 105-24 
(1997).
    \6\ General Counsel Op. No. 10, 63 FR 19258 (Apr. 17, 1998) and 
General Counsel Op. No. 11, 63 FR 27282 (May 18, 1998).
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    One state banking commissioner voiced opposition to the ``broad 
unilateral preemption by charter-granting federal banking agencies'' 
and argued that an FDIC rule is necessary to ``maintain the 
competitiveness of the state charter.'' Another commented that the 
``greatest problem is a lack of certainty for state-chartered 
interstate banks.'' A large commercial banking organization observed 
that it is important to have a ``real choice of regulatory regimes 
under which to operate an interstate banking business'' and noted that 
its bank's ``participation in the interstate marketplace as a state 
chartered institution may be threatened unless the FDIC acts to restore 
parity in the banking regulations.''
    An executive for a large banking organization stated that the rules 
applicable to national banks have given national banks a ``significant 
advantage in operating multistate and national scale lending 
businesses.'' He maintained that, absent the requested rulemaking, 
state banks will continue to contend with an ``extensive patchwork of 
additional state and local laws and regulations in crafting any 
national lending program or even a modest cross border program.'' 
Another banker provided an example in which his bank could not obtain 
approval to operate an automated teller machine in Florida because it 
was chartered by another state. He asserted that a national bank would 
not have been subject to that restriction.
    An attorney for a large bank noted that the requested rulemaking 
would benefit not only large banks with interstate operations but also 
small independent banks located near state borders. She argued that, if 
the FDIC adopts the proposed rule, state banking supervisors likely 
would increase the cooperation they already have demonstrated in 
existing cooperative agreements governing the regulation of interstate 
state-chartered banks.
    Proponents of the petition argued that the requested rulemaking 
would not lead to a ``race to the bottom'' by state legislatures. The 
``race-to-the-bottom'' concern is that some states will enact minimal 
consumer protection laws for

[[Page 60021]]

bank customers in order to lure banks to seek charters from those 
states and export those weak home-state consumer laws to host states 
which have more encompassing and protective consumer laws. One state 
banking commissioner argued that consumers would still be protected by 
home state and federal law in areas where host state law has been 
preempted. He also suggested that Congress enact national consumer laws 
to counteract the concern about a potential for unhealthy competition 
among bank chartering authorities in the area of consumer protection. 
Another speaker noted that effective and rigorous protection of all 
consumers no matter where they reside perhaps could be achieved through 
a partnership between the respective states and the Federal Reserve or 
the FDIC and through cooperative agreements between and among the 
states. He also suggested that the FDIC could issue regulations 
limiting charter conversions (of state-banks) as a means to address the 
potential consumer protection problem.
    A state banking commissioner remarked that state legislators and 
attorneys general are in the business of protecting the consumers in 
their states; thus, it is unlikely that any state would strive to be at 
the bottom for consumer protection in an attempt to gain a few bank 
charters. Another doubted the potential for unhealthy competition among 
bank chartering authorities in the area of consumer protection by 
noting that, as to the current preemption of host state laws for 
national banks and federal thrifts, this ``wholesale relocation of 
banks hasn't happened so far.''
    As to the FDIC's legal authority to issue the requested rulemaking, 
one speaker asserted that the petition is not requesting a 
comprehensive federal preemption of state law, but rather seeks to 
fully implement an existing federal statutory framework for determining 
which state law applies when state banks operate across state lines. He 
and others argued that the FDIC has ample authority to take all the 
actions requested in the petition. In particular, they cited sections 
8, 9 and 27 of the FDI Act,\7\ Riegle Neal II and section 104 of the 
GLBA. One banking commissioner argued that the intent of federal law is 
to maintain the competitive balance between the state and national 
charter and that the petition is asking the FDIC to exercise its 
authority. Another asserted that the FDIC is the proper forum and 
arbiter of the questions raised in the petition and declared that 
``[i]t's * * * [the FDIC's] law to interpret,'' emphasizing that the 
Riegle-Neal I and II provisions are codified in the FDI Act.
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    \7\ 12 U.S.C. 1818, 1819, and 1831d.
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    An attorney for a large banking organization asserted that: (i) 
Section 9 of the FDI Act vests sufficient power in the FDIC to 
implement regulations to carry out the provisions of the FDI Act; (ii) 
the FDIC is the only regulatory body that has the authority to issue 
regulations that will carry out the intent of the Riegle-Neal II and 
GLBA to provide parity for state-chartered banks; and (iii) section 
104(d)(4) of the GLBA sets forth a broad rule for state banks and 
national banks that covers a full range of banking activities and 
``[t]he FDIC is best equipped to adopt regulations that will implement 
the Congressional mandate set forth in section 104(d).'' One state 
banking commissioner expressed uncertainty over the constitutionality 
of the OCC's preemption rules but credited the OCC for bringing 
together ``these various laws, interpretations, and analyses in one 
place as an integrated resource.'' He suggested that the FDIC follow 
suit by publishing an interpretation of federal law for state banks, 
including rules on section 27 of the FDI Act and Riegle-Neal II.
    The president of a financial services trade group argued that the 
requested rulemaking would be a natural extension of the authority 
Congress granted to state banks under Riegle-Neal II and that 
interpretations of section 104 of the GLBA and section 27 of the FDI 
Act would clarify the scope of these activities. She urged the FDIC to 
issue a rule or interpretation clarifying that: (i) Section 104 applies 
to all lending and other activities permitted by the GLBA; (ii) the 
four standards set forth in sections 104(d)(4)(D) are to be read in the 
disjunctive as separate standards; and (iii) the reference to ``other 
persons'' in section 104(d)(4)(D)(i) should be read to include other 
depository institutions.

Summary of Statements Opposed to the Petition

    Those opposed to the rulemaking petition generally argued that the 
petition is a response to a competitive imbalance attributable to the 
OCC's preemption regulations. One speaker, representing a trade group 
for realtors, stated that the ``cure for any imbalance is for Congress 
or the OCC itself, under new leadership, to roll back the OCC 
regulations, not to use them as a model for the state banking system.'' 
She maintained that granting the petition would ``further harm the 
ability of states to protect their citizens; result in undue 
concentration of banking services and less choice for consumers; open 
the door to the mixing of banking and commerce; destroy the state 
banking system, not save it; and disrupt the competitive balance among 
financial service providers.'' In a supplemental statement filed in 
response to a hearing officer's question, another representative for 
the trade group noted that issues relating to preemption under Riegle-
Neal have not been expressly delegated to the FDIC and that the 
legislative history contains no mention of Congress conferring such 
authority on the FDIC. Citing recent case law, the representative also 
stated that if the FDIC were to interpret Riegle-Neal, ``its 
interpretation would not be entitled to Chevron deference because the 
Act could also be interpreted by the OCC and the Federal Reserve 
Board.''
    An attorney for a national consumer group urged rejection of the 
petition because ``there is no basis in federal law for allowing broad 
preemption of state law for state-chartered banks'' and, she argued, 
``even if there were room for discretionary action on this question by 
the FDIC * * * allowing this petition would be terrible public policy, 
with devastating consequences for American consumers.'' As to the 
FDIC's legal authority to issue the requested regulation, she asserted 
that: (i) Riegle-Neal II simply put state-chartered banks on par with 
national banks when a state-chartered bank branches into another state; 
(ii) the GLBA as a whole provides no support for the position in the 
petition that the GLBA creates new preemptive rights to depository 
institutions, beyond insurance and securities activities; and (iii) 
state bank operating subsidiaries, agents of the banks, or other third 
parties are not entitled to preemptive rights.
    A state banking commissioner agreed with others who commented that 
the FDIC does not have the statutory authority to issue the requested 
rulemaking and stated that ``many of us do not believe the OCC has the 
statutory authority to do what it has done by regulation.'' He 
suggested that, ``[i]nstead of adopting legally questionable 
regulations preempting state law, the FDIC should urge Congress to 
address the issue.'' The commissioner criticized ``no-rules'' states 
that ``have chosen to eliminate traditional consumer protections, 
regarding consumer lending practices, in favor of economic 
development.'' He argued that ``[o]nly federal laws that establish 
national rules applicable to all consumer lenders should be permitted 
to pre-empt the protection that State laws afford to their citizens.''
    Another consumer group spokesman reiterated the concern expressed 
by

[[Page 60022]]

others about the negative effect on consumers that might result from 
the requested rulemaking. He said that ``[i]f the petitioner's request 
is granted, state-chartered banks headquartered in states with weaker 
anti-predatory laws will be able to override the rigorous and 
comprehensive laws when they make loans or buy loans from brokers in 
states like North Carolina and New Mexico. At a time when minorities, 
immigrants, and women disproportionately receive high cost loans, it is 
counterproductive to strip states of their rights to protect citizens 
who are striving for their American dreams of their first time 
homeownership and wealth building.''
    Two members of Congress submitted a joint statement in opposition 
to the petition. They asserted that the current imbalance with respect 
to interstate banking operations is solely the result of the OCC's 
recent adoption of its preemption and visitorial regulations and that 
the law itself is clear and there are no gaps in the law that the FDIC 
needs to, or should, fill. The Congressmen offered these options to 
address the issues raised in the petition: (i) The OCC should revise 
its rules to eliminate the overly broad ``obstruct, impair or 
condition'' language to make clear what state laws are not preempted, 
and publish any future preemption determinations on a case-by-case 
basis; (ii) the relevant parties should negotiate a workable solution 
that identifies what national bank core banking areas are not affected 
by state laws, establish a mechanism to inform parties when individual 
laws do not apply and why, and clearly identify which regulators are 
responsible for policing which practices of which institutions; (iii) 
the courts should begin to carefully review the OCC's regulations to 
determine if they are consistent with the statutory framework and not 
so readily defer to the OCC; and (iv) Congress should adopt the 
Preservation of Federalism Banking Act (H.R. 5251) which is designed to 
clarify when state laws are applicable to state banks.
    A state attorney general, writing on behalf of his state and the 
attorneys general of six other states, urged the FDIC to deny the 
petition in its entirety. He argued that the FDIC does not have the 
authority to adopt the requested rules, specifying that: (i) The FDIC's 
rulemaking authority is significantly more limited than the OCC; (ii) 
the FDIC is not the primary regulator of state banks and a state bank's 
power derives primarily from state law; and (iii) if there is a gap to 
fill in Riegle-Neal II and the GLBA, it is a legislative gap that only 
Congress can fill. He also asserted that section 104 of the GLBA fails 
to provide authority for the requested rules because the anti-
discrimination provisions of section 104(d)(4) have nothing to do with 
establishing parity between national and state banks. He commented that 
the requested rules would not preserve the dual banking system and 
would undermine the ability of states to protect their citizens. In 
addition, he argued that the requested rules are not necessary because 
many states have adopted ``wild card'' statutes and have entered into 
cooperative agreements that permit state banks a considerable degree of 
parity with national banks.
    Banking commissioners of seven states submitted a joint statement 
in opposition to the petition. They acknowledged that the ``broad 
preemption by the OCC and the OTS has created an imbalance in the dual 
banking system,'' but voiced disagreement ``with the means recommended 
by the Roundtable to restore the balance.'' They argued that Congress, 
not the FDIC, should determine whether preemption is appropriate, 
particularly in the light of the unsettled status of the OCC and OTS 
preemption rules and activities.
    A consumer group spokeswoman argued that the requested rulemaking 
would undermine the dual banking system by ``federalizing'' Delaware's 
and South Dakota's banking laws. She noted that: In passing Riegle-Neal 
II Congress affirmed the importance of individual state banking 
regulation and Riegle-Neal II created a narrow exception to this 
principle by permitting interstate branching by state banks; and the 
portions of the GLBA relied on by the petition refer largely to the 
sale of insurance, not to all banking and financial activities. A 
representative of another consumer group characterized the petition as 
``audacious'' and said the requested rule would have ``lasting and 
harmful effects on New Yorkers and their communities.'' She suggested 
that the FDIC hold additional hearings at each of the FDIC's regional 
offices to ``afford organizations like ours in New York City and across 
the country opportunity to comment meaningfully.''

Summary of Other Views on the Petition

    Some statements we received neither supported nor opposed the 
petition. A spokesman for the national trade group for state banking 
supervisors commented that ``recent preemption rules * * * have 
significantly altered the financial regulatory system, and threaten the 
future of our nation's dual banking system.'' He said, however, that 
his association hesitates to turn such decision-making authority over 
to any one federal agency and suggested that Congress address the 
issues to clarify its vision of the dual banking system. A state 
banking commissioner argued that the ``regulatory world is out of 
balance,'' but that the petition ``would not solve what is wrong with 
our system.'' Similarly, a spokeswoman for a national trade group for 
community banks said, ``[t]he balance in the dual banking system needs 
to be restored. However * * * we question whether this forum, as 
opposed to the Congress, is the appropriate one. Accordingly, we 
neither support nor oppose the recommendations of the petition at this 
time.'' Another national trade group for banks suggested that the FDIC 
and the industry undertake a broad, in-depth study of the current state 
of the dual banking system--strengths, weaknesses, possible remedies 
and possible outcomes. It added that a ``quick fix'' might be harmful 
in the long run.
    A banking commissioner stated that her agency was presently in 
litigation on the applicability of her state's law to subsidiaries of 
national banks. She commented that ``the issues underlying the petition 
* * * are of such broad scope and have such significant implications 
for the financial services sector that they warrant a more 
comprehensive review by Congress.

III. The Proposed Rules

A. Overview

    The rulemaking petition raises serious and complex legal and policy 
issues regarding the preemption of state law in the context of 
interstate banking. From the comments made in connection with the 
public hearing, it is clear that there is a vast and sometimes strong 
difference of views among many bankers, industry trade groups, public 
advocacy groups, state attorneys general, and members of Congress on 
how to respond to the petition. Issuance of the proposed rules serves 
as the FDIC's response to the rulemaking petition. The proposed rules 
implement sections 24(j) and 27 of the FDI Act (``section 24(j) and 
section 27, respectively'').\8\
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    \8\ 12 U.S.C. 1831a(j)(1) and 12 U.S.C. 1831d, respectively.
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B. Discussion of Section 24(j)

The Statute
    Subsection (j) of section 24 currently provides the following:

    (j) Activities of branches of out-of-state banks.

(1) Application of Host State Law

    The laws of a host State, including laws regarding community 
reinvestment,

[[Page 60023]]

consumer protection, fair lending, and establishment of intrastate 
branches, shall apply to any branch in the host State of an out-of-
State State bank to the same extent as such State laws apply to a 
branch in the host State of an out-of-State national bank. To the 
extent host State law is inapplicable to a branch of an out-of-State 
State bank in such host State pursuant to the preceding sentence, 
home State law shall apply to such branch.

(2) Activities of Branches

    An insured State bank that establishes a branch in a host State 
may conduct any activity at such branch that is permissible under 
the laws of the home State of such bank, to the extent such activity 
is permissible either for a bank chartered by the host State 
(subject to the restrictions in this section) or for a branch in the 
host State of an out-of-State national bank.

(3) Savings Provision

    No provision of this subsection shall be construed as affecting 
the applicability of--
    (A) any State law of any home State under subsection (b), (c), 
or (d) of section 1831u of this title; or
    (B) Federal law to State banks and State bank branches in the 
home State or the host State.

(4) Definitions

    The terms ``host State'', ``home State'', and ``out-of-State 
bank'' have the same meanings as in section 1831u(g) of this title.

    The term ``home State'' as defined in 12 U.S.C. 1831u(g)(4) means 
``(i) with respect to a national bank, the State in which the main 
office of the bank is located; and (ii) with respect to a State bank, 
the State by which the bank is chartered.''
    The term ``host State'' as defined in section 12 U.S.C. 1831u(g)(5) 
means, ``with respect to a bank, a State, other than the home State of 
the bank, in which the bank maintains, or seeks to establish and 
maintain, a branch.''
    The term ``out-of-State bank'' as defined in section 12 U.S.C. 
1831u(g)(8) means, ``with respect to any State, a bank whose home State 
is another State.''
    Subsection (j) was originally enacted by the Riegle-Neal Interstate 
Banking and Branching Efficiency Act of 1994 (``Riegle-Neal I'').\9\ 
Riegle-Neal I generally established a federal framework for interstate 
branching for both State banks and national banks.
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    \9\ Pub. L. 103-328, 108 Stat. 2338 (Sept. 29, 1994).
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    As enacted, paragraph (1) of subsection (j) originally stated that:

    The laws of the host state, including laws regarding community 
reinvestment, consumer protection, fair lending, and establishment 
of intrastate branches, shall apply to any branch in the host state 
of an out-of-state state bank to the same extent as such state laws 
apply to a branch of a bank chartered by that state. (emphasis 
added).\10\

    \10\ Pub. L. 103-328, sec. 102(b)(3)(B), 108 Stat. 2338 (Sept. 
29, 1994).
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    Pursuant to this paragraph a branch of an out-of-state, state bank 
would be subject to host state law to the same extent that a branch of 
a bank chartered by the host state would be.
    Three years after Riegle-Neal I, Congress enacted the Riegle-Neal 
Amendments Act of 1997 (``Riegle-Neal II'') \11\ in an attempt to 
provide state banks that had interstate branches (i.e., branches 
located in states other than the bank's home state) ``parity'' with 
national banks that had interstate branches. Riegle-Neal II revised the 
language of section 24(j)(1) to read as it currently does today:
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    \11\ Pub. L. 105-24, 111 Stat. 238, (July 3, 1997).

    The laws of a host State, including laws regarding community 
reinvestment, consumer protection, fair lending, and establishment 
of intrastate branches, shall apply to any branch in the host State 
of an out-of-State State bank to the same extent as such State laws 
apply to a branch in the host State of an out-of-State national 
bank. To the extent host State law is inapplicable to a branch of an 
out-of-State State bank in such host State pursuant to the preceding 
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sentence, home State law shall apply to such branch.

    This change made host state law apply to a branch of an out-of-
state state bank only to the extent that it applies to a branch of an 
out-of-state national bank.
Authority To Issue Rules Regarding Section 24(j) and Section 27
    The FDIC has the authority to issue rules generally to carry out 
the provisions of the FDI Act. Section 9(a) of the FDI Act, 12 U.S.C. 
1819(a), provides that:

    [T]he Corporation * * * shall have power--
* * * * *
    Tenth. To prescribe by its Board of Directors such rules and 
regulations as it may deem necessary to carry out the provisions of 
this Act or of any other law which it has the responsibility of 
administering or enforcing (except to the extent that authority to 
issue such rules and regulations has been expressly and exclusively 
granted to any other regulatory agency).

    In addition, section 10(g) of the FDI Act, 12 U.S.C. 1820(g), 
provides that:

    Except to the extent that authority under this Act is conferred 
on any of the Federal banking agencies other than the Corporation, 
the Corporation may--
    (1) Prescribe regulations to carry out this Act; and
    (2) By regulation define terms as necessary to carry out this 
Act.

    Section 24(j) and section 27 are each, of course, provisions in the 
FDI Act. Furthermore, no other agency has been granted the authority to 
issue rules to restate, implement, clarify, or otherwise carry out, 
either section 24(j) or section 27. Consequently, sections 9(a) and 
10(g) of the FDI Act expressly grant the FDIC the authority to issue 
rules with respect to sections 24(j) and 27.\12\
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    \12\ As indicated previously, a commenter asserted that the 
FDIC's interpretation of Riegle-Neal would not be entitled to 
Chevron deference because other Federal banking agencies could 
interpret the statute. The FDIC recognizes that there are federal 
court decisions, such as Wachtel v. Office of Thrift Supervision, 
982 F.2d 581 (DC Cir. 1993), that indicate that where the same 
statute is administered by several agencies, deference to the 
interpretation of a statute by one agency is inappropriate. The 
Wachtel decision, however, arose in the context of an enforcement 
proceeding under section 8 of the FDI Act (12 U.S.C. 1818) which 
provides statutory enforcement authorities which are administered by 
each of the Federal banking agencies with respect to the depository 
institutions each agency supervises. This is distinguishable from 
the present situation because the FDIC is here proposing, through 
rulemaking under sections 9(a) and 10(g) of the FDI Act, to 
implement sections 24(j)(1) and 27 of the FDI Act, and no other 
agency has been expressly granted such authority.
---------------------------------------------------------------------------

Interpretation of Section 24(j)(1)
    Section 24(j)(1) states that host state law ``shall apply to any 
branch in the host state of an out-of-state state bank to the same 
extent as such state laws apply to a branch of an out-of-state national 
bank.'' (emphasis added). The statute itself does not provide an 
explanation of what Congress meant by the phrase ``apply to a branch.'' 
Clearly Congress was addressing the activities and operations of a 
branch in the host state, but it is not clear from the statutory text 
what threshold level of involvement by the branch will trigger the 
operation of the statute. The range of potential involvements by the 
branch might, under a broad interpretation, run from a very minimal 
involvement in the activity to, under a very narrow interpretation, 
performance of the entire activity at the branch by branch personnel. 
The proposed rules would clarify that host state law is subject to 
preemption when an activity is conducted at a branch of the out-of-
state state bank, and would define ``activity conducted at a branch'' 
to mean an activity of, by, through, in, from, or substantially 
involving, a branch. This approach is within the range of 
interpretations permitted by the statutory language, but the statute 
itself does not indicate whether this interpretation is the most 
appropriate one. Since the language of this provision is susceptible to 
multiple meanings and presents important questions about how

[[Page 60024]]

it is to be applied, the statute is ambiguous.
    In interpreting any ambiguous statutory provision the objective is 
to interpret the statute in light of the purposes that Congress sought 
to serve.\13\ Although there are neither committee reports nor any 
conference report on Riegle-Neal II, there are several statements by 
the sponsors of Riegle-Neal II, and such statements have been accorded 
substantial weight in determining legislative intent.\14\ In this case, 
evidence of Congress' intent can be found in the statements of the 
sponsors of Riegle-Neal II and in the testimony of witnesses urging 
congressional action. Specifically, Representative Marge Roukema, the 
principal sponsor of the legislation, stated that:
---------------------------------------------------------------------------

    \13\ Chapman v. Houston Welfare Rights Organization, 441 U.S. 
600, 608 (1979).
    \14\ See, Federal Energy Administration v. Algonquin SNG, Inc., 
426 U.S. 548, 564 (1976).

    The essence of this legislation is to provide parity between 
State-chartered bank and national banks * * *
    This legislation is critical to the survival of the dual banking 
system. * * *
    This legislation is also important for consumers, because if we 
do not enact this legislation, State banks will likely convert to a 
national charter. Certainly the incentive will be there. The end 
result could be that there will be no consumer protection at the 
State level * * *
    [T]he bill clarifies [that] the home State law of a State bank 
must be followed in situations in which a specific host State [law] 
does not apply to a national bank.\15\

    \15\ 143 Cong. Rec. H3088-89 (daily ed. May 21, 1997) (statement 
of Rep. Roukema).
---------------------------------------------------------------------------

    Representative Bruce Vento echoed Representative Roukema's concerns 
and confirmed her views of how the bill would operate. Speaking in 
support of enactment, Representative Vento stated that:

    Only under the limited circumstances in which the Comptroller 
preempts host State laws for national banks will out-of-State State-
chartered banks similarly be exempted from the laws of the host 
State. In those cases, the out-of-State bank will be required to 
follow its own home State laws as regards such activity.
* * * * *
    In the absence of this measure, however, most State banks with 
out-of-State bank branches will likely change to a national charter 
causing the atrophy of the dual banking State-national banking [sic] 
system.\16\
---------------------------------------------------------------------------

    \16\ 143 Cong. Rec. H3094 (daily ed. May 21, 1997) (statement of 
Rep. Vento).
---------------------------------------------------------------------------

    Statements by other co-sponsors reinforce the statements of 
Representatives Roukema and Vento that Riegle-Neal II was intended to 
provide parity between state banks and national banks with regard to 
interstate activities.\17\ In addition, Federal Reserve Board Chairman 
Alan Greenspan expressed the support of the Federal Reserve Board for 
this legislation in a letter to Representative Roukema and stated that 
``[t]he Riegle-Neal Clarification Act of 1997 \18\ is an effort to 
create parity between national and state-chartered banks in operating 
out-of-state branches.'' \19\ Other endorsements received by 
Representative Roukema that express the same understanding of the bill 
include those from the National Governors' Association, the Conference 
of State Bank Supervisors and the Independent Bankers' Association of 
America.\20\
---------------------------------------------------------------------------

    \17\ See, e.g., 143 Cong. Rec. H3094 (daily ed. May 21, 1997) 
(statement of Rep. Metcalf); 143 Cong. Rec. H3094-95 (daily ed. May 
21, 1997) (statement of Rep. LaFalce).
    \18\ Riegle-Neal II was originally introduced as the Riegle-Neal 
Clarification Act of 1997; its name was later changed in the Senate 
during deliberations to the ``Riegle-Neal Amendments Act of 1997''.
    \19\ 143 Cong. Rec. H3089-93 (daily ed. May 21, 1997) (statement 
of Rep. Roukema).
    \20\ See id.
---------------------------------------------------------------------------

    The debates in the Senate also indicate that the Senate understood 
that the purpose of the legislation was to provide parity between state 
banks and national banks. In that regard, Senator D'Amato stated the 
following:

    [T]he bill will restore balance to the dual banking system by 
ensuring that neither charter operates at an unfair advantage in 
this new interstate environment.
* * * * *
    [I]t would establish that a host State's law would apply to the 
out-of-State branches of a State-chartered bank only to the same 
extent that that those laws apply to the branches of out-of-State 
national banks located in the host State.\21\
---------------------------------------------------------------------------

    \21\ 143 Cong. Rec. S5637 (daily ed. June 12, 1997) (statement 
of Sen. D'Amato).

    Consequently, legislative history indicates that the purpose of 
Riegle-Neal II is to provide state banks parity with national banks 
with regard to interstate branches to the maximum extent possible.
    Moreover, the very nature of Riegle-Neal II as remedial legislation 
supports a broad interpretation. It is a recognized canon of statutory 
construction that remedial legislation should be interpreted broadly to 
effectuate its purposes.\22\ The problem that Riegle-Neal II sought to 
correct was accurately described by Rep. LaFalce as follows:
---------------------------------------------------------------------------

    \22\ See, Tcherepnin v. Knight, 389 U.S. 332, 336 (1967).

    Now when Congress passed the Interstate Banking and Branching 
bill of 1994, it did not, in my judgment, adequately anticipate the 
negative impact that it might have on State-chartered banks 
interested in branching outside their home States. However * * * it 
has become clear that State-chartered bank wanting to branch outside 
their home States are at a significant disadvantage relative 
national banks branching outside their home State.
    Why so? Well, it is due to the fact that the national bank 
regulator has the authority to permit national banks to conduct 
operations in all the States with some level of consistency. In 
contrast, under the existing interstate legislation State banks 
branching outside their home State must comply with a multitude of 
different State banking laws in each and every State in which they 
operate.
    So the complications of complying with so many different State 
laws in order to branch interstate has led many State banks to 
conclude * * * that it would be much easier to switch to a national 
Federal charter [sic].\23\
---------------------------------------------------------------------------

    \23\ 143 Cong. Rec. H3094, 95 (daily ed. May 21, 1997) 
(statement of Rep. LaFalce).

    The problem then, as understood by Congress as well as the banking 
industry,\24\ was that State banks operated at a disadvantage to 
national banks when they operated outside their home states. The reason 
is that when state banks operated in host states, they were subject to 
all of the laws of each host state in which they operated. National 
banks, however, operate in host states largely free of host state law 
because many host state laws are preempted for national banks. To 
remedy this problem Congress designed Riegle-Neal II to eliminate the 
disparity between the treatment of national bank branches and state 
bank branches with respect to the applicability of host state law.
---------------------------------------------------------------------------

    \24\ See, 143 Cong. Rec. S5637 (daily ed. June 12, 1997) 
(statement of Sen. D'Amato); 143 Cong. Rec. H3089-93 (daily ed. May 
21, 1997) (statement of Rep. Roukema).
---------------------------------------------------------------------------

    The legislative history of Riegle-Neal II indicates that Congress 
wanted to provide state banks parity with national banks at least with 
regard to activities involving branches outside the bank's home state. 
As noted above, the proposed rules generally clarify that host state 
law is subject to preemption when an activity is conducted at a branch 
in the host state of an out-of-state, state bank. The proposed rules 
also include a definition of the phrase ``activity conducted at a 
branch'' to mean ``an activity of, by, through, in, from, or 
substantially involving, a branch.'' Such an interpretation is 
consistent with the legislative intent as detailed above. Moreover, 
Congress recognized that state banks are at a disadvantage to national 
banks when it comes to interstate activities, and Riegle-Neal II was 
intended to remedy that disadvantage by providing a level playing 
field. The language of the

[[Page 60025]]

proposed rules carry out that intention by generally ensuring that 
whenever a branch of an out-of-state national bank would not be subject 
to a host state's law, then a branch of an out-of-state, state bank 
would also not be subject to that host state's law.
    In addition, the language of section 24(j) indicates that it is 
focused on state banks that have interstate branches. The first 
sentence of paragraph (1) of subsection (j) describes the extent to 
which host state ``shall apply to any branch in the host state of an 
out-of-state state bank.'' Consistent with the first sentence of 
paragraph (1), the second sentence provides that when host state law 
does not apply, the bank's home state law shall apply to such 
branch.\25\ Therefore, the plain language of section 24(j)(1) indicates 
that it preempts host state law only with respect to a branch in the 
host state of the out-of-state, state bank.
---------------------------------------------------------------------------

    \25\ The powers exercised by state banks are naturally those 
granted by the individual states, and generally one state's laws 
have not been interpreted as preempting any other state's laws. 
Section 24(j)(1) would under certain circumstances make one state's 
laws (a host state's laws) inapplicable and another's (a home 
state's laws) applicable. However, section 24(j)(1) is a federal 
statute, and it is federal law that preempts the host state's law, 
not another state's laws.
---------------------------------------------------------------------------

    As noted above, section 24(j)(1) provides that host state law 
applies to a branch in the host state of an out-of-state, state bank to 
the same extent that it applies to a branch in the host state of an 
out-of-state, national bank. Therefore, in order to determine if host 
state law is preempted for a branch of an out-of-state, state bank, it 
is necessary to first determine if host state law applies to a branch 
of an out-of-state, national bank. In order to determine if host state 
law applies to a branch of an out-of-state, national bank, the FDIC 
expects to consult with the OCC. This approach is similar to the 
consultations that the FDIC engages in currently when making 
determinations regarding the permissible activities of a national bank 
under section 24(a) of the FDI Act, 12 U.S.C. 1831a(a).
    The federal authorities that the FDIC has relied upon in making its 
preemption decisions in the past generally have been focused on 
specific areas or subjects. For example, section 27 sets forth the 
interest rates that state banks may charge and expressly preempts 
contrary state law; and section 44 (12 U.S.C. 1831u) provides that the 
FDIC may approve a merger between insured banks with different home 
states notwithstanding contrary state law.\26\ In contrast, section 
24(j)(1) is not focused on a specific area or subject of host state 
law; rather it is unrestricted in its scope. As a result of its 
dependence on the law applicable to national banks, the scope of 
section 24(j)(1) includes every area or subject that does not apply to 
national bank branches in the host state.
---------------------------------------------------------------------------

    \26\ The FDIC has extraordinarily broad authority to preempt any 
state law that prohibits or materially obstructs FDIC-assisted, 
interstate acquisitions of BIF-insured institutions in default or in 
danger of default. See section 13(f)(4)(A) of the FDI Act (12 U.S.C. 
1823(f)(4)(A)). See also section 13(k) of the FDI Act (12 U.S.C. 
1823(k) (preempting state law that conflicts with the FDIC's 
authority to resolve certain savings associations); cf., State of 
Colorado v. Resolution Trust Corporation, 926 F.2d 931 (10th Cir. 
1991) (Resolution Trust Corporation was authorized by FIRREA to 
override state branch banking laws in emergency acquisition under 
section 13(k) of the FDI Act); and section 11(n) of the FDI Act (12 
U.S.C. 1821(n)) (preempting state law that conflicts with the FDIC's 
authority to transfer assets to a bridge bank); see, e.g., NCNB 
Texas National Bank v. Cowden, 895 F.2d 1488 (5th Cir. 1990) 
(Federal law, including section 11(n) of the FDI Act, authorized 
FDIC to transfer fiduciary appointments of a failed bank to a bridge 
bank and preempted conflicting Texas state laws relating to such 
transfers).
---------------------------------------------------------------------------

    In summary, section 24(j), as amended by Riegle-Neal II, preempts 
the application of host state laws to a branch of an out-of-state, 
state bank to the extent that those host state laws do not apply to a 
branch of an out-of-state, national bank. The scope of the preemption 
is not limited to particular areas or subjects, but is broader and 
might preempt host state laws dealing with lending, deposit-taking and 
other banking activities. Nevertheless, the preemption provided by 
section 24(j) only operates with respect to a branch in the host state 
of an out-of-state, state bank. By its terms section 24(j)(1), and 
therefore the proposed regulation, would not apply if the out-of-state, 
state bank does not have a branch in the host state.\27\
---------------------------------------------------------------------------

    \27\ Also, the preemption afforded state bank branches pursuant 
to section 24(j) and the proposed regulation only operates to the 
extent that national bank branches would not be subject to host 
state law. If a court were to rule that host state law did apply to 
a national bank branch in the host state, then the host state law 
would also apply to a state bank branch in the host state.
---------------------------------------------------------------------------

C. Discussion of Section 27

    The Petitioner has requested that the FDIC implement section 27 by 
adopting rules parallel to those adopted by the OCC and the OTS. 
Section 27 is the statutory counterpart to section 85 of the NBA (12 
U.S.C. 85) and section 4(g) of the Home Owners' Loan Act (``HOLA'') (12 
U.S.C. 1463(g)), which apply to national banks and savings 
associations, respectively. The Petitioner has correctly observed that 
the OCC and OTS have adopted rules implementing their respective 
statutory provisions but the FDIC has not issued rules implementing 
section 27.\28\ This may create ambiguity or uncertainty about the 
application of the statute. Additionally, in their written statements 
or in their testimony at the public hearing on the Petition, certain 
representatives of state bank supervisors requested that the FDIC 
``codify'' GC-10 and GC-11 and that the authority provided by section 
27 be extended to operating subsidiaries of state banks.
---------------------------------------------------------------------------

    \28\ The primary OCC rule implementing section 85 is 12 CFR 
7.4001 (2005). The OTS rule implementing section 4(g) of HOLA is 12 
CFR 560.110 (2005).
---------------------------------------------------------------------------

    Considering Congress' stated desire to provide state banks and 
insured branches of foreign banks (collectively, ``insured state 
banks'') interest rate parity with national banks and to provide 
certainty in this area, the FDIC's Board of Directors believes it is 
appropriate to grant the Petitioner's request on this portion of the 
Petition. The FDIC also believes that it is appropriate to issue rules 
concerning the application of section 27 to interstate state banks.
    Because section 27, as will be more fully described below, was 
patterned after sections 85 and 86 of the NBA (12 U.S.C. 85, 86) to 
provide insured state banks competitive equality with national banks, 
the following background information is provided to frame the 
discussion of the proposed section 27 rules.
    Section 30 of the NBA was enacted in 1864 to protect national banks 
from discriminatory state usury legislation. To accomplish its goal, 
the statute provided several alternative interest rates that national 
banks were permitted, under federal law, to charge their customers. At 
the time of enactment, the section also specified federal remedies for 
violations of the interest rates provided therein. The section was 
subsequently divided into two sections and renumbered, with the 
interest rate and remedy provisions becoming sections 85 and 86 of the 
NBA, respectively. In addition to the interest rates included in the 
statute when it was enacted, section 85 was amended in 1933 to also 
permit national banks to charge their customers an alternative rate of 
one percent above the discount rate for 90 day commercial paper in 
effect at the Federal Reserve bank for the Federal Reserve district 
where the bank is located.
    Shortly after the 1864 statute was enacted, Tiffany v. National 
Bank of Missouri, 85 U.S. 409 (1873), gave rise to the ``most favored 
lender doctrine.'' In Tiffany, Missouri state law limited interest 
rates for state banks to eight

[[Page 60026]]

percent but allowed other lenders to charge up to ten percent. The 
United States Supreme Court construed section 85 as permitting the 
National Bank of Missouri to charge nine percent interest because 
Missouri law allowed other lenders to charge a higher interest rate 
than that allowed for state banks. In its decision, the Court explained 
that Congress intended to bestow the status of ``national favorites'' 
on national banks by protecting them from unfriendly state laws that 
might make it impossible for them to exist within a state. Since 
Tiffany was decided, it has become well established that national banks 
are generally permitted to charge the highest interest rates permitted 
for any competing state lender by the laws of the state where the 
national bank is located.
    Another benefit that national banks enjoy under section 85 has 
become known as the ``exportation doctrine.'' The exportation doctrine 
is based on the United States Supreme Court's interpretation of section 
85 in Marquette National Bank v. First of Omaha Service Corp., 439 U.S. 
299 (1978). In Marquette the Court was presented with the question of 
where a national bank was ``located,'' under section 85, for purposes 
of determining the appropriate state law to apply to loans the bank 
made to borrowers residing in another state. In construing the statute, 
the Court recognized that adopting an interpretation of the statute 
that would make the location of the bank depend on the whereabouts of 
each loan transaction (in Marquette the transactions at issue involved 
credit cards) would throw confusion into the complex system of modern 
interstate banking. The Court also observed that national banks could 
never be certain whether their contacts with residents of other states 
were sufficient to alter the bank's location for purposes of applying 
section 85. Instead, the Court focused on the physical location of the 
national bank at issue to determine where the bank was ``located'' for 
purposes of applying section 85.\29\ Since Marquette was decided, 
national banks have been allowed to ``export'' interest rates allowed 
by the state where the national bank is located on loans made to out-
of-state borrowers, even though those rates may be prohibited by the 
state laws where the borrowers reside.
---------------------------------------------------------------------------

    \29\ Unlike the situation today, all the offices of the First 
National Bank of Omaha were in the State of Nebraska and its charter 
address was in Nebraska because national banks could not operate 
interstate branches.
---------------------------------------------------------------------------

    Against this backdrop, in the high interest rate environment of the 
late 1970s, Congress became concerned that section 85 provided national 
banks with a competitive advantage over insured state banks, whose 
interest rates were constrained by state laws, and other federally 
insured depository institutions. To rectify the imbalance that had been 
created, Congress included provisions in Title V of the Depository 
Institutions Deregulation and Monetary Control Act of 1980 (``DIDMCA'') 
\30\ that granted all federally insured financial institutions (state 
banks, savings associations, and credit unions) similar interest rate 
authority to that provided in section 85 for national banks.
---------------------------------------------------------------------------

    \30\ Pub. L. 96-221, 94 Stat. 132, 164-168 (1980).
---------------------------------------------------------------------------

    Title V of DIDMCA contained three parts that preempt state usury 
laws. For purposes of this discussion, however, the most relevant 
sections are contained in Part C. Sections 521-523 of DIDMCA amended 
the FDI Act (for insured state banks), the National Housing Act (for 
insured savings associations), and the Federal Credit Union Act (for 
insured credit unions), respectively. Each of these sections, as 
enacted, contained explicit preemptive language \31\ in the statutory 
text, unlike under section 85, but were subject to the ``opt-out'' 
provision in section 525 of the statute.\32\ These provisions are 
described generally in the Conference Report for the legislation as 
follows:
---------------------------------------------------------------------------

    \31\ Section 27 still contains the express preemptive language 
`` * * * '' notwithstanding any State constitution or statute which 
is hereby preempted for purposes of this section'' in subsection (a) 
and ``'such State fixed rate is thereby preempted by the rate 
described in subsection (a) of this section''' in subsection (b). 
(Emphasis added).
    \32\ 12 U.S.C. 1831d note (Effective and Applicability 
Provisions).

    ``State usury ceilings on all loans made by federally insured 
depository institutions (except national banks) * * * will be 
permanently preempted subject to the right of affected states to 
override at any time * * *. In order for a state to override a 
federal preemption of state usury laws provided for in this Title 
the override proposal must explicitly and by its terms indicate that 
the state is overriding the preemption. Under this requirement the 
state law, constitutional provision, or other override proposal must 
specifically refer to this Act and indicate that the state intends 
to override the federal preemption this Act provides.'' \33\
---------------------------------------------------------------------------

    \33\ H.R. Rep. No. 96-842, 78-79 (1980).

    Thus, the specific preemptive language contained in section 27, the 
accompanying legislative history, and the design and structure of Title 
V, Part C of DIDMCA, indicate that Congress intended section 27 to have 
preemptive effect, subject to the ability of state legislatures to 
``opt-out'' of the statute's coverage by following the prescribed 
statutory procedures.
    Regarding section 27, specifically, subsection (a) is patterned 
after section 85 and provides that insured state banks are permitted to 
charge the greater of:
     The rate prescribed for state banks under state law, if 
any;
     One percent more than the discount rate on 90 day 
commercial paper in effect at the Federal Reserve bank for the Federal 
Reserve district where the bank is located; and
     The rate allowed by the laws of the state, territory or 
district where the bank is located.\34\
---------------------------------------------------------------------------

    \34\ FDIC Advisory Op. No. 81-3, Letter from Frank L. Skillern, 
Jr., General Counsel, February 3, 1981, reprinted in [Transfer 
Binder 1988-1989] Fed. Banking L. Rep. (CCH) ] 81,006 (``FDIC 
Advisory Op. No. 81-3'').
---------------------------------------------------------------------------

    In addition, the remedial nature of the enactment and the 
Congressional intent of providing insured state banks competitive 
equality with respect to interest rates are evidenced in the statutory 
language ``[i]n order to prevent discrimination against State-chartered 
insured depository institutions * * * with respect to interest rates * 
* * \35\ Finally, subsection (b) provides virtually identical federal 
remedies for violating subsection (a) of section 27 as section 86 of 
the NBA provides for violations of section 85.
---------------------------------------------------------------------------

    \35\ Senator Proxmire, the Chairman of the Senate Banking 
Committee and a sponsor of DIDMCA, expressed a similar intent in his 
comments regarding H.R. 4986, which contained the language that 
became section 27(a) stating:
    ``Title V * * * contains a provision which provides parity, or 
competitive equality, between national banks and State chartered 
depository institutions on lending limits * * * State chartered 
depository institutions are given the benefits of 12 U.S.C. 85 
unless a State takes specific action to deny State chartered 
institutions that privilege.''
    126 Cong. Rec. S3170 (daily ed. Mar. 27, 1980) (remarks of Sen. 
Proxmire).
---------------------------------------------------------------------------

    Because of the commonalities in the design of section 27 with 
section 85, the use of the identical language in the two sections, and 
the Congressional objective of providing insured state banks parity 
with national banks regarding interest rates, the courts and the FDIC 
have construed section 27 in pari materia with section 85.\36\ In the

[[Page 60027]]

interest of maintaining parity with national banks, the FDIC also 
believes the same rationale applies with regard to section 86.
---------------------------------------------------------------------------

    \36\ Greenwood Trust Co. v. Commonwealth of Massachusetts, 971 
F.2d 818, 827 (1st Cir. 1992) (``The historical record clearly 
requires a court to read the parallel provisions of [DIDMCA] and the 
[NBA] in pari materia. It is, after all, a general rule that when 
Congress borrows language from one statute and incorporates it into 
a second statute, the language of the two acts should be interpreted 
the same way. [citations omitted]. So here. What is more, when 
borrowing of this sort occurs, the borrowed phrases do not shed 
their skins like so many reinvigorated reptiles. Rather, ``if a word 
is obviously transplanted from another legal source, whether the 
common law or other legislation, it brings the old soil with it.'' 
[citation omitted]. Because we think it is perfectly plain that this 
portable soil includes prior judicial interpretations of the 
transplanted language, [citations omitted], [NBA] precedents must 
inform our interpretation of words and phrases that were lifted from 
the [NBA] and inserted into [DIDMCA]'s text.''); General Counsel Op. 
No. 10; FDIC Advisory Op. No. 81-3.
---------------------------------------------------------------------------

D. Explanation of the Proposed Rules

1. Section 24(j) Provisions
    Paragraph (a) is a definitional section that corresponds to section 
24(j)(4) and recites in paragraphs (a)(1) through (a)(3) the statutory 
definitions of ``home state,'' ``host state'' and ``out-of-state bank'' 
found in 12 U.S.C. 1831u(g). However, the proposed rule also adds in 
paragraph (a)(4) a definition of the phrase ``activity conducted at a 
branch'' which is used elsewhere in the proposed rule. It defines 
``activity conducted at a branch'' to mean ``an activity of, by, 
through, in, from, or substantially involving, a branch.'' This 
definition is designed to give effect to Congress' intent to grant 
state banks full parity with national banks with respect to interstate 
branches. As noted above, commenters at the FDIC's public hearing 
stated the need for clarity with regard to the applicability of state 
law to branches of out-of-state, state banks. Issuing a regulation 
without defining the critical terms used in the regulation would 
provide no clarity and could lead to further confusion. Since a 
national bank branch gets the benefit of preemption whether or not the 
entire activity is performed in its branch, and since Congress intended 
to grant state banks full parity with national banks in this area, the 
definition in the proposed rule is designed to clarify that a branch of 
an out-of-state state bank gets the benefit of preemption whether or 
not the entire activity is performed in the branch.
    Paragraphs (b) and (c) of the proposed rule carry out section 
24(j)(1). Paragraph (b) states that except as provided in paragraph 
(c), host state law applies to a branch in the host state of an out-of-
state, state bank. Paragraph (c) clarifies that host state law does not 
apply to an activity conducted at a branch in the host state of an out-
of-state, state bank whenever host state law does not apply to an 
activity conducted at a branch in the host state of an out-of-state, 
national bank. Paragraph (c) further clarifies that when host state law 
does not apply as a result of this preemption, then the state bank's 
home state law applies.
    Paragraph (d) of the proposed rule carries out section 24(j)(2). 
Paragraph (d) states generally that subject to the restrictions 
contained elsewhere in Part 362 of the FDIC's rules and regulations, an 
out-of-state, state bank that has a branch in a host state may conduct 
any activity at that branch that is both permissible under its home 
state law and either permissible for a host state bank or permissible 
for a branch of an out-of-state, national bank. Part 362 sets forth the 
prohibitions and restrictions that a state bank is subject to when it 
wants to conduct as principal an activity that is not permissible for a 
national bank. This paragraph, like the statutory provision it is based 
upon, preserves those prohibitions and restrictions.
    Paragraph (e) is a savings provision that implements the statutory 
savings provision at section 24(j)(3). It basically preserves the 
applicability of a state bank's home state law under the interstate 
merger provisions of section 44 of the FDI Act (12 U.S.C. 1831u), and 
the applicability of Federal law to state banks and state bank 
branches, whether they are in the home state or the host state.
2. Section 27 Provisions
    The portion of the proposed rules implementing section 27 would be 
contained in Part 331, which would be titled ``Federal Interest Rate 
Authority.'' In addition to paralleling the existing rules implementing 
section 85 for national banks, as indicated in the following section-
by-section analysis, some additional provisions are being proposed for 
clarification and to address issues specifically affecting insured 
state, but not national, banks.
    Section 331.1 addresses the authority, purpose, and application of 
the rules. As indicated in the regulatory text, the rules would be 
issued pursuant to the FDIC's rulemaking authority in section 9(a) 
(Tenth) and 10(g) of the FDI Act (12 U.S.C. 1819(a) (Tenth), 1820(g)) 
to carry out the provisions of the FDI Act and any other law that the 
FDIC has the responsibility for administering or enforcing and to 
define the terms necessary to carry out the provisions of the FDI Act. 
Their purpose would be to implement Congress' explicit statutory 
directive in section 27 of preventing discrimination against insured 
state banks with regard to interest rates and to address other issues 
the FDIC considers appropriate to implement section 27. They would 
apply to a ``state bank'' and an ``insured branch,'' as defined in 
section 3(a)(2) and 3(s)(3) (12 U.S.C. 1813(a)(2); 1813(s)(3)), 
respectively. Where the rules apply equally to a ``state bank'' and an 
``insured branch'' the rules use the term ``insured state banks'' as a 
collective reference to the statutorily defined terms. In certain 
instances, however, the treatment under the rules would depend on 
whether the institution at issue is a ``state bank'' or an ``insured 
branch.'' Where such a distinction is relevant, the rules use the 
appropriate statutorily defined term.
    In addition, this section provides a rule of construction to ensure 
that section 27 and its implementing rules are construed in the same 
manner as section 85 and its implementing rules are construed by the 
OCC. This rule of construction is intended to inform the public of the 
authority and benefits provided by section 27, as well as provide 
insured state banks assurance that the FDIC intends that section 27 
provide the same benefits to insured state banks that section 85 
provides to national banks. It will also provide more practical 
benefits. For example, the Federal definition of ``interest'' contained 
in Sec.  331.2(a), like 12 CFR 7.4001(a), contains a non-comprehensive 
list of charges that do and do not constitute ``interest'' for purposes 
of the statute. Since the OCC rule was issued, the OCC has issued 
interpretive letters addressing whether other charges that are not 
listed in the regulation, such as prepayment fees, constitute 
``interest'' for purposes of section 85. The rule of construction 
should make it unnecessary in most instances for insured state banks to 
seek confirmation from the FDIC that its regulation and statute will be 
interpreted in the same manner, when such interpretive letters are 
issued by the OCC. Also, interpretive letters have been issued by the 
OCC advising that national bank operating subsidiaries can utilize 
section 85.\37\ To provide parity, this provision will allow section 27 
to be utilized by insured state bank subsidiaries to the same extent as 
section 85 can be utilized by subsidiaries of national banks (i.e., to 
the extent the insured state bank subsidiaries are majority-owned by 
the insured state bank, subject to supervision of the state banking 
authority, and can only engage in activities that the bank could engage 
in directly).
---------------------------------------------------------------------------

    \37\ OCC Interpretive Letter No. 954, December 16, 2002, 
reprinted in [Transfer Binder 2003-2004] Fed. Banking L. Rep. (CCH) 
] 81-479; OCC Interpretive Letter No. 968, February 12, 2003, 
reprinted in [Transfer Binder 2003-2004] Fed. Banking L. Rep. (CCH), 
] 81-493; OCC Interpretive Letter No. 974, July 21, 2003, reprinted 
in [Transfer Binder 2003-2004] Fed. Banking L. Rep. (CCH) ] 81-500.
---------------------------------------------------------------------------

    Section 331.2 is essentially identical to section 7.4001 of the 
OCC's regulations interpreting section 85. The

[[Page 60028]]

Federal definition of ``interest'' in paragraph (a) was reviewed, with 
approval in GC-10.\38\ As is the case with section 7.4001(a) of the 
OCC's regulation, the Federal definition in the proposed rule is 
intended to define ``interest'' for purposes of determining whether a 
particular charge is ``interest'' subject to section 27 of the FDI Act 
and its most favored lender and exportation rules. Also, like section 
7.4001(a), the charges specified in the paragraph are non-comprehensive 
and other charges may be determined to constitute or not constitute 
``interest'' for purposes of applying section 27. Paragraph (b) would 
formally recognize that insured state banks have the same most favored 
lender authority provided for national banks, which is permitted under 
the ``rate allowed by the laws of the state, territory, or district 
where the bank is located'' language contained in section 27. In 1981, 
shortly after section 27 was enacted, the FDIC's General Counsel 
analyzed section 27 and recognized that the most favored lender 
doctrine applied to insured state banks.\39\ Paragraph (b) of the 
proposed rule is almost identical to the OCC regulatory text the FDIC's 
General Counsel reviewed approvingly in his the opinion. The U.S. 
Supreme Court, in Marquette, also reviewed the same regulatory 
text.\40\ Paragraph (c), like section 7.4001(c), confirms that the 
Federal definition of the term ``interest'' does not change state law 
definitions of ``interest'' (nor how the state definition of interest 
is used) solely for purposes of state law. Finally, as with section 
7.4001(d) for national banks, paragraph (d) of the proposed rule allows 
corporate borrowers and insured state banks to agree to any interest 
rate if the bank is located in a state whose laws deny the defense of 
usury to a corporate borrower.
---------------------------------------------------------------------------

    \38\ GC-10 addressed the question of what charges constitute 
``interest'' for purposes of section 27. The opinion observed that 
the OCC and the OTS had both adopted virtually the same Federal 
definition of ``interest'' for purposes of applying their respective 
statutory counterparts to section 27. The Federal definition of 
``interest'' contained in paragraph (a) of the proposed rule is 
identical to the regulatory definition reviewed in GC-10. The 
opinion concluded that section 85 and section 27 had been and should 
be construed in pari materia because of the similarities in the two 
statutes and the clear congressional intent of providing competitive 
equality to state-chartered lending institutions by the enactment of 
section 27. Thus, it was the Legal Division's opinion that the term 
``interest,'' for purposes of section 27, included those charges 
that a national bank was authorized to charge under section 85 and 
the OCC regulation.
    It is anticipated that GC-10 will be withdrawn if the proposed 
regulations are adopted because the rules embody the substance of 
the legal analysis and conclusions contained in the opinion.
    \39\ FDIC Advisory Op. No. 81-3.
    \40\ Marquette, at 548, note 26.
---------------------------------------------------------------------------

    Section 331.3 addresses where a state bank that does not maintain 
branches in another state, or that operates exclusively over the 
Internet, is ``located'' and where an insured U.S. branch of a foreign 
bank is ``located.'' Paragraph (a) addresses state banks and determines 
the location issue for non-interstate state banks and Internet banks by 
reference to the state that issued the charter. Paragraph (b) addresses 
insured branches of foreign banks and adopts an analogous method for 
determining the location of the insured branch to that provided in 
paragraph (a) for state banks. Paragraph (b) is tailored more, however, 
to the unique nature of insured branches, which do not operate 
interstate branches, do not operate exclusively over the Internet, and 
are an office of the foreign bank that is located in the United States 
operating under a license from the appropriate banking authority, as 
opposed to a separate incorporated entity.
    Section 331.4 addresses where a state bank that maintains 
interstate branches is ``located'' and the interest rate that should be 
applied to loans made by the home office of the bank or its out-of-
state branches. These issues involve the application of section 27 in 
the context of Riegle-Neal I and Riegle-Neal II (collectively, the 
``Interstate Banking Statutes'') and were analyzed in GC-11. Except as 
otherwise indicated, the text of the proposed rule is based upon a 
detailed discussion of the interplay between section 27 and the 
relevant provisions of Interstate Banking Statutes that was contained 
in GC-11; \41\ therefore, the following brief description of the 
proposed rule should be read in context with GC-11.
---------------------------------------------------------------------------

    \41\ Briefly, in GC-11, the FDIC's General Counsel addressed 
where an interstate state bank is ``located,'' for purposes of 
applying section 27, when it operates interstate branches and 
determined that such a bank could be located in its home state and 
in each host state where it operated a branch. The General Counsel 
also addressed the effect of the ``applicable law clause for state 
banks'' and the ``usury savings clause'' enacted in Riegle-Neal I 
and amendments to the ``applicable law clause for state banks'' 
enacted in Riegle-Neal II, on the determination of the appropriate 
state law to apply to loans made by an interstate state bank, either 
through its home office or by a branch of the bank located in a host 
state. In doing so, the opinion based some of its conclusions 
regarding the applicability of host state law, rather than home 
state law, on a discussion of the intended effect of the ``usury 
savings clause'' by Senator Roth, the sponsor of the amendment. 
Finally, the opinion addressed other situations that were not 
addressed by the Interstate Banking Statutes, which the OCC has also 
addressed for national banks in OCC Interpretive Letter 822, and 
concluded that similar analysis and treatment should apply to 
interstate state banks in the context of section 27.
---------------------------------------------------------------------------

    Paragraph (a) of the proposed rule defines ``home state'' and 
``host state,'' for purposes of the section, without reference to 
national banks because the rule exclusively addresses the application 
of section 27 to a state bank. The rule would not apply to an insured 
branch of a foreign bank because section 24(j) (12 U.S.C. 1831a (j)), 
unlike section 27, contains no reference to an ``insured branch.'' The 
definition of ``non-ministerial functions,'' recognizes that the non-
ministerial functions, discussed below, are factors to be considered in 
determining where a loan is made by an interstate state bank. The 
definition of the non-ministerial functions also contains a description 
of the three non-ministerial functions that is consistent with their 
description in GC-11.
    Paragraph (b) recognizes that a state bank that operates interstate 
branches is ``located,'' for purposes of applying section 27, in the 
bank's home state and in each host state where the bank maintains a 
branch. Paragraph (c) is based on an explanation by Senator Roth of 
section 111 (the usury savings clause) of Riegle-Neal I (12 U.S.C. 1811 
note (Restatement of Existing Law)),\42\ which he sponsored.\43\ In 
explaining the provisions, a distinction was made between 
``ministerial'' \44\ and ``non-ministerial'' \45\ functions, with the 
latter being considered the most relevant factors for determining the 
appropriate state's law to apply to a particular loan. Senator Roth 
indicated that there were considered to be three non-ministerial 
functions incident to the making of a loan by an interstate bank and 
that if those three non-ministerial functions occur in a single state, 
that state's interest rate provisions should be applied to the loan 
(this standard is contained in paragraph (c)(1) of the proposed rule). 
GC-11 observed, however, that the Interstate Banking Statutes did not 
address other situations that could occur in the interstate context, 
such as where the three non-

[[Page 60029]]

ministerial functions occur in different states or where some of the 
non-ministerial functions occur in an office that is not considered to 
be the home office or a branch of the bank. In these instances, as 
reflected in GC-11 and paragraph (c)(2) of the proposed rule, home 
state rates may be used. Alternatively, as reflected in GC-11 and 
paragraph (c)(3) of the proposed rule, host state interest rates may be 
applied where a non-ministerial function occurs at a branch in a host 
state, if based on an assessment of all of the facts and circumstances, 
the loan has a clear nexus to the host state.
---------------------------------------------------------------------------

    \42\ The usury savings clause provides, in pertinent part:
    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 [section 1831d] of the 
Federal Deposit Insurance Act.
    \43\ The discussion appears at 140 Cong. Rec. S12789-12790 
(daily ed. Sept. 13, 1994)(Remarks of Senator Roth).
    \44\ These include providing loan applications, assembling 
documents, providing a location for returning documents necessary 
for making a loan, providing account information, and receiving 
payments.
    \45\ These include the approval of credit (i.e., decision to 
extend credit), the extension of credit itself, and the disbursal of 
proceeds of the loan.
---------------------------------------------------------------------------

    An issue that is not addressed in the proposed rules is whether an 
interstate state bank should be required to disclose to its borrowers 
that the interest to be charged on a loan is governed by applicable 
federal law and the law of the relevant state which will govern the 
transaction. Such a disclosure was discussed in GC-11, to prevent 
uncertainty regarding which state's interest rate provisions apply to 
loans made by interstate state banks, and was also mentioned in the 
OCC's corresponding Interpretive Letter 822.\46\ The FDIC is interested 
in comments concerning whether this issue also should be addressed in 
section 331.4, as well as any benefits or burdens that would result 
from requiring such disclosure.
---------------------------------------------------------------------------

    \46\ OCC Interpretive Letter 822, February 17, 1998, reprinted 
in [Transfer Binder 1997-1998] Fed. Banking L. Rep. (CCH) ] 81-265.
---------------------------------------------------------------------------

    Section 331.5 addresses the effect of a state's election to 
exercise the authority provided by section 525 of DIDMCA (12 U.S.C. 
1831d note (Effective and Applicability Provisions) to ``opt-out'' of 
the federal authority provided by section 27.\47\ As proposed, section 
27 would not apply to an insured state bank or an interstate branch of 
a state bank that is situated in a state that has opted-out of the 
coverage of section 27. The FDIC believes that Iowa, Wisconsin and 
Puerto Rico are the only jurisdictions that currently use this 
authority.\48\ The FDIC welcomes additional information concerning 
these states or any other states that may have elected to opt-out under 
section 525.
---------------------------------------------------------------------------

    \47\ Section 525 states:
    The amendments made by sections 521 through 523 of this title 
shall apply only with respect to loans made in any State during the 
period beginning on April 1, 1980, and ending on the date, on or 
after April 1, 1980, on which such State adopts a law or certifies 
that the voters of such State have voted in favor of any provision, 
constitutional or otherwise, which states explicitly and by its 
terms that such State does not want the amendments made by such 
sections to apply with respect to loans made in such State, except 
that such amendments shall apply to a loan made on or after the date 
such law is adopted or such certification is made if such loan is 
made pursuant to a commitment to make such loan which was entered 
into on or after April 1, 1980, and prior to the date on which such 
law is adopted or such certification is made.
    \48\ Act of May 10, 1980, ch. 1156, section 32, 1980 Iowa Acts 
537, 547-48 (not codified); Act, ch. 45, section 50, 1981 Wis. Laws 
586 (not codified); 10 P.R. Laws Ann. section 9981 (2002). Some 
states, such as Nebraska, Massachusetts, Colorado, Maine and North 
Carolina, opted out for a number of years, but either rescinded 
their respective opt-out statutes or allowed them to expire.
---------------------------------------------------------------------------

    Since a state may elect to opt-out under section 525 at any time, 
the FDIC is also interested in comments addressing whether it would be 
beneficial to include a list of the states that have opted-out in the 
text of the rule. The FDIC recognizes that this would require revision 
of the rule whenever a state repeals its existing opt-out or enacts 
opt-out legislation regarding section 27 and that, due to the time 
involved in identifying such information and revising the regulation, 
this may result in the rule being inaccurate for a period of time. 
Thus, if commenters would like to have this information incorporated in 
the rule, the FDIC is also interested in comments or suggestions 
addressing how to assure the accuracy of the state information that 
would be contained therein.

IV. Request for Comment

    The FDIC is interested in comments on all aspects of the proposed 
rules, particularly responses to the specific questions posed in the 
above discussion of the proposed rule. In particular, we are interested 
in specific comments on whether the proposed rules would be either 
helpful or harmful to the industry and the public and, if so, how.

V. Paperwork Reduction Act

    No collections of information pursuant to the Paperwork Reduction 
Act (44 U.S.C. 3501 et seq.) are contained in the proposed rule. 
Consequently, no information has been submitted to the Office of 
Management and Budget for review.

VI. Regulatory Flexibility Act

    The FDIC certifies that this proposed rule would not have a 
significant economic impact on a substantial number of small businesses 
within the meaning of the Regulatory Flexibility Act (5 U.S.C. 605(b)). 
The proposed rule would clarify sections 24(j) and 27 of the FDI Act by 
indicating the state law that would apply in certain interstate banking 
activities conducted by state-chartered banks. The proposed rule would 
impose no new requirements or burdens on insured depository 
institutions. Also, it would not result in any adverse economic impact. 
Accordingly, the Act's requirements relating to an initial regulatory 
flexibility analysis is not applicable.

VII. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the proposed rule will not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, enacted as part of the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act of 1999 
(Pub. L. 105-277, 112 Stat. 2681).

List of Subjects

12 CFR Part 331

    Banks, banking, Deposits, Foreign banking, Interest rates.

12 CFR Part 362

    Administrative practice and procedure, Authority delegations 
(Government agencies), Bank deposit insurance, Banks, banking, 
Investments, Reporting and recordkeeping requirements.

    For the reasons stated above, the Board of Directors of the Federal 
Deposit Insurance Corporation hereby proposes to amend 12 CFR chapter 
III as follows:
    1. Part 331 is added to read as follows:

PART 331--FEDERAL INTEREST RATE AUTHORITY

Sec.
331.1 Authority, purpose and application.
331.2 Interest permitted for insured state banks.
331.3 Location of non-interstate state bank or insured branch.
331.4 Location and interest rate for interstate state bank.
331.5 Effect of opt-out.

    Authority: 12 U.S.C. 1819(a) (Tenth), 1820(g), 1831d, 1831d 
note.


Sec.  331.1  Authority, purpose and application.

    (a) Authority. The regulations in this part are issued by the FDIC 
under the authority contained in sections 9(a)(Tenth) and 10(g) of the 
Federal Deposit Insurance Act (12 U.S.C. 1819(a) (Tenth), 1820(g)) to 
implement section 27 of the FDI Act (12 U.S.C. 1831d) and related 
provisions of the Depository Institution Deregulation and Monetary 
Control Act of 1980, Public Law 96-221, 94 Stat. 132 (1980) 
(``DIDMCA'').
    (b) Purpose. Section 27 of the FDI Act was enacted to prevent 
discrimination against insured state-chartered banks

[[Page 60030]]

and insured U.S. branches of foreign banks with regard to interest 
rates by providing similar interest rate authority to that permitted 
for national banks under section 85 of the National Bank Act (12 U.S.C. 
85). To maintain parity with national banks in this area, the rules 
contained in this Part clarify that state banks have regulatory 
authority that is parallel to the authority provided to national banks 
under regulations issued by the Office of the Comptroller of the 
Currency implementing section 85. Other issues the FDIC considers 
appropriate to implement section 27 are also addressed in the rules.
    (c) Application. This Part applies to a ``state bank'' and an 
``insured branch,'' as those terms are defined in section 3(a)(2) and 
3(s)(3) of the FDI Act (12 U.S.C. 1813(a)(2); 1813(s)(3)), 
respectively. The reference to ``insured state banks'' in this Part, is 
a collective reference to ``state banks'' and ``insured branches.'' To 
maintain parity with national banks under section 85 of the National 
Bank Act, the FDIC will construe section 27 of the FDI Act and the 
regulations in this Part in the same manner as section 85 and its 
implementing regulations are construed by the Office of the Comptroller 
of the Currency.


Sec.  331.2  Interest permitted for insured state banks.

    (a) Definition. The term ``interest'', as used in 12 U.S.C. 1831d, 
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. It includes, among other things, the following fees connected 
with credit extension or availability: Numerical periodic rates, late 
fees, creditor-imposed not sufficient funds (NSF) fees charged when a 
borrower tenders payment on a debt with a check drawn on insufficient 
funds, overlimit fees, annual fees, cash advance fees, and membership 
fees. It does not ordinarily include appraisal fees, premiums and 
commissions attributable to insurance guaranteeing repayment of any 
extension of credit, finders' fees, fees for document preparation or 
notarization, or fees incurred to obtain credit reports.
    (b) Most favored lender. An insured state bank located in a state 
may charge interest at the maximum rate permitted to any state-
chartered or licensed lending institution by the law of that state. If 
state law permits different interest charges on specified classes of 
loans, an insured state bank making such loans is subject only to the 
provisions of state law relating to that class of loans that are 
material to the determination of the permitted interest. For example, 
an insured state bank may lawfully charge the highest rate permitted to 
be charged by a state-licensed small loan company, without being so 
licensed, but subject to state law limitations on the size of loans 
made by small loan companies.
    (c) Effect on state definitions of interest. The Federal definition 
of the term ``interest'' in paragraph (a) of this section does not 
change how interest is defined by the individual states (nor how the 
state definition of interest is used) solely for purposes of state law. 
For example, if late fees are not ``interest'' under state law where an 
insured state bank is located but state law permits its most favored 
lender to charge late fees, then an insured state bank located in that 
state may charge late fees to its intrastate customers. The insured 
state bank may also charge late fees to its interstate customers 
because the fees are interest under the Federal definition of interest 
and an allowable charge under state law where the insured state bank is 
located. However, the late fees would not be treated as interest for 
purposes of evaluating compliance with state usury limitations because 
state law excludes late fees when calculating the maximum interest that 
lending institutions may charge under those limitations.
    (d) Corporate borrowers. An insured state bank located in a state 
whose state law denies the defense of usury to a corporate borrower may 
charge a corporate borrower any rate of interest agreed upon by the 
corporate borrower.


Sec.  331.3  Location of non-interstate state bank or insured branch.

    (a) State bank. A state bank that does not maintain interstate 
branches or operates exclusively through the Internet is located, for 
purposes of applying 12 U.S.C. 1831d, in the state that issued the 
charter.
    (b) Insured branch. An insured branch of a foreign bank is located, 
for purposes of applying 12 U.S.C. 1831d, in the state that issued the 
license.


Sec.  331.4  Location and interest rate for interstate state bank.

    (a) Definitions. For purposes this section, the following terms 
have the following meanings:
    (1) Home state means the state that chartered a state bank.
    (2) Host state means a state, other than the home state of a state 
bank, in which the bank maintains a branch.
    (3) Non-ministerial functions are factors to be considered in 
determining where a loan is made by an interstate state bank. The non-
ministerial functions are:
    (i) Approval. The decision to extend credit occurs where the person 
is located who is charged with making the final judgment of approval or 
denial of credit.
    (ii) Disbursal. The location where the actual physical disbursement 
of the proceeds of the loan occurs, as opposed to the delivery of 
previously disbursed funds.
    (iii) Extension of credit. The site from which the first 
communication of final approval of the loan occurs.
    (b) Location. An interstate state bank is located, for purposes of 
applying 12 U.S.C. 1831d, in the home state of the state bank and in 
each host state where the state bank maintains a branch.
    (c) Location in more than one state. If a state bank is located in 
more than one state, the appropriate interest rate:
    (1) Will be determined by reference to the laws of the state where 
all of the non-ministerial functions occur;
    (2) May be determined by reference to the laws of the home state of 
the state bank, where the non-ministerial functions occur in branches 
located in different host states or any of the non-ministerial 
functions occur in a state where the state bank does not maintain a 
branch; or
    (3) May be determined by reference to the laws of a host state 
where a non-ministerial function occurs if, based on an assessment of 
all of the relevant facts and circumstances, the loan has a clear nexus 
to that host state.


Sec.  331.5  Effect of opt-out.

    12 U.S.C. 1831d does not apply to loans made to customers by an 
insured state bank or an interstate branch of a state bank situated in 
a state that elects to opt-out of the coverage of 12 U.S.C. 1831d, 
pursuant to section 525 of DIDMCA (12 U.S.C. 1831d note (Effective and 
Applicability Provisions).

PART 362--ACTIVITIES OF INSURED BANKS AND INSURED SAVINGS 
ASSOCIATIONS

    2. Revise the authority citation for part 362 to read as follows:

    Authority: 12 U.S.C. 1816, 1818, 1819(a)(Tenth), 1820(g), 
1828(j), 1828 (m), 1828a, 1831a, 1831d, 1831e, 1831w, 1843(l).

    3. Add new subpart F to read as follows:

Subpart F--Preemption


Sec.  362.19  Applicability of State Law.

    (a) Definitions. For purposes of this section the following 
definitions apply.
    (1) The term ``home State'' means (i) with respect to a State bank, 
the State

[[Page 60031]]

by which the bank is chartered, and (ii) with respect to a national 
bank, the State in which the main office of the bank is located.
    (2) The term ``host State'' means with respect to a bank, a State, 
other than the home State of the bank, in which the bank maintains, or 
seeks to establish and maintain, a branch.
    (3) The term ``out-of-State bank'' means, with respect to any 
State, a bank whose home State is another State.
    (4) The phrase ``activity conducted at a branch'' means an activity 
of, by, through, in, from, or substantially involving, a branch.
    (b) Except as provided in paragraph (c) of this section, the laws 
of a host State apply to an activity conducted at a branch in the host 
State by an out-of-State, State bank.
    (c) A host State law does not apply to an activity conducted at a 
branch in the host State of an out-of-State, State bank to the same 
extent that a Federal court or the Office of the Comptroller of the 
Currency has determined in writing that the particular host State law 
does not apply to an activity conducted at a branch in the host State 
of an out-of-State, national bank. If a particular host State law does 
not apply to such activity of an out-of-State, State bank because of 
the preceding sentence, the home State law of the out-of-State, State 
bank applies.
    (d) Subject to the restrictions of subparts A through E of this 
part 362, an out-of-State, State bank that has a branch in a host State 
may conduct any activity at such branch that is permissible under its 
home State law, if it is either
    (1) Permissible for a bank chartered by the host State, or
    (2) Permissible for a branch in the host State of an out-of-State, 
national bank.
    (e) Savings provision. No provision of this section shall be 
construed as affecting the applicability of--
    (1) Any State law of any home State under subsection (b), (c), or 
(d) of 12 U.S.C. 1831u; or
    (2) Federal law to State banks and State bank branches in the home 
State or the host State.

    Dated at Washington DC, this 6th day of October, 2005.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 05-20582 Filed 10-13-05; 8:45 am]
BILLING CODE 6714-01-P