The New Hampshire Banking Department (NHBD) recently invalidated as "unfair" an interest rate expressly authorized by state usury law in a ruling that could trigger challenges to credit card fees, bank fees for overdraft protection, and even markups on consumer goods.

The NHBD ruling on January 6, 2009, may be the first decision in which an interest rate permitted -- indeed, expressly authorized -- by state usury law has been invalidated as an unfair practice under a state unfair or deceptive acts or practices act. The NHBD, in rejecting a lender's request for a no action letter or declaratory ruling that its credit line product complied with state law, instead found that the APR to be charged by the lender would be "unfair" under New Hampshire's Consumer Protection Act (CPA). The ruling ignored the New Hampshire Small Loan Act, which authorizes licensees to charge interest on small loans at a rate agreed upon in writing by borrower and lender.

The ruling involved a product offered by a payday lender, who argued that its proposed credit line qualified as a small loan, making it subject to the "as agreed" rate cap rather than New Hampshire's 36 percent rate cap for payday loans. The NHBD, however, found a determination of the credit line's status to be unnecessary. According to the NHBD, the credit line's APR of 365 percent or more was within a "penumbra of unfairness" and was "unreasonable." As a result, the credit line was deemed unlawful even if it were a small loan. Furthermore, the NHBD found that "any small loan product" providing for an APR of 365 percent or more was unfair and could not be offered to New Hampshire consumers.

While the ruling involved a product offered by a payday lender, the NHBD's analysis presents a serious risk for all providers of financial services and other consumer products, including banks and other depository institutions. For example, it could embolden other state regulators, as well as plaintiffs' attorneys, to challenge as an unfair trade practice interest rates and fees charged on credit cards because an APR or overlimit fee is considered to be too high. In addition, the NHBD's analysis could support an attack on deposit product fees, most notably fees on funds advanced by banks to cover overdrafts. Markups on consumer goods could be challenged on the same basis. Indeed, the approach used by the NHBD threatens to replace clear and understandable rules with an inchoate and unpredictable "eye of the beholder" test.

Ballard Spahr's Consumer Financial Services Group regularly assists lenders and other providers of financial services in defending against regulatory actions that threaten their proposed or existing business practices. For a copy of the New Hampshire ruling or further information, please contact Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; or Barbara Mishkin, 215.864.8528 or mishkinb@ballardspahr.com.


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