In a troubling decision issued on August 7, 2009, Thomas v. US Bank National Association ND, the Eighth Circuit has cast doubt on whether state banks compete on a level playing field with national banks as to interest charges. The decision holds that Section 27 of the Federal Deposit Insurance Act does not completely preempt state law usury claims asserted against an FDIC-insured state-chartered bank, at least when state law authorizes a periodic rate of interest as high or higher than the periodic rate specified in Section 27.

The plaintiffs' complaint, which was initially filed in Missouri state court, alleged that FirstPlus Bank, a now defunct FDIC-insured California state-chartered bank, had charged unlawful broker's or finder's fees and closing costs in violation of the Missouri Second Mortgage Loan Act (MSMLA). The defendants included several national banks to whom the plaintiffs' mortgage loans had been assigned. Relying on complete preemption under Section 27, the defendants removed the case to the federal district court. The district court denied the plaintiffs' motion to remand the case to state court and dismissed the complaint.

The Eighth Circuit reversed. It focused on language in Section 27 that limits its reach to situations where "the applicable rate prescribed in [Section 27(a)] exceeds the rate such State bank or insured branch of a foreign bank would be permitted to charge in the absence of this subsection."  Because the MSMLA authorized an unlimited periodic rate of interest, the court concluded that Section 27 did not apply. The Eighth Circuit acknowledged that its decision conflicted with the Fourth Circuit’s 2007 decision in Discover Bank v. Vaden, where Ballard Spahr attorneys successfully argued that Section 27 completely preempted the plaintiff’s Maryland usury law claims.

We believe the Eighth Circuit decision erred in at least two cardinal respects:

  • It ignored numerous cases, as well as interpretive guidance from the federal banking agencies, holding that Section 27 should be interpreted the same for state banks as Section 85 of the National Bank Act is interpreted for national banks. The U.S. Supreme Court has made clear that Section 85 completely preempts state-law usury claims against national banks.
  • It effectively ignored Smiley v. Citibank. In Smiley, the Supreme Court held that a host of charges identified by Comptroller of the Currency, not just the periodic rate of interest, are "interest" charges that can be charged nationwide by a national bank at the rate allowed by the law of the state where the bank is located. The Eighth Circuit failed to consider whether Section 27 authorized for FirstPlus Bank any interest charges that are not permitted by the MSMLA. If so, Section 27 is fully applicable and completely preempts any limits on interest charges contained in the MSMLA.

In addition, the Eighth Circuit rejected the argument that the MSMLA claims were completely preempted by Section 85 as to national bank assignees of the loans in question. Instead of focusing on Section 85, the court relied upon a provision of the Truth in Lending Act that makes assignees of high-cost HOEPA loans subject to any claims that could have been asserted against the original lender.

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Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documentation of new consumer financial services products, its assistance with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).

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