• OCC Rules on Operating Subsidiary Interest Rate Exportation
  • August 26, 2008 | Author: Timothy R. McTaggart
  • Law Firms: Pepper Hamilton LLP - Washington Office ; Pepper Hamilton LLP - Philadelphia Office
  • The Office of the Comptroller of the Currency (OCC) has recently released Interpretive Letter No. 1100, which addresses the authority of operating subsidiaries of national banks to export interest rates. Under the facts presented, the operating subsidiary would conduct its operations through offices located in one or more states, but no offices would be located in the home state of the parent national bank. The OCC held that because operating subsidiaries conduct their activities on the same terms and conditions as their parent banks, and state laws apply to operating subsidiaries only to the extent that they apply to their parent banks, the operating subsidiary should be able to step into the shoes of the national bank parent for purposes of interest rate exportation. Thus, the OCC concluded, “the interest rates and fees constituting interest that may be imposed by the operating subsidiary permissibly should be based on the usury laws of the parent bank’s home state, even though the operating subsidiary itself has no offices in that home state.”

    Pepper Points – This interpretive letter expands upon prior OCC precedent, and is consistent with an interpretive letter addressing nearly identical facts issued by the Office of Thrift Supervision in 2006. OTS-P-2006-6 (July 20, 2007). In addition to allowing national bank operating subsidiaries to achieve competitive parity with federal savings associations, this letter will also strengthen the attractiveness of the national bank charter, and is a logical (and expected) next step in the development of preemption that has been brewing over the last year.

    In a series of recent court decisions, starting from Watters v. Wachovia in April 2007, holding that national bank operating subsidiaries are exempt from state licensing and supervision under federal preemption, to several federal appellate court opinions holding that similar preemption applies to agents of national banks, the national bank charter has increasingly emerged as the charter of choice for interstate lending. Now, according to the OCC interpretation, not only may a national bank enjoy the benefits of limited liability that operating subsidiaries provide, the national bank may also export interest rates through those operating subsidiaries without regard to the interest rate laws of the borrower’s state of residence. This will give national banks even more options in locating their work force and facilities, much to the chagrin of “leading” credit card states such as Delaware, South Dakota, Georgia, Nevada, and others. For example, under general exportation rules, a national bank likely will chose as its “home state” (the state where its principal office is located), a state with the most comprehensive and flexible interest rate laws. With this ruling, the bank now may select a state, apart from the home state, that is most conducive to its workforce planning (e.g., personnel, resources, infrastructure, etc.) to locate a lending operating subsidiary.

    This added benefit for the national bank charter should move the FDIC to revisit its operating subsidiary rulemaking, as the OCC has yet again illustrated the competitive advantage of the national bank charter over the state bank charter.