Background:

Financial Institution Charters.

A charter determines the "primary" regulator of a financial institution and may impact the powers of the financial institution. A financial institution may choose to be chartered by the federal government or the state. It also may choose to change charters from one regulator to the other.

National Bank Regulation

A "national bank" is a bank that is federally chartered by the Office of the Comptroller of Currency (OCC) under the National Bank Act (NBA). Until 1978, national banks followed the usury laws of the states where they were physically located. If they issued a credit card to a person in Washington, they would charge an interest rate up to Washington's usury rate. In 1978, the U.S. Supreme Court held that NBA meant that a national bank could "export" the usury rate allowed from its home state to another state if the loan is made in the home state. This changed the way the "location" was interpreted by lenders, regulators, and courts. A court would look at a host of factors to determine where a loan is made including where a loan was approved, where credit was extended, and where the funds are disbursed. The location where the borrower resided was a factor but not likely to be as important as the location of the lender's operations. For example, a national bank with credit card operations based in California who issued a credit card to a Washingtonian would probably be able to charge the Washington resident interest up to the usury rate in Washington or California whichever was higher.

The interpretation of the NBA by courts lead the OCC to conclude that a national bank may charge "the most favored lender rates permitted by the state and may charge the permissible interest rates irrespective of the state of residence of the borrower." Over time, the OCC adopted a number of rules purporting to preempt state authority over a number of areas. This subject of state preemption has been before the United States Supreme Court a number of times in recent years.

State Bank Regulation

A state bank is a bank chartered by this state. The state can impose any limits of interest on a bank charted by the state. In response to the evolution of national bank lending practices, the state eventually passed "parity" legislation allowing state banks to charge what a national bank is allowed to charge.

Other Financial Institutions

An analogous evolution of authority regarding other federally regulated financial institutions also occurred with federal regulators purporting to preempt state restrictions on federally chartered institutions. The state adopted similar "parity" provisions for state chartered institutions. It should be noted that some different federal regulations also impact lending by federal credit unions and their allowable rate of interest.

State usury rate

State law prohibits interest from exceeding the higher of:

twelve percent per annum; or
four percentage points above the equivalent coupon issue yield (as published by the Board of Governors of the Federal Reserve System) of the average bill rate for twenty-six week treasury bills as determined at the first bill market auction conducted during the calendar month immediately preceding the later of (1) the establishment of the interest rate by written agreement of the parties to the contract, or (2) any adjustment in the interest rate in the case of a written agreement permitting an adjustment in the interest rate.

There are a number of exceptions to the usury rate.