February 5, 1990
Hon. John B. Larson
President Pro Tempore
Hon. Richard J. Balducci
Speaker of the House
Connecticut General Assembly
Legislative Office Building
Hartford, CT 06106
Dear Messrs. Larson and Balducci:
This is in response to your request for an opinion from this office regarding the constitutionality of provisions of the proposed interstate banking bill which would set interest rate caps on credit cards as a condition of entry by out-of-state bank holding companies, out-of-state savings and loan holding companies, out-of-state banks, out-of-state savings banks, and out-of-state savings and loan associations.
Under the pertinent provisions of the bill, an out-of-state holding company, bank, savings bank, or savings and loan association (“S&L”‘) may not acquire or establish a Connecticut financial institution unless the Connecticut Commissioner of Banking finds inter alia that such out-of-state holding company, bank, savings bank or S&L
agrees, as an express condition of approval of such acquisition or establishment, that all banking and related services originating outside of this state which are offered or provided through the mails by such [holding company, bank, savings bank or S&L], or by any subsidiary of such [holding company, bank, savings bank or S&L], to customers residing in this state, including, but not limited to, the extension of credit, shall comply with the law of this state.
See §§ 2(a)(D), 2(b)(D), 3(5), 4(a)(D) and 5(a)(5) of proposed bill.
Under this provision, out-of-state holding companies, banks, savings banks, S&L’s, and their subsidiaries would be required to comply with Conn. Gen. Stat. § 42-133c which sets the maximum interest rate which may be charged on open-end credit plans (credit cards). In this regard Conn. Gen. Stat. § 42-133c(a) as amended by 1989 Conn. Pub. Act 89-37 provides
(a) Notwithstanding any contrary provision of law, the maximum finance charge which may be applied under an open-end credit plan, as defined in subdivision (h) of section 36-393, in connection with a transaction arising out of a retail sale of consumer goods or services shall not exceed one and one-quarter per cent per month on the average daily balance of the account or the unpaid balance outstanding as of the end of the current billing cycle, except a retail seller may apply a finance charge on any such open-end credit plan, in connection with a transaction arising out of the retail sale of consumer goods or services on sales made on or after the effective date of this act, which shall not exceed one and one-half per cent per month on the average daily balance of the account or the unpaid balance outstanding as of the end of the current billing cycle. for purposes of this section, “retail seller”‘ means a person who (1) sells or agrees to sell one or more articles of goods or furnishes services under an open-credit plan which does not provide for the payment of an annual or periodic membership fee or participation fee, and (2) is the creditor to whom the debt is initially payable on the face of the agreement of indebtedness. Regardless of any agreement to the contrary, a transaction under an open-end credit plan is subject to this section whenever a solicitation for the extension of credit is made by a creditor whose primary activity in Connecticut is soliciting Connecticut customers through the mails, and such solicitation originates outside Connecticut but is directed to and received by a customer who resides, and responds to such solicitation, in Connecticut.
It is our opinion that, insofar as the bill would apply the provisions of Conn. Gen. Stat. § 42-133c to all out-of-state institutions marketing credit cards to Connecticut residents, it would be preempted by federal laws regulating interest rates.
The Supremacy Clause of the Constitution declares the law of the United States to be “the Supreme Law of the Land … any Thing in the Constitution or laws of any State to the Contrary notwithstanding.”‘ U.S. Const. art. VI, cl. 2. Preemption may be either express or implied. Congress may by explicit statutory language declare the extent to which it intends to preempt certain state laws, Fidelity Federal Savings & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 152-53 (1982), Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977), or, in the absence of explicit Congressional guidance, the courts may
infer such intent where Congress has legislated comprehensively to occupy an entire field of regulation, leaving no room for the States to supplement federal law, Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947), or where the state law at issue conflicts with federal law, either because it is impossible to comply with both, Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-143 (1963), or because the state law stands as an obstacle to the accomplishment and execution of congressional objectives, Hines v. Davidowitz, 312 U.S. 52, 67 (1941).
Northwest Central Pipeline Corp. v. Kansas Corporation Comm’n, — U.S. —, 109 S.Ct. 1262, 1273 (1989).
In Marquette National Bank v. First Omaha Service Corporation, 439 U.S. 299 (1978), the Supreme Court held that the interest rate that a national bank may charge in a credit card program is governed by federal law, not state law. Under 12 U.S.C. § 85, national banks may charge the federal discount rate plus one percent or the rate permitted in the state in which they are located, whichever is greater. This is referred to as the “most favored lender doctrine.”‘
In the Depository Institutions Deregulation and Monetary Control Act of 1980 (“DIDMCA”‘), Pub. L. 96-221, Congress extended the most favored lender doctrine to federally insured savings and loan associations, federally insured credit unions, and federally insured state-chartered depository institutions including savings banks and insured branches of foreign banks. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”‘), Pub. L. 101-73, reaffirmed the most favored lender doctrine and consolidated all state-chartered institutions including banks and savings associations under 12 U.S.C. § 1831d. The explicit preemption provision of this statute could not be clearer.
In order to prevent discrimination against State-chartered insured depository institutions, including insured savings banks, or insured branches of foreign banks with respect to interest rates, if the applicable rate prescribed in this subsection exceeds the rate such State bank or insured branch of a foreign bank would be permitted to charge in the absence of this subsection, such State bank or such insured branch of a foreign bank may, notwithstanding any State constitution or statute which is hereby preempted for the purposes of this section, take, receive, reserve, and charge on any loan or discount made, or upon any note, bill of exchange, or other evidence of debt, interest at a rate of not more than 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal Reserve bank in the Federal Reserve district where such State bank or such insured branch of a foreign bank is located or at the rate allowed by the laws of the State, territory, or district where the bank is located, whichever may be greater.
12 U.S.C. § 1831d(a) (1989) (emphasis added).
Thus, under the Marquette ruling and the language of 12 U.S.C. § 1831d, federal law, not state law, governs the interest rate that banking institutions may charge, and federal law states that such institutions may charge the rate permitted by law in the state where they are located, regardless of where the customer resides.
The practical effect of the most favored lender doctrine was to allow holding companies, banks, and thrift institutions to move their credit card operations to states where interest rates are essentially unregulated and apply or export those rates to other states. SeeIndependent Community Bankers Association of South Dakota v. Board of Governors of the Federal Reserve System, 838 F.2d 969, 970 (8th Cir. 1988).
The issue presented by the provisions of the interstate banking bill incorporating Conn. Gen. Stat. § 42-133c is whether federal deference to state law in the area of interstate banking allows the state to overcome the express preemption of state law in 12 U.S.C. § 1831d and the implied preemption which the Marquette case found in 12 U.S.C. § 85. The answer appears to be no.
In the Douglas Amendment to the Banking Holding Company Act, 12 U.S.C. § 1842(d),1 Congress gave the states the authority to permit or deny out-of-state institutions the right to acquire or establish banks within their own borders, Northeast Bancorp, Inc. v. Board of Governors of the Federal Reserve System, 472 U.S. 159 (1985), and to impose conditions on that right of entry. Id. at 173. While the cases are not in agreement on the type of restrictions the states may impose, Independent Community Bankers Association, 838 F.2d at 976-77, Cf. Independent Community Bankers Association v. Board of Governors of the Federal Reserve System, 820 F.2d 428 (D.C. Cir. 1987), there is clear agreement that the Douglas Amendment does not authorize the states to impose conditions on entry of out-of-state banks and bank holding companies which explicitly conflict with other federal banking laws. Independent Community Bankers Association, 838 F.2d at 973; Independent Community Bankers Association, 820 F.2d at 438.
Neither the language of the [Douglas] Amendment nor its legislative history indicates an intention to abrogate extant federal banking law governing bank holding companies and their subsidiary nationally chartered banks.
In other words, the states are only authorized to lift the bar of the Douglas Amendment and allow interstate banking in a manner which does not conflict with other federal regulatory statutes. Here, the proposed bill attempts to impose the Connecticut law governing interest rates to institutions not located in Connecticut. This conflicts with the federal regulatory scheme embodied in 12 U.S.C. § 85 and 12 U.S.C. § 1831d.
In conclusion, current federal law would preempt the interest rate cap provisions of the bill and federal deference to state law in the area of interstate banking would not give the General Assembly the authority to impose an interest rate cap on all out-of-state institutions governed by 12 U.S.C. § 85 and 12 U.S.C. § 1831d.
Very truly yours,
CLARINE NARDI RIDDLE
William B. Gundling
Associate Attorney General
1 Section 3 of the Bank Holding Company Act requires that any acquisition of control of a bank by a corporation or partnership must be approved by the Federal Reserve Board. The Douglas Amendment precludes the Federal Reserve Board from granting such approval “unless the acquisition of … a state bank by an out of state bank holding company is specifically authorized by the statute laws of the state in which such bank is located by language to that effect and not merely by implication.”‘ 12 U.S.C. § 1842(d). A virtually identical provision exists for savings and loan holding companies in 12 U.S.C. § 1467a(e)(3).