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Consumer Credit Regulation: 3.5.6.1 Introduction

The rules governing rate exportation determine which state’s laws apply to the charging of interest. The definition of “interest” thus is critical to application of rate exportation. If a fee or charge is not interest, then different preemption rules apply.702

Consumer Credit Regulation: 3.5.6.2 OCC and FDIC Definition of Interest

OCC and FDIC regulations define interest for purposes of national bank and federal savings association rate exportation as “any payment compensating a creditor or prospective creditor for an extension of credit, making available a line of credit, or any default or breach by a borrower of a condition upon which credit was extended.”707 The regulations pointedly state that this definition does not affect state law definitions of interest for purposes of state law interest rate limits.

Consumer Credit Regulation: 3.5.6.3 Definition of Interest: The Supreme Court’s Smiley Decision and Subsequent Court Rulings

Support for the OCC definition of interest is found in the Supreme Court’s decision in Smiley v. Citibank, where the Court found the OCC interpretation to be reasonable and also gave deference to an OCC ruling finding late fees to be interest.720 The Court drew a distinction between “payment compensating a creditor or prospective creditor for an extension of credit, making available of a line of credit, or any default or breach by a borrower” and all other payments.

Consumer Credit Regulation: 3.5.7 Remedies Where Rate Exceeds Depository’s Home State Cap

If a national bank or federal savings association charges a rate in excess of the amount allowed by applicable federal law (i.e., the amount allowed by the depository’s home state), the consumer’s remedy is under federal law.735 The operation of the remedy is more complicated in the case of state-chartered depositories, who can charge the higher of their home state rate (via rate exportation) or the applicable rate based on the choice of laws of the host state.

Consumer Credit Regulation: 3.6.1 General

The most favored lender doctrine provides that a depository will use as the applicable interest rate ceiling for a particular state the highest rate that any state-chartered or licensed lender in that state can utilize for a particular class of loans.

Consumer Credit Regulation: 3.6.5 Most Favored State Rate Must Be for Same Type of Loan

Depositories that invoke the most favored lender doctrine cannot charge the highest interest rate that a lender is permitted to charge for any type of loan, but only the rate which competing lenders may use when issuing the same type of loan.762 A bank may not use finance company rates if it is making a type of loan that finance companies are not authorized to make, because the finance companies do not compete with the bank for that type of loan.

Consumer Credit Regulation: 3.6.6 Most Favored Lender Rate Calculation Must Include “Material” State Restrictions

A depository institution that uses a most favored lender rate must comply with any statutory restrictions which are “material” to a determination of the interest rate on that type of loan.770 If state law permits finance companies to issue high interest loans, but restricts their associated loan fees, a national bank cannot adopt only the state interest rate without complying with the fee restrictions, because these restrictions are “material” to the interest rate allowed on the loan.

Consumer Credit Regulation: 3.7.2 Scope of State Parity Statutes

Typically, all depository institutions in a state will be covered by one parity statute or another, but the statutes may not apply to branches located in the state of out-of-state, state-chartered banks. 789 For example, a parity statute may apply to “state-chartered” banks, and “state-chartered” will either be defined or assumed to be only applying to banks chartered in that state.

Consumer Credit Regulation: 3.8.2 DIDA Interest Rate Preemption

The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA) preempts state laws limiting interest rates on first mortgage loans,804 and this DIDA provision applies to manufactured home credit.805 For preemption to be applicable, the manufactured home creditor must either be a “qualified lender” or the manufactured home creditor must sell the loan to a qualified lender.

Consumer Credit Regulation: 3.8.4 FHA-Insured and VA-Insured Manufactured Home Loans

The Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) are authorized to insure loans for the purchase or improvement of manufactured homes,831 and state interest ceilings are preempted for these loans.832 For FHA-insured loans, the preemption of state law applies to the “amount of interest”833 while the VA preemption applies to statutes that limit the rate or amount of interest, the manner of calculating that interest