The following article is reprinted from Basis Points® , Vol. 2, Issue 3, Copyright © 2003, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

In a recent letter, the OCC has opined that an operating subsidiary of a national bank has the same authority to export interest as its parent national bank. This letter may encourage any number of banks to shift portions of their direct lending business to one or more operating subsidiaries. This is particularly true of business where there is presently no federal preemption of state limits on usury, such as junior lien mortgage lending and personal property lending. It is also true of any type of lending where the lender wants the ability to impose prepayment penalties. Under the doctrine of exportation, a lender can take the interest authority it has in the state where the loan is made and charge that interest to borrowers in any other state. "Interest" has been defined by regulation to include periodic interest, as well as such incidental charges as annual fees, loan origination fees, overlimit fees, NSF fees, late fees and prepayment penalties.

The OCC noted that an operating subsidiary, by definition, may only engage in activities permitted to its bank parent. Under the OCC regulations, state laws apply to a national bank operating subsidiary to the same extent as those laws apply to the parent national bank. Because of this, the OCC has described operating subsidiaries as the equivalent of a department or division of the parent bank. In its latest letter on the topic, the OCC takes the next step to argue that operating subsidiaries should be subject to the same Federal laws and standards that govern the parent national bank.

One such law is 12 USC § 85. Section 85 authorizes a national bank to charge interest at the greater of the rate allowed by the state in which the national bank is located or a rate equal to one point over the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District where the national bank is located. The first half of this equation (the rate allowed by the state in which the national bank is located) has been read by the courts to give national banks access to the "most favored rate" available to any lender for the same type of loan under state law, whether a bank, a licensed lender, or any other type of lender. This is the origin of both the "Most Favored Lender" doctrine and the "Doctrine of Exportation," the Two Towers of bank rate authority. Together they give a national bank the authority to select the most favored, or highest, rate authority available in the bank's home state and permit the bank to charge that rate to any borrower, regardless of where the borrower may be located.

Is this the last word on the topic? Well, it took JR Tolkien more than three books to tell the epic story of the rise and fall of the power of the Twin Towers over Middle Earth and one suspects that a three page letter from the OCC may not be the last word on this topic. For example, the Letter does not identify a federal statute that authorizes national banks to establish operating subsidiaries let alone a federal statute that conveys all of the preemptive powers available to national banks to their operating subsidiaries. Nor does it identify the federal statute that authorizes the OCC to convey those powers to operating subsidiaries as it sees fit. The best the Letter can do is cite to a provision in the Gramm-Leach-Bliley Act that defines a "financial subsidiary" as something other than "a subsidiary that engages solely in activities that national banks are permitted to engage in directly and are conducted subject to the same terms and conditions that govern the conduct of such activities by national banks[.]" 12 USC 24a(g)(3). If that is, in fact, the best expression of the statutory foundation for the argument that an operating subsidiary can export interest, then the court's may be reviewing this topic for years to come.

For more information, see OCC Interpretive Letter #954, February 2003 (www.occ.treas.gov/interp/feb03/int954.pdf).

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