The Office of the Comptroller of the Currency has made it tougher for states to cap interest rates charged by interstate branches.
In an interpretive letter issued Tuesday, the agency said national banks must adhere only to those interest rate restrictions imposed by the state where they are headquartered, provided the bank makes at least some key lending decisions in that state. They do not have to abide by interest rate caps imposed by other states where they have branches.
"This is a huge development," said Alan S. Kaplinsky, a partner at the Philadelphia law firm Ballard, Spahr, Andrews & Ingersoll, who asked for the ruling on behalf of Huntington National Bank. "Banks have been embarking on interstate branching under a cloud."
Since the advent of interstate branching in 1994, banks have wrestled with whether branches are subject to interest rate restrictions imposed by the state where the branch is located or where the company is headquartered, he said.
His Columbus, Ohio-based client has branches in Kentucky, Florida, Indiana, Michigan, and West Virginia.
In its letter, the agency said at least one of three key lending activities must be based in the bank's home state. Those activities are approval of credit, notification of approval, and disbursal of funds.
"We wanted to fill in another piece of the puzzle for banks with multistate operations," said Julie L. Williams, the OCC's general counsel. "Generally we will look to a home state's interest rate law unless you have all of the three key activities in the host state."
David Roderer, an attorney with Goodwin, Procter & Hoar, said the decision should be a boon to banks. "National banks are now free to structure their lending operations to take advantage of either a home state's or a host state's usury ceiling," he said.
But state banking officials complained the OCC made it too easy to get around interest rate restrictions.
"We are very concerned about preserving authority of host state consumer regulators," said Charles W. Phillips, director of the Indiana Department of Financial Institutions.
A host state's interest rate rules should apply any time a branch disburses cash to customers, Mr. Phillips said.
But Ms. Williams said Congress clearly provided broad authority for multistate banks to rely on the interest rules of their home states when it passed the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. "The mere presence of a host state branch does not defeat the ability of a national bank to apply its home state's rates," she wrote in her letter.
Ms. Williams also laid out criteria for determining if the key lending decisions are made in the home state.
Loan approvals are considered located in the home state if the person responsible for making the final judgment is based in the bank's headquarters or uses a credit-scoring model developed in the bank's home state.
Notification of approval is a home state function if conducted by an official at the headquarters. A loan closing conducted at the branch after notification would not prevent a bank from using home state rates. "Congress explicitly provided that the closing of loans, as long as that did not implicate approval or disbursal, was to be considered a ministerial function," Ms. Williams said.
Finally, disbursal of funds would be considered a home state function unless it was made to the customer in person or credited to an account at the branch. Loans disbursed to escrow or title agents would be considered home state activities.