SHERMAN V. CITIBANK (SOUTH DAKOTA), N.A.
Case Date: 11/28/1995
Docket No: SYLLABUS
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(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
(NOTE: This is a companion case to Hunter v. Greenwood Trust Co., also decided today.)
Argued February 15, 1995 -- Decided November 28, 1995
HANDLER, J., writing for a majority of the Court.
Marc Sherman, a named party in a class-action suit, challenges the legality of the late-payment fees
that are charged to New Jersey holders of Citibank (South Dakota) credit cards. Sherman claims that: New
Jersey's Retail Installment Sales Act of 1960 (RISA) forbids national banks that issue credit-cards to New
Jersey customers from charging late-payment fees; Citibank's failure to disclose in its cardmember
agreements and advertisements that late-payment fees are prohibited by New Jersey law violates the New
Jersey's Consumer Fraud Act; and the imposition of the late-payment fees constitutes a common-law breach
of contract and conversion.
Citibank relies on section 85 of the National Bank Act (NBA), which provides that a national bank
may charge borrowers "interest" at a rate allowed by the laws of the State... where the bank is located."
Citibank is a national bank chartered in South Dakota, and South Dakota includes late-payment fees in its
statutory definition of "interest." Citibank contends that Sherman's RISA claim, as well as his other claims,
conflict with, and are preempted by, section 85 of the NBA. Therefore, according to Citibank, it can charge
late-payment fees in New Jersey
Following the institution of suit, the Law Division granted Citibank's motion to dismiss the complaint
with prejudice. The Appellate Division affirmed. The Supreme Court granted Sherman's petition for
certification.
HELD: Late-payment fees are not "interest" within the intent and purpose of section 85 of the National Bank
Act. Rather, "interest at a rate allowed by the laws of the State... where the bank is located" refers
only to the periodic percentage rate charged on outstanding balances. Therefore, Marc Sherman's
state-law defenses to Citibank's charges do not conflict with federal law, are not preempted, and the
late-payment fees are illegal under New Jersey law.
1. In the area of state usury-law restrictions on lending practices, compelling evidence of an intention by
Congress to preempt state law is required. Because Congress failed to include an express preemption clause
in section 85, the Court addresses whether the NBA conflicts with RISA's prohibition of late-payment fees.
On its face, section 85 immunizes national banks that lend money beyond their home-state's borders from
local usury laws that might give local banks a competitive advantage. However, neither the plain meaning of
the terms "rate" and "interest" in section 85, nor the legislative history of that provision, indicates that these
terms carry the expansive meaning inferred by Citibank. (pp. 5-7)
2. Since 1874, section 85 has been interpreted as entitling a national bank to charge the highest interest rate
allowed to lenders by the laws of the state in which the bank is located. This borrowing of an interest rate is
known as the "most-favored-lender" doctrine. In Marquette National Bank v. First of Omaha Service Corp.,
the national bank's authorized exportation of lending terms was limited to numerical percentage-rate interest
terms. The Supreme Court made no mention of the exportation of other credit-card terms, such as late
charges, nor did its reasoning or rationale imply that discrete and specialized charges affixed to credit-card
loans could be imposed on customers in other states. (pp. 7-10)
4. Citibank relies on cases from other jurisdictions, specifically, Greenwood Trust v. Massachusetts and
Tikkanen v. Citibank (South Dakota), N.A., to support its expansive interpretation of "interest." Those cases,
however, do not support the conclusion that Congress intended to include non-interest rate charges in its
understanding of interest. Further, Smiley v. Citibank, to which Citibank and the dissent refer, does not
support the position that interest under section 85 includes late charges. The most-favored-lender doctrine
serves to eliminate discrimination without distorting or extending the meaning of interest to include charges
that Congress neither expressly nor implicitly incorporated in the definition of interest. (pp. 15-22)
5. The interpretative ruling of the Office of the Controller of the Currency (OCC), the agency charged with
enforcement of the NBA, is not strong evidence that late fees constitute interest for purposes of the NBA.
The soundness of this ruling and its value as authority are greatly undermined when placed in the context of
conflicting OCC rulings. An examination of OCC interpretative letters reveals significant inconsistent
administrative treatment of interest in respect of the NBA. (pp. 22-26)
6. On March 7, 1995, RISA was amended to specifically allow for late-fee charges on retail charge accounts.
Because the amendment became effective on May 29, 1995, for purposes of this appeal, Citibank's late-fee
charges were illegal under RISA. Nonetheless, the amendment indicates that the Legislature did not intend
to include late-fee charges within its definition of interest; rather, it expressly specified when and under what
conditions other non-percentage rate changes could be procured by lenders in addition to annual interest rate
charges. The manner in which both the Legislature and the Department of Banking have chosen to regulate
lender-authorized charges clearly supports the conclusion that late fees are distinct from interest. The
dissent's reasoning in opposition obscures the clear language and structure of the legislative treatment of
interest and late fees. (pp. 28-29)
7. The New Jersey Bank Parity Act (Parity Act) provides for parity between the rates of interest charged by
banks and credit unions, but does not explicitly authorize banks to charge other types of fees. There is no
indication that the Legislature implicitly intended other lender-imposed fees in the Parity Act, nor is there
course of regulatory conduct that reflects a clear and consistent administrative understanding as evidence of
an underlying legislative intent to include such fees. Thus, neither Congress, in passing the NBA, nor the
New Jersey Legislature, through the Parity Act, intended to include late fees in its definition of interest for
the purpose of preventing discrimination against out-of-state lenders. (pp. 30-34)
8. A plain reading of the NBA, as well as most cases that interpret it, indicate that a national bank is
permitted to charge the interest rate of the state in which it is located, not the interest rate of the state in
which the out-of-state customer is located. Here, RISA does not conflict with the most-favored-lender
doctrine. Thus, New Jersey should be permitted to prohibit out-of-state lenders from charging late-fees to
New Jersey residents, because, at the outset of this case, New Jersey banks were also prohibited from
charging those fees. Therefore, Citibank's late-fee charges violated this State's usury laws and are
impermissible. (pp. 34-39)
Judgment of the Appellate Division is REVERSED.
JUSTICE POLLOCK, dissenting, in which JUSTICE GARIBALDI joins, notes that recent federal
cases, Greenwood Trust Co. v. Massachusetts and Tikkanen v. Citibank (South Dakota), N.A., support the
conclusion that "interest" includes late fees and that an out-of-state bank can export those fees. Furthermore,
Congress intended to delegate to the OCC the authority to implement the goals of the NBA. As such,
federal banking regulators are in a better position than state courts to define the meaning of interest in the
NBA. The evolution of the OCC's analysis does not render its opinion unworthy of judicial deference in
defining "interest" to include late payment fees. The OCC has made a reasonable choice among possible
definitions of interest, and has consistently determined that late-payment and certain other non-periodic fees
are interest for the purposes of section 85. Because Justice Pollock believes that section 85's definition of
"interest" includes late fees, he also addresses whether Congress intended that the NBA, as interpreted by the
OCC, should preempt state law. Given the pervasive role that Congress has entrusted to federal banking
regulators, consistent regulatory rulings on preemption should be respected. Close analysis of New Jersey
law, moreover, reveals that RISA impermissibly interferes with the Congressional goal of preventing states
from discriminating against national banks. Under the Parity Act, state banks, like national banks, may
charge late fees as interest; therefore, the definition of interest in the Parity Act includes late fees. Because
state-chartered banks may charge late fees to New Jersey customers, state laws, such as RISA, that prohibit
out-of-state national banks from charging such fees would constitute impermissible discrimination in violation
of the Supremacy Clause. Therefore, the NBA conflicts with, and thus preempts, RISA.
O'HERN, J., dissenting, would allow national banks to assess late charges against credit card holders
in New Jersey, not because the late charges are interest under the NBA, (they are not) and not because
Congress has authorized the Controller of Currency to preempt the State's consumer protection law, but
because New Jersey permits lenders to impose such late charges and may not discriminate against national
banks that seek to impose the same charges.
CHIEF JUSTICE WILENTZ and JUSTICES STEIN and COLEMAN join in JUSTICE
HANDLER's opinion. JUSTICE POLLOCK filed a separate dissenting opinion in which JUSTICE
GARIBALDI joins. JUSTICE O'HERN filed a separate dissenting opinion.
SUPREME COURT OF NEW JERSEY
MARC SHERMAN, on behalf of
Plaintiff-Appellant,
v.
CITIBANK (SOUTH DAKOTA), N.A.,
Defendant-Respondent.
Argued February 15, 1995 -- Decided November 28, 1995
On certification to the Superior Court,
Appellate Division, whose opinion is reported
at 272 N.J. Super. 435 (1994).
Michael D. Donovan, a member of the
Pennsylvania bar, argued the cause for
appellant (Spector Gadon & Rosen, attorneys;
Mr. Donovan and Ann Miller, a member of the
Pennsylvania bar, of counsel; Mr. Donovan,
Ms. Miller, Paul R. Rosen, and Robert L.
Grundlock, Jr., on the briefs).
Louis R. Cohen, a member of the District of
Columbia bar, argued the cause for respondent
(Dechert Price & Rhoads, attorneys; Mr.
Cohen, George G. O'Brien, Matthew V. DelDuca,
and Robert D. Rhoad, on the briefs).
Marilyn A. Bair, Deputy Attorney General,
argued the cause for amicus curiae Attorney
General of New Jersey (James J. Ciancia,
Acting Attorney General, attorney; Andrea M.
Silkowitz, Assistant Attorney General, of
counsel).
Richard P. Jacobson submitted a brief on
behalf of amici curiae The States of Arizona,
Delaware, Louisiana, Nevada, Ohio, South
Dakota, and Utah (Dunn, Pashman, Sponzilli,
Swick & Finnerty, attorneys).
Irene E. Dowdy, Assistant United States
Attorney, submitted a brief on behalf of
amicus curiae Office of the Comptroller of
the Currency (Faith S. Hochberg, United
States Attorney, attorney).
Charles N. Riley submitted a brief on behalf
of amicus curiae Consumer Action (Tomar,
Simonoff, Adourian & O'Brien, attorneys).
Charles N. Riley submitted a brief on behalf
of amici curiae the States of Hawaii, Iowa,
Maryland, Massachusetts, Pennsylvania, South
Carolina, Vermont, West Virginia, and
Wisconsin (Tomar, Simonoff, Adourian &
O'Brien, attorneys).
Mark L. First submitted a brief on behalf of
amicus curiae Mellon Bank (DE), N.A. (Reed,
Smith, Shaw & McClay, attorneys).
Dennis R. Casale submitted a brief on behalf
of amici curiae The New Jersey Bankers
Association, American Bankers Association,
American Financial Services Association and
Consumer Bankers Association (Jamieson,
Moore, Peskin & Spicer, attorneys).
Jeffrey M. Keiser submitted a brief on behalf
of amici curiae Trial Lawyers for Public
Justice, P.C., and Bankcard Holders of
America, Inc.
Michael J. Dunne submitted a brief on behalf
of amici curiae Visa U.S.A., Inc., and
Mastercard International Incorporated
(Pitney, Hardin, Kipp & Szuch, attorneys).
The opinion of the Court was delivered by
In this case, as in the companion case of Hunter v.
Greenwood Trust Co., __ N.J. __, rev'g 272 N.J. Super. 526
(1994), also decided today, New Jersey credit-card customers
contend that New Jersey's usury laws prohibit banks that issue
those cards from charging late-payment fees to New Jersey
customers. Since the early years of the Republic, the states have generally resisted the development of national banks and favored their own state-chartered banks through regulatory legislation. William Oscar Scroggs, A Century of Banking Progress 50-51 (1924); John J. Knox, A History of Banking in the U.S. 12 (2d ed. 1969). The Supreme Court has, since M'Culloch v. Maryland, 17 U.S. (4 Wheat) 316, 4 L. Ed. 579 (1819), generally limited federal statutory involvement by construing preemption narrowly and giving relatively free rein to state usury law regulations. See Anderson Nat'l Bank v. Luckett, 321 U.S. 233, 64 S. Ct. 599, 88 L. Ed. 692 (1944); McClellan v. Chipman, 164 U.S. 347, 17 S. Ct. 85, 41 L. Ed. 461 (1896). This Court, in considering preemption claims, must be cautioned by the longstanding presumption that "Congress did not intend to displace state law." Maryland v. Louisiana, 451 U.S. 725, 746, 101 S.Ct. 2114, 2129, 68 L. Ed. 2d 576, 595 (1981), and that it should not unnecessarily disturb "the federal-state balance." United States v. Bass, 404 U.S. 336, 349, 92 S. Ct. 515, 523, 30 L. Ed. 2d 488, 497 (1971). Indeed, greater restraint ought apply to preemption of spheres traditionally occupied by the states. Where the field that Congress is said to have preempted has been traditionally occupied by the states, "we start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless there was the clear and manifest purpose of Congress." Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L. Ed. 1447 (1947). "It is well settled that state usury law restrictions on lending practices are so extensive and historically rooted as to form part of the consumer protection terrain 'traditionally occupied' by the states." Greenwood Trust Co. v. Massachusetts, 776 F. Supp. 21, 27-28 (D. Mass. 1991), rev'd, 971 F.2d 818 (1st Cir. 1992), cert. denied, __ U.S. __, 113 S. Ct. 974, 122 L. Ed. 2d 129 (1993) (citing Lewis v. BT Inv. Managers, Inc., 447 U.S. 27, 38, 100 S.Ct. 2009, 2016, 64 L. Ed. 2d 702, 713 (1980) ("We readily accept the submission that, both as a matter of history and as a matter of present commercial reality, banking and related financial activities are of profound local concern")); Smiley v. Citibank (South Dakota), N.A., 44 Cal. Rptr. 2d 441, 465-66 (1995) (Arabian, J., dissenting) (same); id. at 467-68 (George, J., dissenting) (same). Accordingly, "[b]ecause consumer protection law is a field traditionally regulated by the states, compelling evidence of an intention to preempt is required in this area." General Motors Corp. v. Abrams, 897 F.2d 34, 41-42 (2d Cir. 1990) (upholding New York's "Lemon Law" against a claim that a Federal Trade Commission consent decree preempted major elements of the local law). Congress' failure to include an express preemption clause in section 85 necessitates a careful examination of whether the NBA conflicts with RISA's prohibition of late-payment fees. Section 85 provides in pertinent part: Any [national bank] association may take, receive, reserve, and charge on any loan or discount made, or upon any notes, bills of exchange, or other evidence of debt, interest at a rate allowed by the laws of the State, Territory or District where the bank is located, or at a rate of 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 the bank is located, whichever may be the greater . . .
On its face, section 85 immunizes national banks that lend money beyond their home-state's borders from local usury laws that might give local banks a competitive advantage. It also protects national banks during periods of inflation by overriding even the home-state's usury laws and permitting national banks to charge interest at a rate tied to the federal discount rate. E.g. Tiffany v. National Bank, 85 U.S. (18 Wall) 409, 412-13, 21 L. Ed. 862, 863-64 (1874) (holding that Congress, by enacting NBA, intended to protect national banks from hostile state usury laws); Roper v. Consurve, Inc., 578 F. 2d 1106 (5th Cir. 1978), aff'd sub nom., Deposit Guaranty Nat'l Bank v. Roper, 445 U.S. 326, 100 S. Ct. 1166, 63 L. Ed. 2d 427 (1980) (holding section 85 was designed by Congress to mandate parity between national banks and local lenders). However, neither the plain meaning of the terms "rate" and "interest" in section 85, nor the legislative history of that provision indicates that these terms carry the expansive meaning inferred by defendant. See Smiley, supra, 44 Cal. Rptr. 2d at 469 (George, J., dissenting). Since 1874, the Supreme Court has interpreted section 85 as entitling a national bank to charge the highest interest rate allowed to lenders by the laws of the state in which the bank is located. Tiffany, supra, 85 U.S. at 411-13, 21 L. Ed. at 863-64 ("The only mode of guarding against [state discrimination] was . . . to allow to national associations the rate allowed by the state to natural persons generally, and a higher rate"). Courts have recognized that Tiffany construed section 85 to place national banks in a position of limited advantage over state banks by allowing them to charge interest at the highest rate applicable under state law to lenders generally and not necessarily at a rate applicable to state banks, which might be lower. This ability to "borrow" an interest rate has come to be known as the "most-favored-lender" doctrine. See, e.g., Fisher v. First Nat'l Bank, 548 F.2d 255 (8th Cir. 1977) (recognizing that notwithstanding limitations on interest imposed on state banks by Nebraska law, national bank located in Nebraska could legally charge, with respect to credit-card transactions, rates allowed by Nebraska law to small loan companies). In Marquette National Bank v. First of Omaha Service Corp., 439 U.S. 299, 99 S. Ct. 540, 58 L. Ed. 2d 534 (1978), the Supreme Court relied on the NBA and its most-favored-lender doctrine to allow a national bank chartered in Nebraska to charge its credit-card customers in Minnesota a rate of interest authorized in Nebraska, but prohibited by usury law restrictions in Minnesota. Id. at 313-15, 99 S.Ct. at 548-49, 58 L. Ed. 2d at 545-46. The Marquette Court recognized that the "exportation" of interest rates from a national bank's "home state" into a foreign state would "significantly impair the ability of the States to enact effective usury laws," but it found that such impairment "has always been implicit in the structure of the National Bank Act since citizens of one State were free to visit a neighboring State to receive credit at foreign interest rates." Id. at 318, 99 S. Ct. at 550, 58 L. Ed. 2d at 548 (citation omitted) (footnote omitted). The Court, nonetheless, suggested Congressional action would be necessary to check the preemptive effect of the NBA in a time of national bank deregulation, tightened credit availability, and an increasingly nationalized credit-card lending system: This impairment may in fact be accentuated by the ease with which interstate credit is available by mail through the use of modern credit cards. But the protection of state usury laws is an issue of legislative policy, and any plea to alter § 85 to further that end is better addressed to the wisdom of Congress than to the judgment of this Court.
[Id. at 318-19, 99 S. Ct. at 550,
58 L. Ed. 2d at 548.]
Marquette does not mandate or encourage an extension of the
"most-favored-lender" status to expand the definition of "rates"
to include other non-interest rate charges. The national bank's
authorized exportation of lending terms in Marquette was limited
to numerical percentage-rate interest terms. The Court made no
mention of the exportation of other credit-card terms, such as
late charges, nor did its reasoning or rationale imply that
[S. Rep. No. 96-368, 96th Cong., 2d
Sess. 19, reprinted in 1980 U.S.
Code Cong. and Ad. News, Vol. 2,
236, 255.]
Subsequent legislative history links preemption concerns in
section 501 both to the consideration of section 521, and to DIDA
in its entirety as passed on March 27-28, 1980. Notably,
Congress passed section 501 at the same time, and the same title
(Title V) of the same act, as section 521.
Defendant relies on case law from other jurisdictions to support its expansive interpretation of "interest", specifically, Greenwood Trust, supra, 971 F.2d 818 and Tikkanen v. Citibank (South Dakota), N.A., 801 F. Supp. 270 (D. Minn. 1992). We find, however, that the reasoning expressed in the Greenwood Trust line of cases and the authorities cited by the Greenwood Trust court are unpersuasive and do not support the conclusion that Congress intended to include non-interest rate charges in its understanding of interest. Greenwood Trust held that prior case law supported the notion that federal common law construes interest to encompass a variety of lender-imposed fees and financial requirements that are independent of a numerical percentage rate. 971 F.2d at 829 (citing American Timber & Trading Co. v. First Nat'l Bank, 690 F.2d 781, 787-88 (9th Cir. 1982); Fisher v. First Nat'l Bank, 548 F.2d 255, 258-61 (8th Cir. 1977); Panos v. Smith, 116 F.2d 445, 446-46 (6th Cir. 1940); Cronkleton v. Hall, 66 F.2d 384, 387 (8th Cir.), cert. denied, 290 U.S. 685, 54 S. Ct. 121, 78 L. Ed. 590 (1933); Nelson v. Citibank (South Dakota) N.A., 794 F. Supp. 312, 318 (D. Minn. 1992)). Inimical to the holding in Greenwood Trust, a careful examination of the cases cited does not establish that Congress intended to include late-payment fees within a federal definition of interest under either section 85 or section 521. Contrary to the Greenwood Trust court's interpretation, American Timber & Trading Co., supra, did not hold that a compensating-balance requirement was interest under section 85. Rather, the court held that a compensating-balance requirement reduces the principal amount of a loan for purposes of calculating effective interest. 690 F.2d at 787-88. In addition, Fisher, supra, did not expressly hold that cash-advance fees were interest under section 85. In that case, the plaintiff challenged the periodic interest and cash-advance fees charged by an out-of-state national bank. 548 F.2d at 256. The court applied the most favorable laws covering any class of lenders in the bank's home state, which permitted certain lenders to charge 30% interest on a balance under $300, and held that the charges were not usurious. Id. at 258-61. The court did not even discuss the distinction between periodic interest rates and the flat fees charged. In Panos, supra, the court did not hold that mortgage taxes and recording fees were interest under section 85. Rather, the court held that such charges, which were deducted from the principal received by the borrower, reduced the principal amount of a loan for purposes of calculating effective interest. 116 F.2d at 446-47. In Cronkleton, supra, the court did not conclude that a bonus or commission was interest under section 85. The Eighth Circuit's holding (in relevant part) was limited to a modification of the district court's award of damages for usury under the NBA. The court's opinion does not provide a detailed account of the facts. However, it appears that in February 1926, the defendant, a national bank, loaned $55,000 to the plaintiffs. 66 F.2d at 385. The contractual periodic rate of interest was not usurious. Ibid. But, in November 1930, plaintiffs paid to the bank an additional $1,000. Ibid. Although the district court "made no findings as to bonuses paid," the court characterized the additional payment as a bonus or commission. Id. at 386. The court then noted that "in determining the rate 'reserved' or 'charged' . . . the taking of a 'bonus' or 'commission' . . . may enter in to render an otherwise lawful rate unlawful and usurious." Id. at 387. The Greenwood Trust court suggested that Nelson, supra, decided three months earlier, held that late-payment fees were interest under section 85. 971 F.2d at 829. However, Nelson expressly disclaimed that conclusion. 794 F. Supp. at 320 ("the question of whether national banks may export terms other than periodic interest charges goes to the merits of the case; deciding that question on a motion to remand is inappropriate"). The court held only that the defendant's claim that section 85 preempted plaintiffs' state law claims raised a substantial federal question. Id. at 315-16. The court in Greenwood Trust also cited several cases to support the proposition that section 85 "adopts the entire case law of [a state bank's home] state interpreting the state's limitations on usury; it does not merely incorporate the numerical rate adopted by the state." 971 F.2d at 829 (citing First Nat'l Bank v. Nowlin, 509 F.2d 872, 876 (8th Cir. 1975); accord Roper v. Consurve, Inc., 777 F. Supp. 508, 510-11 (S.D. Miss. 1990), aff'd, 932 F.2d 965 (5th Cir.) (table), cert. denied, __ U.S. __, 112 S. Ct. 181, 116 L. Ed. 2d 142 (1991); Daggs v. Phoenix Nat'l Bank, 177 U.S. 549, 555, 20 S. Ct. 732, 735, 44 L. Ed. 882 (1900); Union Nat'l Bank v. Louisville, N.A. & C. Ry., 163 U,S, 325, 331, 16 S. Ct. 1039, 1042, 41 L. Ed. 177 (1896); Bartholomew v. Northampton Nat'l Bank, 584 F.2d 1288, 1295 (3d Cir. 1978); McAdoo v. Union Nat'l Bank, 535 F.2d 1050, 1055-58 (8th Cir. 1976); Northway Lanes v. Hackley Union Nat'l Bank & Trust Co., 464 F.2d 855, 861-64 (6th Cir. 1972)). Those cases, however, do not demonstrate that Congress intended to incorporate a state definition of interest that would authorize states unilaterally to incorporate non-percentage rate charges into an exportable definition under section 85. Moreover, none of those cases involve a definition of interest for exportation purposes where the definition varied between states. Nowlin, supra, exemplifies the Greenwood Trust court's misplaced reliance on previous cases construing the NBA. In Nowlin, a national bank in Arkansas loaned money to the plaintiff, who agreed to repay the loan in installments. 509 F.2d at 874. Instead of amortizing the loan over the agreed term, the bank "discounted" the notes by 8%; that is, the bank gave the plaintiff the requested sum, but an additional 8% for every year of the notes' term was immediately added to the outstanding principal amount. Ibid. The plaintiff then had to repay the adjusted principal amount in equal payments over the term. Ibid. Because all interest was calculated up-front based on the initial loan amount, instead of being calculated periodically on a declining principal balance, the national bank achieved an effective yield of nearly 16%. Ibid. The bank did not dispute that Arkansas considered usurious interest rates over 10%. Id. at 876. Furthermore, the bank did not dispute that a state bank could not "discount" notes in a like manner because Arkansas case law defined interest for purposes of its usury laws as "effective yield." Ibid. However, the bank argued that because it was a national bank, it was subject only to section 85, which defined interest narrowly to include only percentage rates charged, not effective yields. Ibid. Because its 8% discount rate was less than the 10% Arkansas-usury rate, the bank argued that it did not violate the NBA. Ibid. The court rejected the bank's arguments. After discussing the objectives of section 85, the court held that such a narrow interpretation would be inconsistent with Congress' desire to foster competitive equality between state and national banks. Id. at 880. Thus, the court held, Arkansas' definition of interest was incorporated into section 85. Ibid. Contrary to the Greenwood Trust Court's conclusion, Nowlin does not offer an expanded definition of the term "rate," but rather shows only that calculation of chargeable interest rates must take "the case law of the state" into account. The state law regarding discounting was given substantial weight because discounting, unlike late-fee charges, directly affects the numerical interest rate by altering the percentage rate over time. It is noteworthy that the Nowlin decision involved the intra-state, not inter-state, application of Arkansas' definition of interest. Thus, it said nothing about exporting that definition to a foreign state where state-usury laws are more restrictive. Moreover, the case should be read as a judicial attempt to protect state usury laws at the expense of the federal most-favored-lender doctrine. Defendant also refers, as does the dissent, to Smiley v. Citibank, supra, 44 Cal. Rptr.2d 441 (1995), to support its position that "interest" under section 85 includes late charges. Post at __ (slip op. at 4). Similar use is made of Copeland v. MBNA America Bank, N.A., supra, __ Colo. __ (1995). The majority in Smiley bases that conclusion in large measure on its understanding of historical legal usage. Smiley, supra, at 449-51. See also Copeland, supra, at __ (slip op. at 11-13) (same). In our view, however, interest in its historical setting is limited to a periodic charge expressed as a percentage of a principal balance due. See discussion, supra, at 25-28. The majority in Smiley also concluded that if interest does not include late charges then a state could discriminate against a national bank to make it unprofitable for it to lend money in that state. Smiley, supra, at 451. However, a state cannot discriminate against a national bank by permitting state banks to charge late fees or higher late fees while prohibiting a national bank from charging those fees. See discussion, infra at 38-41. See Smiley, supra, at 470 (George, J., dissenting) (noting that it has been established since the early 1800's that even in the absence of a specific federal statutory prohibition a state may not discriminate against a federal instrumentality either in the enactment or enforcement of state laws). Thus, the most-favored-lender doctrine serves to eliminate discrimination without distorting or extending the meaning of interest to include charges that Congress neither expressly nor implicitly incorporated in the definition of interest.
Defendant, as well as the dissent, cites a recently-promulgated proposed interpretive ruling by the Office of the Comptroller of the Currency (OCC), the agency charged with enforcement of the NBA, as evidence that late fees constitute interest for purposes of the NBA. Post at ___ (slip op. at 16). The soundness of this ruling, and its value as authority, are greatly undermined when placed in the context of conflicting OCC rulings. It is well settled that in general an agency's interpretation of a statute it is charged with enforcing is entitled to substantial deference, Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843-45, 104 S. Ct. 2778, 2781-83, 81 L. Ed. 2d 694, 703-04 (1984); EPA v. National Crushed Stone Ass'n, 449 U.S. 64, 83, 101 S. Ct. 295, 307, 66 L. Ed. 2d 268, 283 (1980) (citing Udall v. Tallman, 380 U.S. 1, 16, 85 S. Ct. 792, 801, 13 L. Ed. 2d 616 (1965)), and must in general be upheld even if that interpretation is not the only permissible one or even the most reasonable. Grocery Town Market, Inc. v. United States, 848 F.2d 392, 396 (3d Cir. 1988). There are, however, exceptions to the general rule. Far less than the usual amount of deference to an agency interpretation is appropriate when that agency has failed to adopt a consistent interpretation in administering the statute in question. INS v. Cardoza-Fonseca, 480 U.S. 421, 446 n.30, 107 S. Ct. 1207, 1221 n.30, 94 L. Ed. 2d 434, 457 n.30 (1987) (citing Watt v. Alaska, 451 U.S. 259, 273, 101 S. Ct. 1673, 1681, 68 L. Ed. 2d 80 (1981); General Elec. Co. v. Gilbert, 429 U.S. 125, 143, 97 S. Ct. 401, 411-12, 50 L. Ed. 2d 343 (1976)). "It is emphatically the province and duty of the judicial department to say what the law is." Marbury v. Madison, 5 U.S. (1 Cranch) 137, 177, 2 L. Ed. 60 (1803). Statutory construction is ultimately a judicial function. See, e.g., SEC v. Sloan, 436 U.S. 103, 118, 98 S. Ct. 1702, 1712, 56 L. Ed. 2d 148, 161 (1978); Federal Maritime Comm. v. Seatrain Lines, Inc., 411 U.S. 726, 745-46, 93 S. Ct. 1773, 1784-85, 36 L. Ed. 2d 620, 633-34 (1973). Indeed, "one of the Judiciary's characteristic roles is to interpret statutes." Japan Whaling Ass'n v. American Catacean Soc'y, 478 U.S. 221, 230, 106 S. Ct. 2860, 2866, 92 L. Ed. 2d 166, 179 (1986). Accordingly, the Supreme Court in Chevron, supra, did not state that silence or ambiguity in a statute automatically requires a court to delegate its entire interpretive responsibility to an agency, especially when an agency's interpretation is contrary to the purpose of the statute or inconsistent. See West v. Bowen, 879 F.2d 1122, 1138 (3d Cir. 1989) (Mansmann, J., concurring and dissenting). Courts have found consistency or lack thereof in an agency interpretation to be crucial in determining the degree of deference to be afforded that interpretation. See, e.g., INS v. Cardoza-Fonseca, supra (rejecting deference to Board of Immigration Appeals due to years of inconsistent positions); Director, Office of Workers' Compensation Programs v. Mangifest, 826 F.2d 1318, 1319-20 (3d Cir. 1987) (finding "ambiguities and inconsistencies in the Director's interpretation of . . . regulations . . . sufficiently great to preclude deference"); Revak v. National Mines Corp., 808 F.2d 996, 1002 (3d Cir. 1986) (rejecting deference arguments due to inconsistent agency interpretation of statute); Disabled in Action v. Sykes, 833 F.2d 1113, 1117-19 (3d Cir. 1987), cert. denied, 485 U.S. 989, 108 S. Ct. 1293, 99 L. Ed. 2d 503 (1988). There is a great difference between flexibility and vacillation. Accordingly, judicial deference to administrative rulings should be cast on a sliding scale whereby the usual respect for agency determination diminishes as apparent inconsistencies surmount. West, supra, 879 F.2d at 1134 (Mansmann, J., dissenting and concurring). The federal administrative understanding of the meaning of "interest" has wavered. Cf. Copeland, supra, __ Colo. at __ (slip op. at 13) (asserting that "[t]he OCC consistently has taken the position that late payment fees are interest" under both section 85 of the NBA and section 521 of the DIDA) (emphasis added). An examination of OCC interpretive letters reveals significant inconsistent administrative treatment of interest with respect to the NBA. As early as 1964, the OCC, responding to an inquiry to define interest under the NBA, stated that "late payment fees . . . would not properly be characterized as interest." See Letter by James J. Saxon, Comptroller of the Currency (June 25, 1964), Brief of Petitioner-Defendant at Ex C. (No. 38,817). Then, in 1986, the OCC was asked specifically whether late fees were considered interest that could be exported under section 85. Letter by Charles F. Byrd, Assistant Director, Legal Advisory Service (May 5, 1986), 1986 WL 143937 (O.C.C.). The agency opined that section 85 looks to state law to determine the maximum permissible interest rate, but that federal law determines which charges are "material" to the rate determination. Id. at *1. Because courts had not determined whether late fees were material, the OCC refused to provide the answer. Ibid. In 1988, however, the OCC issued Interpretive Letter No. 452, which addressed whether various fees charged by an out-of-state national bank to its credit cardholder in Iowa were material to the determination of the interest rate under Section 85. Letter by Robert B. Serino, Deputy Chief Counsel, Office of the Comptroller of Currency [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,676 at 78,063 (Aug. 11, 1988). The agency concluded that whether particular fees are material to the interest rate determination under section 85 depends on the laws of a national bank's home state. Id. at 78,065-66 (citing Interpretive Ruling 7.7310, 12 C.F.R. § 7.7310(a)). The OCC recently has affirmed that position. See Letter by Peter Liebsman, Assistant Director, Bank Operations and Asset Division (February 26, 1993), 1993 WL 501557 at *2 (the "1993 OCC Letter"). However, because the State failed to define "materiality", the 1993 OCC Letter stated that "characteristics of either the loan or the borrower . . . [that are] an integral part of a bank's decision to establish the rate of interest that will be charged" typically are material. Id. at *3. Notably, the OCC opined that charges such as "late fees, nonsufficient check charges, cash advance fees and attorney fees appear not to determine the numerical rate of interest to be charged." Id. at *4. Because such fees have only an "indirect effect on interest rates in that they may affect the ultimate return on loan proceeds," the agency suggested that absent their inclusion in the home-state's definition of interest, they would not be material, and thus, would not be exportable. See ibid. The conflicting interpretations, coupled with the logic expressed in the "materiality" standard, convince us that this Court should not forsake its own considered reasoning by relying on an equivocation. It is the responsibility of Congress to depart from the traditional understanding of interest and to express an intent to include non-numerical interest rates in its definition of "interest" under the NBA. New Jersey's banking statutes also reflect the basic understanding that the notion of interest was conceived and continues to be defined as specific percentage rates, rather than discrete charges, such as late fees, which are not directly related to borrowing money. N.J.S.A. 17:13A, which governs installment loan rate advertising, defines interest as follows: every charge paid to the lender or contracted for by the lender and the borrower in connection with or as an incident of a loan, whether designated as interest or as a financial charge or otherwise, except that the term does not include the following charges when made pursuant to law: late or delinquency charges; attorneys' and collection fees; insurance premiums, including premiums for credit life insurance; recording or filing fees, and all other charges which may lawfully be made on loans in addition to interest or finance charges.
Other statutes distinguish late fees from interest by either
authorizing or prohibiting certain lending institutions from
making such charges. N.J.S.A. 17:13-104b specifically authorizes
New Jersey credit unions to charge late fees to its members.
[N.J.S.A. 17:13-104b (emphasis
added).]
N.J.S.A. 17:9A governs a banking institution's authority to make
check loans and other loans, N.J.S.A. 17:9A-59.1 to -59.17, small
business loans, N.J.S.A. 17:9A-59.25 to -59.39 and loans secured
by a deposit, N.J.S.A. 17:9A-59.40-63. In defining the amount of
interest permitted on each class of loans, the respective
statutes specifically include only percentage rate interest, not
other financial charges. Other charges are provided for in
separate sections. For example, N.J.S.A. 17:9A-59.6, sets the
rate of interest for advance loans. Later provisions provide for
additional fees on advance loans, such as late charges, N.J.S.A.
17:9A-59.7, and service charges, N.J.S.A. 17:9A-59.8.
At the time this case was before the Court, the statute
expressly authorized delinquency or late-payment charges on only
retail installment contracts. N.J.S.A. 17:16C-42(a). On March
7, 1995, however, the statute was amended by L. 1995, c. 43, § 1,
which specifically allows for late-payment charges on retail
charge accounts. It provides in pertinent part that:
The effective date of the amendment was May 29, 1995, 90 days following its enactment. L. 1995, c. 43, § 2. Thus, for purposes of this appeal, defendant's late-fee charges were still illegal under RISA. This amendment to the statute indicates, however, that the legislature did not intend to include late-fee charges within its definition of interest; rather, it expressly specified when and under what conditions other non-percentage rate charges could be procured by lenders in addition to annual interest rate charges. Moreover, the regulations governing banking specifically provide for the maximum rate of interest to be charged on the issuance of different types of loans. N.J.A.C. 3:1-1.1; N.J.A.C. 3:1-1.2. These regulations governing interest say nothing about other financial charges, such as late fees. Thus, the manner in which both the Legislature and the Department of Banking have chosen to regulate lender-authorized charges clearly supports the conclusion that late fees are distinct from interest and thus not contained within the accepted definition of interest. The dissent incorporates late fees, and presumably other similar charges, into the notion of traditional interest by homogenizing what the Legislature has meticulously separated. It does so only by obscuring the clear language and structure of the legislative treatment of interest and late fees. See Post at __ (slip op. at 24-28). The State Bank Parity Act, N.J.S.A. 17:13B-1 to -2, authorizes New Jersey banks to charge the same "rate of interest" charged by credit unions. N.J.S.A. 17:13B-2 provides: Notwithstanding any provisions of R.S. 31:1-1 or any other statute to the contrary, any bank, savings bank, savings and loan association or credit union may charge a rate of interest on any class or type of loan at the rate of interest permitted to any other lender by the laws of this State on that class or type of loan.
[N.J.S.A. 17:13B-2 (emphasis
added).]
The Assembly Banking and Insurance Committee Statement that
accompanied this legislation indicates that the act was intended
as a state-bank companion to section 85 of the NBA.
[Assembly Banking & Insurance
Committee, Statement to Assembly
Bill No. 1986 (1981).] Thus, while the Act provides for parity between the rates of interest charged by both banks and credit unions, the act does not explicitly authorize banks to charge other types of fees. Furthermore, there is no indication that the Legislature implicitly intended these other fees in the State Bank Parity Act. Indeed, the fact that the Legislature has passed separate statutes that expressly authorize the imposition of discrete fees and charges, (see discussion, supra, at __ (slip op. at 24-28)), in contrast to interest, underscores the understanding that those types of charges are not contemplated by the State Bank Parity Act. The clearest indication of the Legislature's intent to distinguish between interest rates and late fees is in the language of its recent amendment to RISA, in which it expressly authorizes holders of retail charge accounts, as well as retail installment contracts, to charge late fees. The Legislature obviously enacted this law because it wanted to enable banks and other retail charge-account holders to charge late fees that credit unions were permitted to charge under N.J.S.A. 17:13-104b. Had the State Bank Parity Act provided parity between lenders as to specific non-interest rate charges, there would have been no need for the amendment because holders of retail charge accounts would have been entitled, pursuant to the parity act, to charge the late fees that credit unions were authorized to charge. Courts should avoid a construction that would render legislative enactments meaningless. State v. Reynolds, 124 N.J. 559 (1991). Thus, by excluding discrete charges from the parity act, the Legislature retained flexibility with respect to the non-percentage rate fees different lenders were permitted to charge their customers. For example, retail charge account holders are limited to a $10 late-fee per default period, w |