Copyright (c) 2004 Minnesota Law Review
Minnesota Law Review

February, 2004

88 Minn. L. Rev. 518

LENGTH: 43752 words

ARTICLE: The Amazing, Elastic, Ever-Expanding Exportation Doctrine and Its Effect on Predatory Lending Regulation

NAME: Elizabeth R. Schiltz+

BIO:

+ Associate Professor of Law, University of St. Thomas School of Law. B.A. 1982 Yale University; J.D. 1985, Columbia University School of Law. For their helpful comments on prior drafts of this Article, I am grateful to Thomas C. Berg, Neil W. Hamilton, Patricia A. McCoy, Thomas M. Mengler, A. Brooke Overby, Walter F. ("Jack") Pratt, Jr., PAtrick J. Schiltz, Scott A. Taylor, and Julia L. Williams. My work on this Article spanned my employment at two law schools. I owe thanks to able research assistants from both schools: at Notre Dame Law School, Todd Barker, Michael Chaplin, Christine Curkovich, Tim Flanagan, JOhn Geelan, and Travis Jackson; at the University if St. Thomas School of Law, Heather McElroy and Ryan Palmer.

SUMMARY:
... The recent dramatic growth in subprime lending has reinvigorated initiatives for more effective consumer credit regulation, giving new urgency to one of the perennial debates of consumer credit regulation: Assuming the consumer credit market requires some statutory regulation, are state or federal laws more effective? ... To understand how 85, a statutory provision aimed at preventing states from destroying the national banking system in its infancy, came to justify a legal doctrine preempting virtually all significant state consumer credit laws, we must examine three distinct dimensions of the evolution of the Exportation Doctrine - the expansion of its geographic reach (from intrastate to interstate), the expansion of its substantive scope (from numerical interest rate to many additional significant credit terms), and the expansion of its orbit of beneficiaries (from national banks to any corporate entity that acquires or contracts with any sort of depository institution). ... With respect to the other two prongs of the lending test, origination and approval, the OCC took the position that if any two occur at the same location, a loan was made at that location; however, any one of these functions occurring separately did not constitute "lending. ... Second, Smiley decisively rejects the argument that consumer credit regulation is the primary province of states when the lender is a national bank. This would appear to leave some room for state regulation of consumer credit in situations where the lender is not a national bank. ...

TEXT:
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INTRODUCTION

The recent dramatic growth in subprime lending 1 has reinvigorated initiatives for more effective consumer credit regulation, 2 giving new urgency to one of the perennial debates of consumer credit regulation: Assuming the consumer credit market requires some statutory regulation, are state or federal laws more effective? 3

[*521] An important factor in the current debate is the increased participation of mainstream financial institutions, such as banks and savings and loan institutions, in the subprime loan market.

4 Some banks have shaped traditional banking products, such as credit cards, to market them to subprime borrowers. 5 Other banks are offering products that heretofore were the sphere of the "fringe banking system," such as payday loans 6 and tax refund anticipation loans. 7 The encroachment of mainstream financial institutions into the subprime consumer credit [*522] market shines a bright spotlight on a legal power peculiar to federally regulated banks and savings and loan associations. 8 Under the "Exportation Doctrine," such entities have the power to "export" the consumer credit regulation (or lack thereof) from the state in which they are located to all other states where they have customers.

The Exportation Doctrine has evolved from a discrete statutory privilege allowing national banks to charge the same interest rates as other local lenders, to an expansive legal doctrine allowing almost any corporate entity to establish a nationwide consumer lending program unrestrained by any significant state consumer credit laws. Over the past few years, as states and municipalities have become more aggressive about regulating consumer credit through new legislation or increased enforcement of existing statutes, federal banking regulators have become equally aggressive in asserting the preemptive force of the Exportation Doctrine.

The Exportation Doctrine has come to render ineffective state predatory lending laws to an extent that has not been adequately recognized or analyzed in the existing legal literature. 9 Yet it has profound implications for the pitched battles [*523] surrounding predatory lending laws that are currently taking place at both the federal and the state level. 10 If state predatory lending laws are indeed ineffective in the face of the Exportation [*524] Doctrine, does it make sense to continue to enact such laws? If the Doctrine is the most powerful regulatory force in the consumer credit market, what role does it play in combating predatory lending? If the Doctrine is not an adequate substitute for state predatory lending laws, should it be curbed or should it be reformed? All of these questions are crucial to the current debates over predatory lending laws. 11

This Article will undertake a historical analysis of the evolution of the Exportation Doctrine, demonstrating that the Doctrine has expanded along three distinct dimensions, shaped by different combinations of policy rationales and precedents. These three dimensions are (1) the Doctrine's geographic reach (from intrastate to interstate); (2) its substantive scope (from numerical interest rate to many additional significant credit terms); and (3) the orbit of its beneficiaries (from national banks to any corporate entity that acquires or contracts with a depository institution). Examining each of these dimensions separately, and then analyzing them together in light of the overall debate over the primacy of federal versus state consumer credit regulation, yields a number of significant insights. First, in its current expanded form, the Exportation Doctrine virtually emasculates individual state predatory lending statutes. Second, although the first two dimensions of the Doctrine's expansion are not vulnerable to judicial challenge, the third is. Finally, even though the Doctrine in its expanded form is not entirely justified under the principles of banking law from which it stems, with a bit of tweaking, it could arguably become an extremely effective mechanism for protecting consumers [*525] against predatory lending.

Part I of this Article briefly describes the complex pattern of state and federal consumer credit regulation in the United States. Part II depicts the historic evolution of the Exportation Doctrine along the three dimensions described above, illustrating the dramatic extent to which the Exportation Doctrine has emasculated state consumer credit laws and analyzing the extent to which the various expansions are justified under principles of banking law. Finally, Part III explores the implications of the expanded Exportation Doctrine for the efficacy of state predatory lending laws, and offers proposals for realizing the potential of the Exportation Doctrine as a powerful vehicle for effective consumer credit regulation.

I. THE CONTEXT: A BRIEF DESCRIPTION OF STATE AND FEDERAL REGULATION OF CONSUMER CREDIT

The plethora of laws governing consumer lending has variously been described as, among other things, "a crazy-quilt pattern," 12 "[a] crazy-quilt, patch-work welter," 13 "a patchwork," 14 a "hodgepodge," 15 "an utter hodgepodge," 16 and "a maze, if not a mess, and probably both." 17 Traditionally, consumer protection issues such as consumer credit regulation are considered to be primarily the province of state, rather than federal, law. 18 Indeed, every state has its own idiosyncratic consumer credit laws. Efforts to promulgate a uniform state consumer credit code, following the model of the Uniform Commercial Code, were largely unsuccessful. In addition to nonuniform state laws, federal consumer credit laws applicable to consumer lenders in all states emerged in the 1960s. In order to fully appreciate the significance of the Exportation Doctrine and the extent to which it undermines state consumer credit laws, it is [*526] necessary to have a basic understanding of the existing statutory framework upon which it acts.

A. Typical State Laws Governing Consumer Credit

The typical state consumer credit law starts with a general usury statute - a law limiting the amount of interest that may be charged on a loan. Every state has a basic statute setting a maximum legal interest rate for any type loan, typically between 6% and 10%. 19 Various other statutes carve out exceptions to the general usury limit for specific types of borrowers, lenders, or credit arrangements. These exception statutes typically include some limitations: in exchange for immunity from the general usury limit, lenders must comply with various types of consumer protection provisions, such as prescribed methodologies for calculating interest charges 20 and prepayment rebates, 21 limits on the types of security that can be taken for such loans, 22 limits on the ways in which security that is [*527] given for such loans can be repossessed, 23 and prohibitions on obtaining confessions of judgment or powers of attorney. 24

These exception statutes were enacted to address specific types of credit arrangements offered by particular types of lenders, as they emerged in the consumer credit market. For example, "small loan laws" or "licensed loan laws" were adopted in the first half of the twentieth century to foster the development of a legitimate consumer finance industry to provide small loans to consumers at a time when most banks provided credit only to commercial enterprises. 25 "Retail installment sales acts" were adopted in the 1950s and 1960s as retailers began offering more credit to finance the purchase of goods or services. 26 When credit cards burst onto the consumer credit scene, states enacted "open-end credit laws." 27 However, as the consumer credit market developed in ways that blurred the distinctions among the types of providers and credit plans, these state laws remained largely unchanged. 28 In today's credit market, for example, banks are eager to make small consumer loans, and retailers offer credit through both installment loans and credit cards issued by special purpose banks that they own. 29

The practical consequence of this accretive process of law- [*528] making was that functionally identical loans to consumers in the same state could be subject to dramatically different regulations, depending on the corporate identity of the lender (e.g., bank, retailer, or finance company) or the form of the loan (e.g., credit card advance or one-time closed-end loan). 30 Growing dissatisfaction with this artificially balkanized framework for regulating the emerging national market for consumer credit prompted reform initiatives on both the state and federal levels in the late 1960s. The state initiative proved to be one of the least successful uniform law efforts of the National Conference of Commissioners on Uniform State Laws (Conference of Commissioners): the Uniform Consumer Credit Code (U3C). 31 The federal initiative led to the enactment of one of the most significant pieces of federal consumer protection legislation, the Consumer Credit Protection Act of 1968 (CCPA). 32 Let us examine each of these in turn.

B. The Uniform Consumer Credit Code

The U3C was an ambitious undertaking. The Prefatory Note to the U3C proclaims:



Enactment of the [U3C] would abolish the crazy-quilt, patchwork welter of prior laws on consumer credit and replace them by a single new comprehensive law providing a modern, theoretically and pragmatically consistent structure of legal regulation designed to provide an adequate volume of credit at reasonable cost under conditions fair to both consumers and creditors. Upon its enactment, no longer would credit regulation within a State consist of a number of separate uncoordinated statutes governing the activities of different types of creditors in disparate ways. 33

The U3C was not, however, a success. Consumer groups vehemently opposed its procreditor slant and failure to provide meaningful consumer protections. 34 One consumer advocacy [*529] group, the National Consumer Law Center (Consumer Center), published a counterproposal in 1970, the National Consumer Act, 35 which was roundly criticized as unreasonably proconsumer. 36 Both the Conference of Commissioners and the Consumer Center regrouped in the face of the criticism and drafted revised versions of their model law proposals. 37

Not a single state adopted any of these proposals (Model Laws) entirely as drafted. Eleven states have enacted comprehensive credit legislation containing elements of the various proposals, each including nonuniform variations. 38 The Conference [*530] of Commissioners is no longer pursuing any uniform consumer credit law initiatives. 39 Nevertheless, the Model Laws are significant for a number of reasons. First, over one-fifth of the states did adopt their "modern, theoretically and pragmatically consistent structure" in preference to the "crazy-quilt, patchwork welter" 40 of the nonuniform consumer credit laws. Second, the Model Laws represent the considered judgment of a body of experts in the area as to how every state should regulate consumer credit. 41

Both the consumer and the industry representatives agreed on some basic organizational principles for the "ideal" consumer credit law. The Model Laws incorporated the basic quid pro quo of the nonuniform state laws that they sought to replace. In exchange for complying with a set of consumer-oriented restrictions on credit agreements and collection practices, lenders could extend credit at rates higher than the state's basic usury limit. None of the consumer protection provisions found in the Model Laws were very different from those in the nonuniform state laws. 42

[*531] What was radically different about the Model Laws, though, was their comprehensive scope and universal application. In marked contrast to the nonuniform state laws, the Model Laws provided one coherent set of laws to govern all consumer credit transactions, regardless of the corporate identity of the lender - bank, finance company, or retailer. 43 For the most part, the Model Laws imposed the same restrictions 44 on all consumer loans, defined as extensions of credit under $ 25,000 to individuals for personal, family, household, or agricultural purposes. 45 Thus, the Model Laws consolidated the regulation of the historically distinct, but functionally converging, types of transactions addressed by the nonuniform consumer credit laws under one statutory umbrella.

The one area where most of the Model Laws did not impose uniformity is the area of usury rates. 46 The U3C provided for a graduated series of permissible interest rates, starting at a base rate of 18% for all consumer loans, 47 with higher rates available for certain types of credit or lenders. 48 The particular usury rates proposed in the U3C were chosen because, at the time, they were considered extremely high. 49 They were intended [*532] to function as ceilings, rather than baseline rates for consumer credit. 50 In theory, these high ceilings would create incentives for reputable lenders willing to comply with the basic consumer protection provisions established in the U3C to enter the consumer lending market, protecting consumers who would otherwise have to resort to more exploitative loan sharks. 51 The competition generated by this attractive free market would cause lenders to charge rates lower than these ceilings. 52 The drafters believed that "the most effective means of limiting prices" would be the comparison shopping of borrowers, as facilitated by the new federal disclosure laws, 53 within this thriving free market.

This reliance on the free market to regulate consumer [*533] credit rates was one of the most controversial aspects of the U3C. 54 Both of the Consumer Center's proposals rejected this idea. 55 States that adopted the U3C also rejected the idea, uniformly selecting rates lower than those proposed by the U3C. 56

C. Federal Law: The Consumer Credit Protection Act

The CCPA, enacted in 1968, was "the first modern consumer protection statute." 57 The centerpiece of the CCPA was the Truth in Lending Act (TILA), 58 which was subsequently supplemented by the Fair Credit Reporting Act 59 in 1970, the Fair Credit Billing Act and the Equal Credit Opportunity Act 60 in 1974, and the Fair Debt Collection Practices Act 61 in 1977. 62 [*534] While each of these laws focuses on a particular substantive aspect of consumer protection (respectively, misleading disclosure of credit terms, abuses of consumer credit reports, billing errors, discrimination in lending, and abusive debt collection practices), with minor variations, they all follow the same basic structural "template." 63 This template is characterized by three features: (1) its universal application to all consumer credit transactions, regardless of the identity of the lender or the type of credit extended; (2) its multilayered enforcement scheme; and (3) its declared deference to more protective state consumer protection laws.

1. Universal Application

The CCPA applies to all consumer credit transactions regardless of the identity of the lender. Any person or entity in the consumer credit business, whether a bank, finance company, retailer, 64 credit reporting agency, 65 or third-party debt collector, 66 is equally subject to the relevant provisions of the CCPA. Consumer credit transactions covered by the CCPA generally include all extensions of credit of $ 25,000 or less to [*535] individuals for personal, family, or household purposes. 67

2. Multi-Layered Enforcement Scheme

The CCPA's enforcement scheme is complex. The Board of Governors of the Federal Reserve System (Federal Reserve) is designated as the federal agency responsible for drafting the regulations that implement the statute. 68 Compliance with those regulations, however, is delegated to whatever federal agency has primary enforcement responsibility for the particular type of lender involved. Thus, for example, the CCPA is enforced for national banks by the Office of the Comptroller of the Currency (OCC), and for savings and loan associations by the Office of Thrift Supervision (OTS), both bureaus of the Treasury Department. 69 If no federal agency has primary enforcement responsibility for any particular type of lender (as is the case with finance companies or retailers), the Federal Trade Commission (FTC) is responsible for enforcing compliance. 70 The appropriate agency can use whatever general enforcement powers it has over the lender to enforce compliance with the CCPA. 71 In addition to this administrative enforcement scheme, the CCPA provides a private right of action to consumers. 72

3. Deference to State Law

By declining to totally preempt the field of consumer credit [*536] disclosure regulation in enacting the CCPA, Congress at least rhetorically acknowledged the traditional deference to state legislators in matters related to consumer protection. 73 The CCPA provides that lenders must comply with both the CCPA and with any other disclosure requirements imposed by state law, "except to the extent that those laws are inconsistent with [the CCPA], and then only to the extent of the inconsistency." 74 Moreover, the Federal Reserve is given the power to fully exempt from the CCPA "any class of credit transactions within any State if it determines that under the law of that State that class of transactions is subject to requirements substantially similar to those imposed under this part, and that there is adequate provision for enforcement." 75

In practice, states do not retain much power to enact meaningful state laws in areas covered by the CCPA. Determinations by the Federal Reserve that state laws and enforcement provisions are adequate to replace the CCPA are rare. 76 Attempts by states to enact legislation that is more restrictive than the CCPA are rare. 77 Moreover, recent amendments to the CCPA have completely preempted related state laws. 78

[*537]

D. More Federal Law: The Federal Trade Commission Act

An additional layer of regulation affecting consumer credit is based on the general prohibition in section 5 of the Federal Trade Commission Act of 1914 79 (FTCA) of "unfair or deceptive acts or practices in or affecting commerce." 80 To the extent that consumer credit practices involve unfair or deceptive practices, they are subject to the FTCA.

While the same statutory prescription covers all lenders, regardless of corporate identity, the FTCA is administered through the same array of federal agencies that administer the CCPA. The FTCA is administered by the primary federal regulatory agencies of banks and savings and loan associations for such institutions, and by the FTC for other lenders. 81

On two occasions, the FTC has determined that particular practices in the consumer credit industry merited regulation as unfair or deceptive practices. First, in 1975, the FTC promulgated its "Holder in Due Course Rule," 82 which protects consumers' rights to assert claims and defenses arising from the transaction underlying a consumer loan when the loan is transferred to or financed by a third party. The Holder in Due Course Rule applies to all sellers of consumer goods who offer [*538] credit either themselves or through arrangements with third parties. 83 The rule does not specifically preempt any state law, but rather prohibits sellers and creditors from using contracts containing language that would deny consumers protections provided under state contract and commercial laws. 84

Second, in 1984, the FTC promulgated its "Trade Regulation Rule on Credit Practices." 85 The Credit Practices Rule declares specific consumer credit practices - such as confessions of judgment, 86 certain assignments of wages, 87 failure to provide clear disclosures of liability to cosigners, 88 and pyramiding of late charges 89 - to be unfair acts or practices under the FTCA. Federal banking regulators have promulgated substantially similar regulations applicable to banks and savings and loan associations. 90 All of the versions of the Credit Practices Rule promulgated by the various agencies include language from the TILA template providing that the rule can be preempted by state law if the appropriate agency determines that state law "affords a level of protection to consumers that is substantially equivalent to, or greater than, the protection afforded" in the federal rule. 91 Again, following the TILA model, such determinations are rare. 92

[*539]

E. Summary of Statutory Framework of Consumer Credit Regulation

The existing statutory framework for consumer credit regulation is based on the presumption that consumer protection is the province of states, rather than the federal government. Each state has its own statutory scheme for consumer credit regulation, structured around a blanket statutory prohibition on charging interest above a certain minimal rate, unless the loan qualifies for some exception. The exceptions are typically granted in exchange for regulation of the lender or of the type of loan; they were enacted by states in response to the emergence of certain types of loans or lenders in the market, but they no longer reflect the realities of the current credit market. The efforts of the Conference of Commissioners to replace these historical accretions with a comprehensive statute providing for equal treatment of lenders were largely unsuccessful.

Imposed on this layer of state laws are two federal consumer protection statutes, the CCPA and the FTCA. Both of these statutes apply equally to all lenders, although they are administered by different federal regulatory agencies for different lenders. Both statutes also, at least in theory, evince some degree of respect for the authority of states over consumer protection issues, giving effect to state statutes that provide equal or greater protection to consumers than the federal statutes. In practice, however, state statutes dealing with these topics rarely trump the federal laws.

On top of this already complex statutory structure is perched yet another statutory scheme governing some of the most significant players in the consumer finance market - federally regulated financial institutions. This statutory scheme has had the effect of undermining state consumer credit protection laws that are, at least rhetorically, bastions of consumer protection.

II. THE STORY: THE EXPANSION OF THE EXPORTATION DOCTRINE

Consumer lenders chartered as banks or thrifts 93 (referred [*540] to collectively as "depository institutions") 94 are treated differently from other consumer lenders in significant respects. As a result of the unique role that they play as financial intermediaries, depository institutions are among the most heavily regulated business operations in the country and are subject to a complex array of federal and state laws. A byproduct of the complex interplay of federal and state law is that, owing to the Exportation Doctrine, depository institutions have gradually acquired significant power to ignore many state consumer credit laws. More recently, these same powers have to some degree become available to other types of consumer lenders, such as retailers and check-cashing outlets.

This section will first explain the general framework of laws applicable to depository institutions and then examine the evolution of the Exportation Doctrine within that general framework.

A. Banking Regulation 101 - Why Are Depository Institutions Special? 95

Depository institutions differ from other consumer lenders in that they operate under charters granted by either a state or the federal government. This charter comes with significant privileges - such as the power to accept federally insured deposits, and access to funding through federal reserve banks and federal home loan banks - which are commensurate with the public service role these depository institutions play as financial [*541] intermediaries. 96 However, these privileges have a cost. Depository institutions are subject to extensive regulation of almost every facet of their day-to-day operations. 97

This comprehensive regulatory scheme is further complicated by the fact that the banking industry consists of two parallel systems of banks and thrifts - those that operate under federal charters, and those that operate under state charters. Under this "dual banking system," depository institutions can choose to be chartered and primarily regulated either by the federal government or by a state government. 98 A state-chartered bank or thrift will receive its charter and be primarily regulated by the appropriate state banking regulator. A federally chartered bank will receive its charter and be primarily regulated by a federal regulatory agency, the OCC. 99 A federally chartered thrift will receive its charter and be primarily regulated by another federal regulatory agency, the OTS. 100

The choice of one primary regulator does not, however, wholly insulate a depository institution from the jurisdiction of the other. 101 State-chartered depository institutions are subject [*542] to some federal laws that are applicable to all depository institutions, regardless of charter. 102 State-chartered banks typically must also maintain federal deposit insurance, 103 and accepting such insurance subjects the depository institution to substantial federal regulation and to the jurisdiction of the Federal Deposit Insurance Corporation (FDIC). 104 State-chartered banks that choose to be members of the Federal Reserve system are subject to the jurisdiction of the Federal Reserve. 105 Similarly, state-chartered thrifts typically must maintain federal deposit insurance, 106 subjecting them to the jurisdiction of the FDIC and the OTS. 107 In addition, some federal laws, like the consumer protection laws discussed in the previous section, apply equally to all consumer lenders regardless of charter.

At the same time, federally chartered depository institutions are subject to some state regulation. Federally chartered depository institutions are "instrumentalities of the Federal government, created for a public purpose, and as such necessarily subject to the paramount authority of the United States." 108 Through the operation of the Supremacy Clause, 109 the federal [*543] laws creating and regulating these depository institutions provide their fundamental legal framework. These laws, however, leave some regulatory aspects to state law, either because federal law does not address the area or because federal law expressly provides for state governance. To illustrate the former, federal law does not provide a unique system of general contract, tort, or property law; consequently, federal depository institutions for the most part are subject to the laws of the state where they are located with respect to such matters. 110 To illustrate the latter, federal banking law expressly defers to the laws of the state where a national bank is located to determine the extent to which a national bank may establish branches within a state. 111

As a consumer protection issue, consumer credit regulation traditionally has been considered the province of state law. 112 The fact that there is no comprehensive federal law governing the extension of consumer credit would seem to support that conclusion. Arguably, the areas of consumer credit regulation that are not governed by the CCPA and the FTCA should be left to state law. Under the Exportation Doctrine, however, depository institutions are given the power to select one particular state's consumer credit regulation and give it preemptive effect over all other state consumer credit laws. Although this preemption power originated with a relatively modest statutory provision setting interest rates for national banks, over the years it has evolved to effectively exempt most depository institutions from the reach of significant state consumer credit laws and to enable corporate entities which are not depository institutions to effectively assert the same powers.

[*544]

B. The Development of the Exportation Doctrine

1. Section 85 of the National Bank Act and the "Most Favored Lender Doctrine"

The Exportation Doctrine originated in the National Bank Act (NBA), an 1864 law establishing a national banking system. 113 Congress created the national banking system to effectuate a number of federal policies, most importantly creating a national currency and a national market for federal bonds to finance the Civil War. 114 Congress did not feel it could effectuate these policies through the existing network of state-chartered banks, so it established a competing system of national banks. 115 The success of this national banking system depended on the creation of a national bank charter that provided an attractive alternative to the existing state bank charters. Among the incentives offered to national banks was the power to charge for loans



interest at the rate allowed by the laws of the state or territory where the bank is located, and no more; except that where, by the laws of any state, a different rate is limited for banks of issue, organized under state laws, the rate so limited shall be allowed for [national banks] organized [or existing] in any such state. 116

The Supreme Court made clear the value of this section 85 of the NBA (12 U.S.C. 85) as one of the "perks" of a national bank charter the first time it had occasion to examine it, in Tiffany v. National Bank of Missouri. 117 Tiffany considered a Missouri law that established a usury limit of 8% for its state banks; all other lenders in the state were permitted to charge 10%. 118 The National Bank of the State of Missouri relied on [*545] what is now 85 as its authority to charge 9% interest to its customers. 119 The Supreme Court sanctioned this practice, explaining that in enacting the NBA, Congress intended to bestow upon national banks the status of "national favorites." 120 Section 85 was intended to prevent state interest rate legislation disfavoring banks from forcing national banks out of business. 121 Under what came to be known as the "Most Favored Lender Doctrine," 85 consistently has been interpreted to permit national banks to make loans at the highest rates permitted any type of lender under the laws of the state in which the bank is located. 122

To understand how 85, a statutory provision aimed at preventing states from destroying the national banking system in its infancy, came to justify a legal doctrine preempting virtually all significant state consumer credit laws, we must examine three distinct dimensions of the evolution of the Exportation Doctrine - the expansion of its geographic reach (from intrastate to interstate), the expansion of its substantive scope (from numerical interest rate to many additional significant credit terms), and the expansion of its orbit of beneficiaries (from national banks to any corporate entity that acquires or contracts with any sort of depository institution).

[*546]

2. Expanding the Geographic Reach of 85

a. The Genesis of the Exportation Doctrine - The Marquette Decision

In 1978, the Supreme Court dramatically augmented the power of 85, articulating what came to be known as the "Exportation Doctrine." In Marquette National Bank v. First of Omaha Service Corp., 123 the Court held that under 85, a national bank in Nebraska could "export" the credit card interest rate permitted under Nebraska law to cardholders living in Minnesota, where this rate was usurious. 124 In reaching this decision, the Court focused on the meaning of the term "located" in the part of 85 authorizing national banks to charge "interest at the rate allowed by the laws of the State, Territory, or District where the bank is located." 125 Was this Nebraska bank "located" in Nebraska, where it had its physical presence, or in Minnesota, where its customers were using their credit cards?

The Court noted that the bank's national charter gave its address as Nebraska, and that the bank had no branches in Minnesota. 126 Indeed, under federal banking law at the time, the bank could not legally have had any branches in Minnesota. 127 The Court also noted that the bank conducted most of the significant commercial activity related to the loan in the state of Nebraska - assessment of finance charges, receipt of payments, and credit approvals. 128 The fact that the bank systematically solicited customers in Minnesota did not affect its location for purposes of 85. Nor did the fact that the bank's credit cards were being slapped onto counters in stores in Minnesota affect the bank's location. Indeed, the Court explained:



If the location of the bank were to depend on the whereabouts of each credit card transaction, the meaning of the term "located" would be so stretched as to throw into confusion the complex system of modern interstate banking. A national bank could never be certain whether its contacts with residents of foreign States were sufficient to alter its location for purposes of 85. We do not choose to invite these difficulties by rendering so elastic the term "located." 129

[*547] For the Marquette Court, the bank's unambiguous physical presence in and only in the state of Nebraska was enough to anchor the bank's "location" to the state of Nebraska. 130 The Court focused on what it deemed to be the one inalterable feature of a bank's interstate lending program - the bank's physical location, limited by law at the time to the borders of its state. 131 Marquette was decided, however, at what turned out to be the infancy of interstate banking; since 1978, national banks have acquired the technological and legal capability to maintain physical presences of many types in many states.

The development of computer-generated data management technologies has enabled banks to offer standardized, nationwide credit card programs to consumers across the country. Today, the location of a bank's charter address or main headquarters often bears little relation to the physical location of its customers, the computers generating the data required for making credit decisions, or the legions of employees processing applications, payments, or other mailings. 132 This functional dispersal of bank operations presaged the advent of interstate branching.

b. Interpreting the Exportation Doctrine in the Era of Interstate Banking

In 1994, Congress finally acknowledged the reality of nationwide banking operations by enacting the Riegle-Neal Interstate Banking and Branching Efficiency Act (Riegle-Neal). 133 Riegle-Neal gives national banks the power to branch across state lines. 134 Riegle-Neal's alteration of Marquette's basic assumptions (that the Nebraska bank did not, and legally could not, have a branch in Minnesota) raises questions about the continued vitality of the decision. In enacting Riegle-Neal, however, [*548] Congress declined to address directly the Exportation Doctrine. Instead, Congress stated merely, "No provision of this title ... shall be construed as affecting in any way ... the applicability of [85]." 135

To what was Congress referring? What was the "applicability" of 85 in the context of interstate branching? The Supreme Court has not reconsidered the geographic reach of the Exportation Doctrine since Marquette, and thus has not clarified how subsequent changes in technology and legal restrictions affect exportation. 136 Since Marquette, the applicability of 85 has been construed primarily in administrative actions, which courts have occasionally reviewed. The most active agency in this area has been the OCC, whose interpretations have evolved in two distinct stages.

First, when banks could not branch across state borders, the OCC issued a series of interpretations delineating how much of a physical presence a bank could have in a state and still not be considered to have a branch there. 137 Although these interpretations were not issued in connection with 85 issues, they are significant for 85 analysis. Marquette's holding that the Nebraska bank was not "located" in Minnesota was based in part on the fact that the Nebraska bank had no branches in Minnesota. For banks exporting rates into states where they had some sort of physical presence, then, it was important to ensure that such presence did not rise to the level of a branch, thereby taking them out of the parameters of Marquette.

Second, after banks were granted the authority to branch across state borders, the OCC issued a series of interpretations articulating the view that a bank could be "located" in more than one state and "export" the rates permitted at any of its locations, provided it "makes" the loan from that location. 138 These interpretations permit a bank to choose the most favorable rates available in any of the states where it has banking operations, and to charge those rates to all its customers regardless [*549] of where they live. Let us examine these two interpretative strands.

i. OCC Branch Interpretations Before Riegle-Neal

In the decades before the enactment of Riegle-Neal, banks were becoming increasingly frustrated by their inability to respond to customers' demands for services commensurate with developing nationwide markets. When banks tried to provide services at locations other than their main offices or permitted branches, they bumped up against the NBA's restrictive approach to bank branching. The NBA permitted a national bank to establish a branch only at locations permitted under the laws of the state where the bank was located. 139 Not only did all state laws prohibit branching across state lines, but many state laws placed extensive restrictions on the number and geographic location of branches within state lines. 140

Creative bankers began to push the limits of these restrictions by attempting to offer services to customers at facilities carefully structured to avoid the NBA's definition of a "branch." The NBA defines a "branch" to include any "place of business ... at which deposits are received, or checks paid, or money lent." 141 Banks tested the parameters of this definition by, inter alia, offering limited banking services through ATM machines, 142 setting up offices offering only discount brokerage services, 143 and sending armored cars across state lines to pick up deposits from customers. 144 These experiments were challenged repeatedly in court by competitors and state regulators, resulting in a series of judicial opinions from the 1960s through the 1980s expanding the limits of that statutory definition. 145

In 1993, the OCC pulled all of these cases together into a three-pronged definition of "branch." 146 Under the OCC's analysis, [*550] a bank facility only constitutes a "branch" if the following criteria are met. First, the activities performed at that facility must include at least one of the "core banking functions" delineated in the NBA's statutory definition: receiving deposits, paying checks, or lending money. 147 Second, the facility must be owned or operated by the bank itself. 148 Third, the facility must be accessible to the public, with this accessibility giving the bank a competitive advantage in serving its customers. 149

These refinements in the definition of "branch" were prompted primarily by banks eager to find ways to engage in interstate banking despite the restrictions of state banking laws. If interstate facilities were not technically "branches," they would not be subject to legal restrictions on interstate branching. Under this three-part definition, banks could engage in discount brokerage at locations across the country because discount brokerage was not a "core banking function." Banks could offer ATMs nationwide, as long as the banks themselves did not own or operate them. Banks could also operate labor-intensive backroom data processing units or customer call centers at locations with cheap and plentiful labor supplies, even outside of the state where the bank was located, as long as they were not open to the public.

As the technology developed for banks to offer large-scale, standardized consumer loan products, economies of scale mandated offering these products to ever-larger pools of customers. 150 [*551] The geographic location of these customers became irrelevant. Mass mailings of credit card solicitations could reach customers across the country, applications for credit generated by such solicitations could be efficiently processed by pools of data processors inputting data into the bank's computers from centralized locations having no relation to the bank's locations, and the dispersal of credit occurred in thousands of stores across the country. 151 Banks relied on the three-pronged "branch" tests to ensure that none of the locations at which increasingly dispersed functions of the lending process took place constituted impermissible branches. 152

As the lending process became increasingly mechanized and geographically dispersed, banks and the OCC relied on increasingly sophisticated definitions of "lending" as a core banking function. 153 This culminated in another three-part definition, this time parsing the process of lending: "lending money" consisted of origination, approval, and disbursement of funds to the borrower. 154 With respect to disbursal, relying on judicial precedent, the OCC accepted that a loan was clearly "made" at the time and place a borrower actually received the loan proceeds. 155 Under this interpretation, a loan was not "made" at any location where a bank disbursed the borrowed funds to any party other than the borrower, such as the seller of a piece of [*552] real estate. 156 With respect to the other two prongs of the lending test, origination 157 and approval, the OCC took the position that if any two occur at the same location, a loan was made at that location; however, any one of these functions occurring separately did not constitute "lending." 158

These odd-sounding distinctions were not the result of academic hairsplitting. To the contrary, they were reactions to efforts by hardheaded business people to take advantage of technological developments that opened the doors to nationwide banking, despite legal barriers. And these distinctions were significant in structuring consumer lending operations. After Marquette, it became clear to banks that it was to their advantage to locate consumer lending operations (particularly nationwide credit card programs) in states with generous (or nonexistent) usury laws. Indeed, states such as South Dakota, Delaware, and Utah amended their laws to deregulate interest rates on credit cards for the express purpose of attracting nonpolluting, labor-intensive credit card operations to their states. 159 Large credit card issuers chose such states to charter banks whose activities were largely limited to issuing credit [*553] cards, and moved all their existing credit card operations from their commercial banks to those credit card banks. 160 Because the consumer loan programs already established by those banks were conducted in dispersed geographic locations, there often was not much incentive to move all aspects of the credit card operations to the charter location of the new bank. Thus, banks had to consider whether they had enough activity occurring at the charter location to ensure that the bank was "located" in that state in order to use Marquette to export rates from that state. At the same time, banks also had to consider whether any of their disbursed locations constituted "branches" in states where customers lived, potentially undermining their Marquette-based right to export into those states.

ii. OCC Branch Interpretations After Riegle-Neal

As discussed above, in enacting Riegle-Neal, Congress declined to address directly how the presence of a branch in a state into which a bank wishes to export another state's interest rates might affect the Exportation Doctrine. Instead, Congress adopted an oblique clause indicating that nothing in Riegle-Neal should affect the applicability of 85. 161 The OCC was quick to jump into the interpretative void left by this vague language, issuing an exhaustive opinion letter explaining exactly what Congress meant by this provision, dubbed the "usury savings clause." 162

Relying extensively on a statement inserted into the Congressional Record by Delaware Senator William Roth, Jr., 163 the [*554] sponsor of the usury savings clause, the OCC concluded this clause was intended to ensure that "the Marquette doctrine, permitting a bank to utilize interest rates allowed by the law of the state where the bank is located regardless of the state of the residence of the borrower, is not defeated simply because a bank has a branch in the state where the borrower resides." 164

This much is arguably supported by the plain meaning of the language of the usury savings clause. As discussed above, before Riegle-Neal was enacted, 85 was interpreted to mean that a bank could export the interest rate of the state where it was chartered (the "home state") to other states. By its terms, the usury savings clause expresses the intent to preserve that power, allowing a bank to continue to export its home state interest rates to other states, regardless of the now-permitted presence of branches in those other states.

The OCC went further, however, attributing to the usury savings clause additional power not found in the plain meaning of its language. Again relying heavily on Senator Roth's statement, the OCC asserted that the drafters intended the usury savings clause to give a bank the power to make loans either from the bank's home state or from any state in which the bank has interstate branches (the "host state"). If the loan is "made" in the home state, the bank can export the home state's interest rates. If the loan is "made" in the host state, the bank can export the host state's interest rates.

To determine where a loan is "made," the OCC suggested a different test from its prior three-pronged test. 165 Again relying on Senator Roth's testimony, the OCC divided all lending-related activity into either "ministerial" or "non-ministerial" functions. The ministerial functions include acts such as "providing credit card or loan applications or receiving payments," 166 and are considered irrelevant to the determination of where a loan is "made." Only three non-ministerial functions - "the decision to extend credit, the extension of credit itself, and [*555] the disbursal of the proceeds of a loan" 167 - are relevant to the "making" of the loan. 168 Thus, the "origination" prong of the old test was replaced with "extension of credit," which the OCC interpreted as "the communication of final approval by the bank to the borrower." 169 The OCC went on to provide remarkably clear guidance as to exactly where each of these functions occurs. Approval occurs wherever the human beings who either make discretionary judgments of approval or establish non-discretionary approval criteria are located. 170 Disbursal occurs wherever the customer physically obtains the loan proceeds - either in person or through the crediting of a bank account. 171 Extension of credit occurs at the location from which the first communication of final approval comes. 172

If all three of these non-ministerial functions occur in a host state, the loan is definitely "made" in that state. 173 If fewer than all three of these functions occur in the host state, however, the OCC did not offer any definitive guidance on where the loan is considered to have been "made." 174 Instead, it held that in such situations the bank's home state rates "may always be applied," 175 but that the old three-pronged test could still be applied to justify charging host state rates instead. 176

To sum up, the geographic reach of 85 has been vastly expanded through aggressive interpretations of the term "located." Section 85 permits a national bank to charge "interest at the rate allowed by the laws of the state or territory where the bank is located, and no more." The Supreme Court's Marquette decision held that a bank was "located" in the state where it had its physical presence, and that a bank could "export" [*556] the rates of that state to borrowers in other states. At the time Marquette was decided, banks were not legally permitted to have branches outside their home states. The enactment of Riegle-Neal allowed banks to establish branches in other states, and the Act further contained a provision stating that nothing in the statute should be construed to affect in any way the applicability of 85. The OCC has interpreted that provision to mean that a bank can be "located" in either its home state or any of its host states, and that the Exportation Doctrine can be used by a bank to export rates from either location, depending on where the loan is "made." In addition, through its near-Dickensian parsing of the lending process, the OCC has in effect restricted the meaning of "location" for purposes of the Exportation Doctrine - a bank is not necessarily "located" in a state where it has a substantial physical presence, provided certain aspects of the lending process do not take place in that state.

Clearly, the term "location," as used in 85 in support of the Exportation Doctrine, bears little relation to its dictionary meaning. The next phase in the transformation in the nationwide banking system - its expansion onto the Internet - provides additional evidence of the increasing strain being placed on the antiquated language of 85.

c. Further Complications from Internet Banking

In 1996, then Comptroller of the Currency Eugene A. Ludwig noted:



Since our inception, the United States has been committed to a legal infrastructure that ties the activities of all manner of banks closely to state laws. Even national banks draw many of their authorities from state laws. But technology has put this legal infrastructure under increasing strain. For example, who should we say has jurisdiction over a loan issued by a depository institution with offices in State A to a consumer in State B who applies for a loan through a Web site maintained on a server in State C ... or country C for that matter? 177



Over the past few years, a number of national banks have been chartered as "Internet-only" banks, interacting with customers primarily through the Internet rather than through traditional bricks-and-mortar bank offices. 178 Each of these [*557] banks has a specific charter address in the state where its "main office" (typically described as "an office suite [including] a "call center' reached by telephone or computer") 179 is located. Although the designation of these sites as the "location" of the bank sometimes appears to be supported by the existing physical presence of corporate affiliates, 180 it is not clear from the publicly available data how much of a physical presence the banks actually maintain at their designated "locations," especially since many of the banking functions requiring substantial physical assets or manpower are outsourced to third parties. 181 While the outsourced functions are well within the range [*558] of data-processing and servicing functions that have been outsourced by conventional banks for decades with full regulatory approval, 182 in the case of an Internet bank, the outsourcing of significant functions further diminishes the already attenuated presence of the bank at its designated "location."

It is not clear from the publicly available approval documents whether the OCC was concerned about how substantial an actual physical presence backed up the applicants' location designation. Recent regulatory pronouncements have done nothing to clarify this issue. The OCC recently promulgated a regulation addressing electronic activities of banks. 183 In its initial request for public comment on the topic, the OCC noted that the concept of "location" was potentially problematic in this context and suggested that it would be willing to take a broad look at the issues raised. 184 The final regulation, however, contains only two provisions dealing with these issues, both of which merely rephrase the positions developed by the OCC in the interstate context in language applicable to the Internet:



For purposes of [85], the main office of a national bank that operates exclusively through the Internet is the office identified by the bank [in its charter application or through a subsequent relocation]. 185

[*559] and



A national bank shall not be considered located in a State solely because it physically maintains technology, such as a server or automated loan center, in that state, or because the bank's products or services are accessed through electronic means by customers located in the state. 186

Whether the mere designation of a headquarters location by these Internet banks in their charter applications will be considered sufficient to support a "location" for purposes of the Exportation Doctrine remains to be seen. The preamble to the new regulation suggests that even the OCC is not certain of the strength of its position. For one thing, the OCC claimed that its position that the physical location of technology in a state is not the sole factor to be considered in determining its "location" is "consistent with evolving case authority," yet it cited only one decision from a federal district court in New Jersey. 187 For another, the OCC rejected one commentator's proposal to eliminate any inference that the location of a bank's technological equipment or customers may ever be considered in the determination of a bank's "location," explaining:



It is not our intent to remove these factors altogether from the determination of where a bank is located since the equipment may be connected to other relevant activities of the bank. Instead, the purpose of this provision is simply to make clear that these factors alone will not determine the bank's location in a State. 188

Internet banks clearly present a vivid canvas for graphically displaying the true scope of the OCC's aggressive interpretations of the geographic reach of the Exportation Doctrine. One Internet-only bank, NextBank, changed its designated "location" from California to Arizona sometime between the date it opened and the date the OCC closed it less than three years later. 189 While the specific reasons for the change in location were not publicized, it is difficult not to suspect that the comparative liberality of interest rate laws in Arizona as opposed to [*560] California 190 was a significant motivation.

In summary, this dimension of the expansion of the Exportation Doctrine demonstrates that "location" has lost any rational connection to the actual physical presence of a bank. As long as a bank puts enough personnel engaged in "non-ministerial" lending functions in a jurisdiction with favorable consumer credit laws, it will be considered "located" in that state. Actual physical presence of other personnel or assets in any other state is irrelevant. As banks get more aggressive in using the Exportation Doctrine to avoid state consumer credit laws, it is likely that the OCC's expansive understanding of what constitutes a bank's "location" for purposes of the Exportation Doctrine will face judicial scrutiny. If, however, these courts follow the precedents established by cases examining the regulatory expansions of the definition of "interest," as discussed in the next section of this Article, it is unlikely that these interpretations will be restrained in any way.

3. Expanding the Substantive Scope of 85 - Defining "Interest"

The second dimension of the Exportation Doctrine that has been the subject of a dramatic expansion is its substantive scope - exactly what credit terms are "exportable" under this Doctrine? The language of 85 seems clear enough in that regard; on its face, it gives banks the power to charge "interest at the rate allowed by the laws of the State ... where the bank is located." 191 Based on this plain language, one would assume that state laws imposing consumer protection features other than interest rate restrictions, such as licensing requirements for certain types of loans, limitations on penalties like late fees or bad check fees, restrictions on the types of security that may be taken for a loan, or unique disclosure requirements, should not be preempted under the Exportation Doctrine.

This has not been the case, however. In 1966, the OCC opened the door to a more expansive interpretation of "interest" as used in 85 by issuing a ruling clarifying that banks using the Most Favored Lender Doctrine to charge rates permitted to other lenders under state law were not subject to the licensing [*561] requirements of those laws. 192 For example, a national bank using the Most Favored Lender Doctrine to charge customers rates available to licensed lenders in Minnesota would not be required to obtain a license from the state of Minnesota or submit to Minnesota's regulatory scheme for licensed lenders. The OCC was differentiating between two different sources of preemption of state law. The Most Favored Lender Doctrine permits our hypothetical bank to use Minnesota's licensed lender law to preempt other state interest rate restrictions. 193 As a federally chartered depository institution, however, the bank operates under a national bank charter. 194 Through the operation of the Supremacy Clause, the federal regulatory scheme governing national bank charters preempts Minnesota's licensing scheme. 195 Thus, the national bank can use the specific preemptive power of 85 to disregard state interest restrictions, and can use the more general preemptive power of the Supremacy Clause to disregard Minnesota's licensing requirements.

Navigating between these two sources of preemption authority in its later codification of this ruling, the OCC used the following language: "If State law permits a higher interest rate on a specified class of loans, a national bank making such loans at such higher rate is subject only to the provisions of State law relating to such class of loans that are material to the determination of the interest rate." 196 Provisions of the law such as licensing requirements were not considered to be "material to the determination of the interest rate"; thus, they did not apply to national banks using the Most Favored Lender Doctrine. 197 Provisions that were "material to the determination of the interest rate," such as the numerical rate limitation and methods of calculating interest, did apply to national banks using the Most Favored Lender Doctrine. 198

[*562] In other words, the OCC interpreted the term "interest" in 85 to mean more than simply the numerical interest rate addressed in a state usury statute. "Interest" was interpreted to include any additional terms that were "material to the determination of the interest rate." With the subsequent proclamation of the Exportation Doctrine, banks quickly grasped the potential of this regulatory "gloss" on 85's straightforward language. They argued that credit terms such as closing costs, compounding laws, annual and cash advance fees on credit cards, bad check fees, and late fees were all "material to the determination of the interest rate," and thus exportable as "interest" under the Exportation Doctrine. Courts across the country by and large accepted these arguments. 199

By the time this issue made its way up to the Supreme Court, the question centered on where we look to define "interest" - the laws of the state from which the bank is exporting the rate, the laws of the state into which the rate is being exported, or the regulations of the relevant regulator? With respect to national banks, in Smiley v. Citibank 200 the Supreme Court held that the relevant definition is the one promulgated by their primary federal regulator, the OCC. 201 In the course of the litigation leading up to these decisions, the OCC had amended its definition of "interest" to include a wide variety of fees and charges, over and above the numerical interest rate. 202

[*563] The Supreme Court upheld the OCC's expansive interpretation of "interest" as reasonable. 203 Moreover, the Court rejected the argument that the traditional deference shown to agency interpretations such as this should be "trumped" by the fact that 85 preempts state law. 204 Thus, in addition to being able to choose among many possible locations for the exportation of favorable interest rates, national banks now have the authority to ignore state laws in the states where their customers reside on a large number of credit terms in addition to the basic usury limits.

More recently, the OCC has used the preemptive authority of 85 to bolster its argument that a state disclosure law was preempted. In American Bankers Ass'n v. Lockyer, 205 a coalition of federal depository institutions and their trade associations challenged a California statute imposing on credit card issuers disclosure requirements beyond those required under TILA. The statute required specific warnings about the effect of making only minimum payments on credit card accounts. 206 The OCC submitted an amicus curiae brief, arguing that the California statute was preempted because, among other things, it "would encroach directly upon the national bank power to determine the terms and conditions of offers of credit." 207 The OCC pointed first to the two exemptions in this statute for issuers charging no interest and issuers requiring minimum payments of 10%. 208 The OCC argued that the first exemption directly implicated 85, and the second implicated national banks' "power [*564] to determine the terms and conditions of offers of credit." 209 In addition, the disclosure requirements themselves imposed a significant burden on bank operations. 210 The court deferred to the OCC's finding of such a burden, and accepted the plaintiff's argument that the California statute "interferes with the federal power to lend money through its imposition of costly operational and administrative burdens on national banks' lending activities." 211 In doing so, the court held: "Consumer protection is not reflected in the case law as an area in which states have traditionally been permitted to regulate national banks. Accordingly ... "the presumption against preemption of state laws is inapplicable.'" 212

The Lockyer court did not base its preemption decision solely on 85. The preemptive force of the entire scheme of regulation provided for national banks' lending operations was clearly persuasive to the court. 213 The court did, however, explicitly defer to the OCC's analysis, which expressly included the invocation of 85. 214 In doing so, the court did not object to the OCC's determination that, because California's disclosure law provided exemptions based on the interest rate charged, the entire law was "material to the determination of the interest rate," and thus preempted under the Exportation Doctrine. 215 If courts continue to accept this argument, there do not appear to be any logical limits to the substantive scope of the Doctrine.

This dimension of the expansion of the Exportation Doctrine is extremely significant for two reasons. First, it is crucial to understanding the substantive scope of the preemptive effect that the Exportation Doctrine has on state consumer credit laws. The Doctrine does not just preempt all state laws establishing usury limits. It also preempts all state laws dealing with everything the OCC declares to be "material to the determination of the interest rate." If the Lockyer ruling holds, there appear to be almost no limits to the sorts of consumer credit statutes that the OCC could hold to be related to interest rates. [*565] Second, Smiley decisively rejects the argument that consumer credit regulation is the primary province of states when the lender is a national bank. This would appear to leave some room for state regulation of consumer credit in situations where the lender is not a national bank. However, the third dimension of the expansion of the Exportation Doctrine further diminishes even that vestige of state power, extending the orbit of the Doctrine's beneficiaries to many additional lenders.

4. Expanding the Orbit of the Beneficiaries of the Exportation Doctrine to State Banks - Competitive Equality in Action

One of the most important forces in the dynamic of our nation's distinctive dual banking system is the drive to maintain "competitive equality" among the two banking systems. If a regulatory innovation applicable to one type of depository institution provides a competitive advantage, that innovation is typically made available to the other type of depository institution as well, leveling the playing field, and thus maintaining the crucial "competitive equality" of the dual banking system. 216 The extension of the Exportation Doctrine to state-chartered banks is a vivid demonstration of this dynamic in play.

The Most Favored Lender Doctrine and Exportation Doctrine clearly gave national banks a competitive advantage over state banks. In most states, the legislatures directly addressed this imbalance by abolishing state usury laws disfavoring state banks and sometimes enacting laws favoring banks in their states over other types of lenders. 217 However, these accommodations proved inadequate during the inflationary period of the late 1970s. Even the most liberal of the state usury laws proved constrictive when prime rates reached levels of 20% in April 1980. 218 Section 85 had been amended in 1933 to give national banks the option of charging either the highest state rate available as Most Favored Lenders, or a rate pegged to federal discount rates. 219 In a high interest rate environment, the federal [*566] discount rate option often exceeded even the most favorable state rates. 220 State banks did not have that option. In order to maintain the competitive equality of the dual banking system, Congress stepped in and enacted legislation giving federally insured state banks the same advantage.

Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 221 (DIDMCA) gave state-chartered, federally insured banks the power to charge



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 ... 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. 222

The legislative rationale in enacting section 521 of DIDMCA is expressly included in the language of the statute, which begins: "In order to prevent discrimination against State chartered insured depository institutions ... ." 223 Section 521 is equally forthright about its preemptive effect, permitting state-chartered banks to charge its rates "notwithstanding any State constitution or statute which is hereby preempted for the purposes of this section." 224

Section 521 was enacted for the specific purpose of enabling state banks to peg interest rates to federal discount rates. However, Congress accomplished this goal by appropriating all [*567] of 85, not just the federal rate language. Pursuant to the "general rule that when Congress borrows language from one statute and incorporates it into a second statute, the language of the two acts should be interpreted the same way," 225 section 521 has been interpreted to extend to state banks all of the powers deriving from 85 that were extended to national banks, from Most Favored Lender status 226 to the Exportation Doctrine. 227

The FDIC, as primary federal regulator of state banks, has invariably followed the OCC's lead in providing regulatory support for aggressive expansions of the Exportation Doctrine, and both legislatures and courts have been largely cooperative. A few years after Riegle-Neal was enacted, Congress enacted the Riegle-Neal Amendments Act of 1997, 228 which clarifies the applicable law for state banks engaged in interstate branching. This law generally provides that interstate branches of state banks are subject to the laws of the state where they are located to the same extent as interstate branches of national banks. 229 It also adds the equivalent of the "usury savings clause" for state banks. 230 The FDIC relied on this clause in adopting the OCC's interpretation of the ability of state banks to export rates from either their home states or from states where their branches are located. 231

Similarly, the FDIC has adopted the OCC's expansive definition of "interest." 232 When the issue of the appropriate definition of "interest" under section 521 reached the Supreme Court, the Court declined to review a First Circuit decision which held that the relevant definition is the one found in the laws of the [*568] state from which the rate is being exported. 233 Not surprisingly, states which host significant credit card banks have enacted extremely generous definitions of "interest." 234

Thus, the orbit of the beneficiaries of the Exportation Doctrine has been broadened by federal statute to include state-chartered banks. This extension of the Exportation Doctrine to state-chartered banks does not appear to be susceptible to legal challenge. Congress provided for this extension pursuant to its authority under the Commerce Clause to regulate interstate commerce. 235 The extension of the Exportation Doctrine to state banks has been implicitly affirmed by the Supreme Court. 236 The FDIC's interpretation of the meaning of the language of section 521 is presumably subject to the same amount of deference as the OCC's interpretations of the meaning of the language of 85. 237

Moreover, as a matter of banking policy, the extension of the Exportation Doctrine to state banks is justified. Although the statutory provision from which the Doctrine was derived, 85, was enacted for the purpose of fostering national banks as alternatives to state banks, 238 the Exportation Doctrine itself clearly serves a different purpose - that of fostering the development of an interstate banking system. 239 Under the principle of competitive equality, a privilege that fosters the development of interstate banking for national banks ought to be made available to state banks as well. The next stage in the expansion of the orbit of the Exportation Doctrine's beneficiaries is [*569] not, however, so readily justified by any established principle of banking policy.

5. Expanding the Orbit of Beneficiaries of the Exportation Doctrine to Nonbank Corporate Entities

a. Banking Regulation 102 - Why Depository Institutions Are Special, Part Two

The unique charter bestowed on depository institutions as a consequence of their role as financial intermediaries carries with it a heavy regulatory burden. 240 This burden includes the body of activity and ownership restrictions aimed at insulating the financial intermediary from the general stream of commerce in which it functions. This separation of "banking" from "commerce" is grounded in the desire to preserve the stability and impartiality of the nation's financial system, which is dependent on the intermediation performed by depository institutions. 241 Although the exact nature and extent of these restrictions have varied at times, currently a bank is not free to engage in general commercial activity, and, conversely, a commercial enterprise is not free to engage in the business of banking.

These restrictions take on two forms - activities restrictions and affiliation restrictions. The activities restrictions derive from the fact that "a bank is a creature of its enabling statute, so that "powers not conferred ... are denied.'" 242 The enabling statute for national banks gives them the generic powers required to function as a legal entity - such as the power to make contracts, engage in litigation, appoint officers [*570] and directors, and prescribe bylaws. 243 In addition to these generic powers, banks are only empowered to exercise "all such incidental powers as shall be necessary to carry on the business of banking." 244 The powers of state-chartered banks are similarly limited. 245 Conversely, state statutes typically prohibit entities without either a state or federal bank charter from engaging in the business of banking. 246 As one commentator explained:



The premise underlying these provisions is that an entity should not be allowed to engage in the business of banking unless the entity complies with the regulatory safeguards designed to restrain the risks associated with depository institutions and also presumably complies with the social obligations and political constraints imposed on the banking industry. 247

In other words, banks can only engage in "the business of banking" and only banks can engage in "the business of banking." Although the exact scope of what constitutes the "business of banking" is not always clear, 248 it is clear that banks are not permitted to engage in general commercial activities such as making cars or selling clothes, and commercial entities such as car manufacturers and retailers are not permitted to engage in general banking business.

In addition to the activities restrictions imposed by the federal and state laws described above, the separation of banking from commerce is accomplished through a number of restrictions on corporate affiliations between banks and general commercial enterprises. These restrictions address situations in which both entities are part of the same corporate structure, [*571] or controlled by the same individuals. Beginning with the Glass-Steagall Act of 1933, 249 Congress enacted progressively tighter restrictions on corporate affiliations between banks and commercial enterprises. Glass-Steagall prohibited corporate affiliations between banks and securities companies. 250 The Bank Holding Company Act of 1956 251 (BHCA) prohibited corporate affiliations between banks and entities engaged in any activities other than banking or activities "so closely related to banking as to be a proper incident thereto." 252 With the enactment of the Gramm-Leach-Bliley Act of 1999, 253 banks meeting certain financial and regulatory criteria can affiliate with a broader category of entities engaged in activities other than banking, but such activities must still be "financial in nature" or "incidental" or "complementary to" a financial activity. 254 Again, while the exact parameters of "financial in nature" have yet to be fleshed out, we are left with a legal structure in which formal corporate affiliations between banks and nonfinancial commercial enterprises, such as car manufacturers and clothing retailers, are generally prohibited. 255

While such affiliations are generally prohibited, there are some exceptions. A couple of these exceptions are significant for purposes of our analysis because they enable commercial entities with no interest in becoming full-fledged banks to obtain one particular benefit of a bank charter - the exportation power - in order to offer uniform nationwide lending programs without having to observe nonuniform state consumer credit laws. 256 Through these mechanisms, the orbit of beneficiaries of [*572] the Exportation Doctrine is expanded to include commercial entities. The two primary mechanisms through which commercial enterprises can acquire exportation powers are, first, the remaining "nonbank bank" loopholes in the BHCA, and, second, contractual arrangements falling short of formal corporate affiliations, in which commercial entities essentially "rent" a bank's charter.

b. Nonbank Banks

The BHCA effectuates its prohibition of corporate affiliations between banks and commercial enterprises by subjecting the corporate parents of banks to regulation as "bank holding companies." 257 If a corporation is a bank holding company, it is prohibited from engaging in any activities other than those "closely related to banking" or "financial in nature," or having any corporate or ownership affiliation with any other entity engaged in such activities. 258

Historically, there have been many exceptions to this general prohibition, deriving from the BHCA's definition of "bank." Originally, a holding company owning only one bank was not considered a bank holding company. When the BHCA was amended in 1970 to extend its reach to include single-bank holding companies, the definition of "bank" was amended to read "any institution ... which (1) accepts deposits that the depositor has a legal right to withdraw on demand and (2) engages [*573] in the business of making commercial loans." 259 This definition became known as the "nonbank bank loophole": Any entity chartered as a bank that did not engage in both of those activities could function as a bank for most practical purposes, yet not be considered a bank for purposes of the BHCA. Thus, the BHCA would not prohibit a commercial entity from owning or having a corporate affiliation with such a "nonbank bank." The most popular use of the nonbank bank loophole was by commercial enterprises desiring to offer consumer banking services, particularly consumer lending. 260

When Congress addressed this loophole by enacting the Competitive Equality Banking Act of 1987 261 (CEBA), it failed to close the loophole completely. First, CEBA grandfathered existing nonbank banks, provided they complied with certain restrictions on growth and activities, 262 thus permitting commercial enterprises such as Chrysler Corporation, General Electric Company, and Sears, Roebuck & Company to retain their affiliated banks. 263 Second, at the same time that Congress amended the BHCA's bank definition, it enacted a lengthy list of exceptions to the definition. 264 This list consists of particular banklike institutions that Congress determined should not subject their parents to regulation as bank holding companies, even though they would otherwise fall within the BHCA's bank definition. Thus, commercial enterprises may own these types of banklike institutions. Included on this list are "credit card banks," banks which limit their operations to issuing credit cards, 265 and "industrial loan companies," a unique type of general-purpose [*574] state-chartered financial institution available only in a few states. 266

Commercial enterprises (including companies such as General Electric, Merrill Lynch & Company, Whirlpool Corporation, and Nordstrom) have been aggressive in taking advantage of both of these loopholes to engage in consumer lending. 267 [*575] Thus, through the operation of the nonbank bank exception to the bank holding company, the orbit of the beneficiaries of the Exportation Doctrine has been expanded to include many commercial enterprises.

c. Charter Renting or Attribute Franchising

Another way a commercial enterprise can obtain exportation powers is by entering into a contractual arrangement with a bank pursuant to which the bank extends credit to the customers of the commercial enterprise. Some consumer activists characterize these arrangements as "charter renting"; 268 the OCC sometimes prefers to characterize them as "franchising the bank's attributes." 269 Regardless of the characterization, these arrangements all involve a relationship between a bank and some other entity that does not wish to extend credit itself. For a variety of reasons, this other entity wants to make credit available to its customers, but does not itself want to be the entity extending the credit. For example, it may be that the commercial entity is not interested in acquiring the expertise and infrastructure necessary to administer consumer credit. Or it may be that the commercial entity wants to take advantage of some unique feature of a bank charter, such as particular funding sources, access to existing credit card systems such as Visa and MasterCard, or exportation powers. If the commercial entity is not interested in establishing its own nonbank bank to [*576] conduct its credit operations, it can enter into a contract (or, more likely, a complex series of contracts) with a bank, whereby the bank issues the credit on behalf of the commercial entity.

While variations of these arrangements have existed for decades, 270 three recent versions are significant for purposes of this Article - cobranded credit cards, refund anticipation loans, and payday loans. In order to fully appreciate the extent to which the Exportation Doctrine has in fact emasculated state consumer credit laws, it is crucial to understand the full extent to which it is being used by nonbanks as well as by banks. Moreover, these arrangements all involve, or have the potential for involving, subprime credit products or products typically associated with predatory lending. The use of the Exportation Doctrine by such lenders dramatically highlights the consequences of its expansion.

i. Cobranded Credit Cards

In the early 1990s, a group of highly visible commercial enterprises launched "cobranded credit card programs." The credit cards issued under these programs were prominently identified with the commercial enterprise launching the program; most of these cards offered rebates on products sold by the commercial enterprise, such as AT&T's 10% discount on long distance calls, 271 Ford Motor Company's rebate on Ford cars based on charge volume, 272 or 10% discounts on World Championship Wrestling merchandise. 273 However, each of these credit cards was issued by an existing conventional bank that had no corporate affiliation with the commercial enterprise - Universal Bank issued AT&T's card, 274 Citibank issued [*577] Ford's card, 275 and Capital One issued the World Championship Wrestling card. 276 Cobranded credit card relationships continue to be established by major commercial entities, including most major airlines, 277 Mercedes-Benz, 278 Walt Disney, 279 Kmart, 280 Wal-Mart, 281 and Amazon.com. 282

The degree of control that the commercial enterprise in a cobranding relationship retains over the credit extended under this arrangement can vary considerably, ranging from delegating virtually the entire responsibility for the program to the bank issuing the credit, to retaining control over virtually every aspect of the program, including repurchasing the receivables generated through use of the credit cards. 283 Logically, commercial [*578] enterprises that choose to enter into cobranding relationships are probably not terribly interested in maintaining control over their credit operations. If they wished to maintain control over their own credit operations, they could easily have chartered their own credit card banks. Similarly, the opportunity to piggyback on the exportation powers of the chartered bank issuing the credit would likely be of negligible interest, since they could easily acquire such powers themselves by chartering a credit card bank. Their motivation for entering into such a relationship is more likely to be to offer credit to their customers without having to acquire the expertise or infrastructure necessary to manage credit. 284

ii. Refund Anticipation Loans

The next significant credit product offered by commercial entities under contractual arrangements with banks is the refund anticipation loan (RAL). RALs are short-term loans extended to consumers "in anticipation" of their tax refunds. 285 They are marketed by commercial tax preparers as quick refunds, enabling taxpayers using the tax preparers to file electronically and obtain their refunds within a day or two. In actuality, RALs are loans extended by banks, through a contractual arrangement with the tax preparer. They typically are structured as follows:

[*579]

When the loan is made, the bank prepares to collect on the loan by opening a temporary bank account for the borrower to receive electronic deposit of the refund. The documents signed by the borrower instruct the IRS to direct deposit the refund into that account. The contract usually contains a right of setoff, so the lender is repaid when the refund appears in the bank's account. The consumer is liable for the full amount of the loan if the refund is disallowed in whole or in part. The refund amount would be affected if, for example, [the] IRS disallows a deduction or if there is an intercept of the refund for child support or a student loan debt. 286

Consumers usually pay three fees in connection with RALs - a tax preparation fee to the tax preparer, an electronic filing fee to the tax preparer, and a loan fee to the bank making the loan, a portion of which is typically paid by the bank to the tax preparer. 287 The loan fees, typically ranging from $ 29 to $ 89, 288 are based on the size of the refund, translating into effective annual percentage rates ranging from 67% to 608%. 289 Obviously, such interest rates would typically exceed the legal rate of interest under state law for a tax preparer. 290 Thus, the loans are extended by banks chartered in states with no restrictions on interest charges, such as Delaware. 291 Until quite recently, RALs were offered by the two largest tax preparers, H&R Block and Jackson Hewitt, among others. 292

[*580] As with the cobranding arrangements, the motivations of the parties entering into these arrangements, and the degree of control each party retains over the lending involved, vary widely. We can assume that the profit to be made from the various fees charged is a prime motivation for both the tax preparers and the banks. The tax preparers have additional motives, however, since they do not have the legal power to implement two aspects of a RAL program on their own. First, RALs require the taxpayer to have a bank account into which the IRS can directly deposit the refund. 293 Offering bank deposits is one of the most straightforward hallmarks of the "business of banking," and is illegal under most state laws by entities other than chartered depository institutions. 294 Second, a bank, of course, has the power under the Exportation Doctrine to construct a nationwide program with standardized terms and high effective interest rates, by "exporting" the law of a jurisdiction with no restrictions on RALs, regardless of any more restrictive consumer protection statutes in the jurisdictions where the taxpayers reside. 295 Both the lack of interest rate limits and the lack of a need to continually monitor and comply with consumer protection statutes in fifty states clearly have a major impact on the economics of a national program.

Details about the specific arrangements between the tax preparers and the banks extending the credit have not been as widely covered in the general press as details about the cobranding agreements. The opinions issued in connection with lawsuits challenging these arrangements suggest that the participants are sensitive to issues of control over the credit decisions [*581] and the tax preparers' operations. 296 They are not apparently as concerned, however, about control over the resulting receivables; for example, H&R Block purchased about one-half of the RALs it generated. 297

iii. Payday Loans

The third significant type of credit offered by commercial entities under contractual arrangements with banks is the payday loan. 298 Payday loans are short-term cash advances, typically made on the security of postdated personal checks issued by the borrower to the lender. The lender agrees not to deposit this check until some date in the near future, typically two weeks from the date of the advance (in other words, on the next "payday," when sufficient salary will presumably be deposited in the borrower's account to repay the loan). 299 Fees charged for such loans, which are deducted by the lender from the cash advanced, typically translate into effective APRs averaging 470%. 300 Although structured as short-term advances, the loans are often renewed when the borrower cannot repay on the due date and are often the subject of abusive collection practices. 301

Although the payday loan industry emerged only in the early 1990s, it quickly expanded into a multi-billion-dollar industry. 302 [*582] The industry leaders are commercial entities specializing in this business, check-cashing outlets, and pawn shops. 303 They are organized as national or regional chains, offering loans in their offices, online, and through the telephone. 304 The explosive growth of this industry has attracted the intense scrutiny of consumer activists and state legislatures, and has resulted in state legislation attempting to stem more blatantly abusive features of such loans. 305

In response to these state efforts, a number of payday lenders teamed up with depository institutions. 306 As with the cobranded credit cards and the RALs, these payday lenders entered into contractual arrangements whereby the bank actually extends the credit to the borrowers. In contrast to the other two types of credit products, however, the motives of the payday lenders entering into these arrangements were simple. They did not need the credit-granting expertise of the banks, since they were already fully engaged in the business of making these loans. Indeed, they almost certainly had more expertise in this particular credit product than any of their bank partners. Nor did they need the unique bank power to accept deposits; anyone can cash a check that is made out to her. The primary motivation of the payday lenders in entering into these arrangements was to obtain the benefit of 85's exportation powers. 307 This can be evidenced by the reported structures of [*583] some of these programs, in which little of the control over the lending was surrendered to the bank partner. For example, under the arrangement between Goleta National Bank and ACE Cash Express, ACE purchased a 90% participation in each loan made by the bank, bore 90% of the loss on any loan that defaulted, received the loan payments, paid collection costs, and kept the loan records. 308

Clearly, the Exportation Doctrine has been dramatically expanded by the extension of the scope of its beneficiaries to nonbank commercial entities. However, federal banking regulators have not been as unequivocal in their support for this dimension of the expansion of the Exportation Doctrine as they were with respect to the expansion of the definitions of "location" and "interest." At least with respect to nonbanks engaged in subprime lending, regulators have suggested that there are some limits to the use of the Doctrine by nonbanks.

d. Regulatory Reaction to the Extension of the Exportation Doctrine's Orbit of Beneficiaries to Subprime Lenders

The position that federal bank regulators have taken with respect to the expansion of the orbit of the beneficiaries of the Exportation Doctrine to commercial entities is more nuanced than their whole-hearted support of the other two dimensions of expansion. Regulators have been steadfast in their support of the legal authority of commercial entities interested in exploiting these opportunities to do so - either by chartering nonbank banks or by partnering with banks. Federal bank regulators have, however, demonstrated an increased willingness to use existing discretionary powers to deny or curb particular applications of these powers in cases involving subprime lending.

i. Nonbank Banks

With respect to the first method of extending the Exportation Doctrine to nonbanks - the use of the nonbank bank exceptions to the BHCA - both the OCC and the FDIC have readily approved applications of various commercial enterprises to [*584] charter or acquire credit card banks. 309 So far, courts facing challenges to the legal authority of exportation by credit card banks have not balked at extending the Doctrine, at least to national banks. 310 However, a state-chartered credit card bank is the subject of one of the most significant ongoing legal challenges to the use of the Exportation Doctrine by nonbank banks. In Heaton v. Monogram Credit Card Bank of Georgia, 311 Patricia Heaton, a resident of Louisiana, filed a class action lawsuit against Monogram Credit Card Bank of Georgia, a subsidiary of General Electric (Monogram), charging that Monogram had no authority to charge late fees in excess of the amount permitted by Louisiana law. 312 Heaton argued that Monogram was not entitled to export the rates permitted under laws of the state where it was located (Georgia) because Monogram was not a "state bank" for purposes of section 521. 313 The only deposits Monogram accepted were from its parent corporation. Heaton argued that it was therefore not "engaged in the business" of accepting deposits, and was therefore not a "state bank." 314

Thus far, this argument has been asserted only in preliminary skirmishes involving the removal of the case to federal court; 315 the argument has not been heard or argued on its merits, [*585] as it affects Monogram's authority to export Georgia's late fees. However, during these preliminary skirmishes, the FDIC actively supported Monogram's position. The FDIC issued a General Counsel's Opinion holding that maintaining one deposit in a minimum amount of $ 500,000 is enough to be "engaged in the business" of receiving deposits. 316 This opinion letter was quickly promulgated as a regulation. 317 The opinion and regulation merely formalized a long-standing position of the FDIC. 318 Indeed, the FDIC could not have granted Monogram FDIC insurance had it not reached this conclusion at the time the charter was granted. 319 However, the timing of the issuance of the opinion, and the fact that it was apparently drafted by counsel for Monogram for the FDIC's signature, attracted both the attention of the media 320 and the approbation of at least one of the judges ruling against Monogram in the complicated series of venue skirmishes. 321

While the federal banking regulators continue to support the legal authority of commercial enterprises to establish nonbank banks to take advantage of the Exportation Doctrine, they are demonstrating an increasing willingness to use their regulatory powers to prevent entities from taking advantage of this power in order to engage in arguably predatory lending practices. Three distinct regulatory initiatives are evident.

[*586] First, regulators have demonstrated an increasing willingness to withhold approval of expansion or new charter applications involving subprime lenders. 322 Regulators imposed many conditions on Citigroup's acquisition of Associates First Capital Group, a national subprime mortgage lender and credit card issuer. 323 The OCC also conditioned the acquisition of a check-cashing company by a national bank on the bank's agreement not to permit the subsidiary to engage in payday lending. 324 The OCC also denied an application by CompuCredit Corporation, a subprime credit card lender, to acquire a credit card bank. 325

Second, federal banking agencies have issued a number of regulatory guides dealing with subprime lending which, although not exclusively aimed at nonbank bank subsidiaries of [*587] commercial enterprises, contain strong warnings that such entities might be particularly vulnerable to enforcement of these policies. Indeed, the policies have been applied against a number of such subsidiaries.

The four federal financial institution regulators - the OCC, the Federal Reserve, the FDIC, and the OTS - have issued two joint guidances on subprime lending in the past few years, noting the increased involvement of insured depository institutions in subprime lending. 326 While the agencies expressed their support for responsible subprime lending as a way to "expand credit access for consumers and offer attractive returns," 327 they stressed that it carries elevated levels of risk and demands intensive risk management and additional capital support. The first guide warned, "If the risks associated with this activity are not properly controlled, the agencies consider subprime lending a high-risk activity that is unsafe and unsound." 328 The second guide was specifically aimed at depository institutions whose subprime activities constitute 25% or more of their business, 329 which would certainly include any nonbank bank chartered by a commercial enterprise engaging heavily in subprime consumer lending. In this guide, the agencies outlined detailed risk management expectations, warning that "when a primary supervisor determines that an institution's risk management practices are materially deficient, the primary supervisor may instruct the institution to discontinue its subprime lending programs." 330

The agencies have also released a joint guide on account management policies for credit card lending. 331 This guide addressed specific credit card account management, risk management, and loss allowance practices observed in recent examinations that the agencies deem "inappropriate." 332 The practices identified in this proposed guide are characteristic of [*588] predatory lending: failing to consider the repayment capacity of individual borrowers when extending new lines of credit or increasing existing lines; lack of prudent over-limit practices, especially with subprime credit accounts; and workout and forbearance programs that make it difficult for the borrower to extinguish the indebtedness. 333 The agencies warned that they would not tolerate accounting practices that do not reflect the true risks and losses of subprime credit card programs. 334 Again, although the scope of this guide was not limited to subsidiaries of commercial enterprises, it addressed the sole business engaged in by many such subsidiaries.

These three guides, taken together, provide a strong warning to commercial enterprises offering consumer lending through nonbank bank subsidiaries that the regulators intend to use their supervisory powers to closely monitor subprime lending and to prevent predatory lending. Moreover, all of the federal banking agencies have taken enforcement actions