Citibank (SD) NA must show legal support for its usurious interest rates

Judge Ciaffa in Nassau District court was not moved by Citibank's assertions that it was entitled to a 29.99% interest rate merely because it is a "national bank." This otherwise routine inquest in a credit line debt case presents an important issue for creditors and prospective judgment debtors. What proof does a national bank need to submit in order to justify an award that includes interest charges far in excess of New York's usury limits?

The creditor in this case, a well-known national bank, seeks a judgment against defendant for unpaid balances that increased, monthly, upon the assessment of interest charges which accrued at an annual rate of up to 29.990 percent. Additionally, monthly "late fees" were added to the balances.

The court found that there was nothing in the papers submitted that explains why Citibank should be entitled to a monetary judgment that includes interest rates and fees that significantly exceed New York's criminal usury rate of 25 percent (P.L. §190.40), and which effectively doubled the permissible civil rate on loans and debts subject to New York law. See Citibank (South Dakota) N.A. v. Mahmoud, 19 Misc3d 1141(A), 2008 NY Slip Op 51091(U) (Civ Ct Richmond Co).

Are such otherwise "usurious" interest charges properly recoverable in a District Court proceeding brought by a national bank against a New York resident debtor? Lawyers for credit card issuers (such as Citibank) typically contend that national banks are exempt from our state's usury limits under the provisions of federal law. Although the argument finds some support in the United States Supreme Court's precedents, see Smiley v. Citibank, 527 U.S. 735 (1996); Marquette Nat. Bank v. First of Omaha Service Corp., 439 U.S. 299 (1978), a national bank's right to exceed this state's usury limits is not established simply by alleging its status as a "national bank." Instead, under applicable provisions of federal law, a greater showing is required. At a minimum, the bank must demonstrate, through proof in admissible form, that at least one significant non-ministerial action associated with the account took place in the bank's "home state."

Plaintiff Citibank, as "a national banking association" (complaint, ¶1), possesses certain rights under federal law which may very well allow it to impose interest charges and fees in excess of our state's limitations. See Smiley v. Citibank, supra; Marquette Nat. Bank v. First of Omaha, supra. But it would be wrong to assume that its right to do so is completely unfettered. Cf. American Express Travel Related Services Co. v. Assih, 2009 NY Slip Op 29527 (Civ Ct. Richmond Co).

More than four years ago, in Citibank (South Dakota), N.A. v. Martin, 11 Misc3d 219 (Civ Ct NY Co 2005), in the context of a summary judgment motion, Citibank was advised, in explicit terms, that it should provide relevant information to the Court "refuting application of local usury laws" to assure that a damage award is "not excessive in amount." 11 Misc3d at 221-223. The Court's concerns in that decision were echoed several years later in another Citibank case. See Citibank (South Dakota), N.A. v. Mahmoud, supra. In a more recent decision by Judge Straniere, he again pointedly raised issues respecting a credit card issuer's entitlement to the benefit of a federal statutory exemption. See American Express v. Assih, supra.

Importantly, the Comptroller found compelling evidence in the federal legislative history which supported its interpretation. As Senator Roth (R-Del.) stated in the Congressional Record: if a national bank with a home office in State A "approves a loan, extends the credit, and disburses the proceeds" to persons or entities in State B, it "may apply the law of State A even if the bank has a branch or agent in State B and even if that branch or agent performed some ministerial functions such as providing credit card or loan applications or receiving payments."Interpretative Letter #822, supra, quoting statement of Sen. Roth in support of the "usury savings clause" of theRiegle-Neal Act (12 USC §1811). Conversely, "if a branch or branches in a particular host state approves the loan, extends the credit, and disburses the proceeds to a customer, Congress contemplated application of the usury laws of that state" irrespective of whether the home state's laws allowed for higher or different rates. Interpretive Letter #822, supra.

The Court's more recent decision in Watters v. Wachovia Bank, 550 US 1 (2007), in turn, draws a material distinction between the power of a national bank to act through "operating subsidiaries" and the acts undertaken by its "affiliates." When a national bank acts through its "operating subsidiaries" it may do so under the same terms and conditions applicable to the bank itself. In contrast, the acts of "affiliates" located in other states remain subject to the other state's regulation.

Moreover, as recognized in Watters, "state usury laws" continue to "govern the maximum rate of interest national banks can charge on loans." Watters v. Wachovia Bank, supra. The key issue, in all cases, is whether the non-ministerial actions of the bank and/or its affiliates, undertaken in connection with a given account, actually took place in one state or another. Inherently, this is a fact sensitive question. Cf. SPGGC v. Blumenthal, 505 F3d 183 (2d Cir. 2007) (seller of pre-paid gift cards issued by national bank held subject to Connecticut Gift Card Law in the absence of proof that "the fees in question [were] established and collected by the issuing bank rather than by [the seller]").

In the instant case, Citibank's ability to lawfully charge interest rates and late fees to defendant's account, in amounts in excess of those permitted by New York law, rests upon the premise that 12 USC §85 gives at the right to do so. Section 85 on its face governs the rate of interest that may be charged by a national bank "on any loan…or other evidences of debt," and it is well settled that the providing of money through a credit card or similar credit line account constitutes a "loan" within the meaning of section 85. See 44B Am Jur2d, Interest and Usury §126. Accordingly, Court does not question Citibank's right, consistent with federal law, to structure its credit line and credit card affairs in a manner that enables it to avoid and circumvent the usury limits of this state.

However, the issue presented, here, is whether Citibank has, indeed, so structured its affairs. The Court shares the concerns expressed by several of my fellow judges as to whether national banks and other credit card issuers have been literally following the letter of the law, or have been abusing it for their enrichment at the expense of our state's citizens. See American Express v. Assih, supra; Citibank v. Martin, supra.

Because it failed to set forth where Citi-bank or its affiliates had performed non-ministerial acts, the court found that absent a showing that plaintiff was entitled to apply interest charges in fees in excess of those allowed by New York law, see American Express Travel Related Services, Co. v. Assih, supra, the Court limits its award to $9,408.41, plus statutory interest from the due date of payment in that amount.

Citibank (South Dakota) NA v. Hansen, 19450/09

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