The U.S. District Court for the Eastern District of New York dismissed a suit against a national bank’s affiliates for violations of New York state usury laws in connection with the affiliates’ securitization of the bank’s credit card accounts, finding that the interest rates were controlled by the federal National Bank Act (NBA) instead of New York state law.
The plaintiffs were New York residents who held credit cards issued by a national bank. The bank—which was not a defendant—sold the rights to receivables on the credit card accounts (such as payments of principal, interest, and fees) to certain affiliated entities, which securitized the receivables for sale to investors in the form of fixed income securities. While the bank sold the rights to the receivables on the accounts as part of the securitization process, the bank continued to own and service the underlying credit card accounts themselves.
The NBA allows national banks to charge the interest rates allowed in the place where the bank is located—even to customers who live in a different state—and preempts state law usury claims under the laws of other states. The bank here was located in Virginia, which did not impose any relevant usury caps on the bank. The NBA also generally preempts state laws which significantly interfere with a national bank’s powers. The plaintiffs argued that because the national bank sold the receivables on the credit card accounts to its affiliates—which were not national banks—as part of the securitization process, and because the non-bank affiliates played key roles in the handling of the accounts as part of securitization process, the NBA did not preempt usury claims against the affiliates under the laws of other states.
The court found that the interest rates were controlled by the NBA, which incorporated Virginia’s lack of a usury cap for this particular national bank, instead of New York state usury laws. The national bank owned and controlled the credit card accounts that generated the receivables that collateralized the securities, and maintained the authority to modify terms and provisions of the underlying credit card accounts, including the interest rates and fees charged to the credit card holders. The fact that it relied on non-national bank affiliates as part of the securitization process did not change the fact that the national bank owned and operated the underlying accounts. Further, the court found that applying state usury laws instead of the NBA would significantly interfere with the national bank’s ability to issue credit cards and securitize the proceeds of the accounts.