Interest Exportation FAQs: 8 Questions to Consider When Offering a Credit Card or Lending Program

Immediately! This is one of the first things the bank should do if it’s thinking about offering any type of lending program (credit cards, loans, lines of credit, etc.). This analysis is going to dictate the interest the bank can charge in each state and drive the program’s footprint and financial strategy. For fintechs partnering with a bank, the bank should establish the pricing terms for the program as early as possible.

“Interest exportation” refers to a bank’s federal right to charge the highest interest available in the state where it is located on credit it extends to borrowers residing in any state. For example, a card issuing bank located in Delaware can charge a California borrower the highest available interest Delaware allows on credit cards, even if it is higher than what California law allows. Where a bank is “located” is the bank’s home state or, in some circumstances, the state where the bank has a branch.

In legalese, federal law grants banks the right to charge and “export” nationwide the interest permitted to their home state’s “most favored lender” on extensions of credit they make to borrowers located within and outside of their home state, without regard to the interest limits of the borrower’s state of residence.

“Most favored lender” refers to a principle in federal law that authorizes banks to charge interest on each class of loans at the maximum amount authorized for any class of lender—the most favored lender—under the laws of the state where the bank is located. The “most favored lender” is the lender in that state with the right to charge the highest interest for the type of lending product the bank is offering.

More than you might think.

Practice Pointers

• A good rule of thumb is that “interest” includes the numerical periodic rate and any fee or charge that is an alternative to charging a higher rate.
• What is considered “interest” for exportation purposes is not necessarily the same as what a state considers interest for usury purposes. These are two separate analyses, both of which should be performed.

No. If the bank is going to export the highest available “interest” permitted by its home state, it also has to export any provision of the law that is “material” to the determination of that permitted interest. This includes, for example, provisions governing:

• The manner in which the interest is calculated
  • e.g., interest calculation method, balance computation method, interest compounding, etc.
• Grace periods
  • e.g., a grace period on credit card purchases; a grace or “courtesy” period on late fees
• Refunding
  • e.g., refunding an annual fee in the event of account closure

Yes, but only if a state-chartered bank is exporting the interest.

State-chartered banks derive their interest exportation rights from DIDMCA. DIDMCA allows states (including U.S. territories) to opt out of these interest exportation rights – i.e., a state can formally prevent a state-chartered bank from exporting its most favored lender interest with respect to loans made in that state. Currently, only Iowa and Puerto Rico have opted out.

Consequences: A state-chartered bank may not export interest to Iowa or Puerto Rico for extensions of credit made in those jurisdictions. It must comply with the interest limits imposed by Iowa and Puerto Rico law. Case in point: the Iowa settlement that inspired these FAQs.

• There, Iowa regulators alleged that a Utah-chartered bank exercised its interest exportation rights to charge interest on consumer installment loans made to Iowa residents in excess of the maximum interest allowed by Iowa law. Such rights are not available to the bank because Iowa has opted out of interest exportation under DIDMCA. The bank decided to stop making consumer installment loans to Iowa residents rather than comply with Iowa’s 21% interest cap. The bank also had to provide restitution to Iowa residents who were charged interest above the cap.

Practice Pointers:

• Technically, DIDMCA only allows states to opt out of interest exportation with respect to extensions of credit “made in” that state. Where an extension of credit is “made” is a facts-and-circumstances analysis; it does not depend solely on where the borrower resides. However, it is possible for a state regulator to take an expansive view—beyond the technical language—and apply its opt out to any extension of credit made to an Iowa or Puerto Rico resident, regardless of where the bank considers the extension of credit to be “made.”
• If you’re a state-chartered bank (or you’re partnering with one), and the credit card or lending program footprint includes Iowa or Puerto Rico, the bank needs to evaluate whether it can offer the program in those jurisdictions based on the regulators’ posture and the jurisdiction’s interest limits.
• There is no state opt-out right under the interest exportation authority for federal charters (national banks and federal savings associations, including federal savings banks). As such, opt-out is an issue for state-chartered banks only.

Yes.

• All Charters – Federal and State: All have the right to export “interest” under federal law. However, the source of federal law granting that right differs by charter type (national bank vs. state-chartered bank vs. savings association/federal savings bank).
• State-Chartered Banks Only: Per #6, state-chartered banks are subject to a state’s right to opt out of interest exportation under DIDMCA.

Note: There is a significant difference between federal and state charters when it comes to preemption other than interest exportation. Federal charters have broader preemption rights than state charters and can largely operate without regard to state requirements. See the next question for an example of this.

Interest exportation does not apply to non-interest fees. “Non-interest fees” refers to fees and charges that are not considered “interest” for exportation purposes. See #4.

However, under preemption regulations from the Office of the Comptroller of the Currency (OCC), federal charters may be able to charge non-interest fees without regard to state law limits based on preemption principles and whether the fees are established “according to sound banking judgment and safe and sound banking principles.”

Practice Pointer:

• If the bank has a federal charter, the preemption analysis does not stop at interest exportation.