The U.S. Court of Appeals for the Second Circuit (the “Appeals Court”) found that a Connecticut law regulating refund anticipation loans (“RALs”) is preempted for national banks and tax preparation firms or other third parties working with national banks to make RALs. Pacific Capital Bank v. Connecticut, 2d Cir., No. 06-4149-cv (Sept. 12, 2008). The Connecticut statute, Conn. Gen. Stat. § 42-480 (“RAL Statute”), was challenged by Pacific Capital Bank, N.A. (“Pacific Capital”), a California-based national bank having no offices in Connecticut. Pacific Capital made RALs to Connecticut residents largely through tax preparation firms located in the state. California law did not limit the interest rates on RALs and a typical Pacific Capital RAL had an annualized interest rate of approximately 115%.
The RAL Statute regulates a RAL “facilitator,” a term excluding a national bank. A facilitator is subjected to a number of requirements with regard to RALs including limits on interest that may be charged, disclosures to borrowers, and limits on where RALs may be made. In 2005, the Connecticut Attorney General issued an opinion letter stating that the provisions of the RAL Statute are not applicable to national banks, but are not preempted for loans made by a national bank through a facilitator.
Pacific Capital challenged the RAL Statute on the grounds that the law impairs the ability of a national bank to make loans by placing an effective ceiling on interest that may be charged. The district court found that the RAL Statute was preempted for national banks and their third party facilitators with respect to limitations on the place where a RAL may be made. The district court also found that the interest limit must be altered to allow national banks to make loans, including through their third party facilitators, at interest rates otherwise permitted.The State of Connecticut appealed as to (1) Pacific Capital’s standing to challenge the RAL Statute and (2) the lower court ruling that the National Bank Act can preempt a state statute that regulates only non-banks and interpreting part of the RAL Statute as inapplicable to facilitators assisting national banks. The Appeals Court found that Pacific Capital had standing to challenge the law because an indirect injury is sufficient to meet the standing requirement. Finding that the RAL Statute was in irreconcilable conflict with federal law, the Appeals Court, citing the 2007 Watters decision by the U.S. Supreme Court, found the RAL Statute preempted for national banks and the facilitators working with national banks. The Appeals Court noted that “[i]f a state statute subjects non-bank entities to punishment for acting as agents for national banks with respect to [a] particular [National Bank Act]-authorized activity and thereby significantly interferes with national banks’ ability to carry on that activity, the state statute does not escape preemption on the theory that, on its face, it regulates only non-bank entities.”