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Update Newsletter: Fall 2004

The National Bank Act and the Credit Card Industry

Prior to the Civil War, our nation's bank-related activities, including issuing currency and chartering and regulating banks, took place at the state level. As our economy grew and became more national in scope, Congress recognized that this system was inadequate. In response, it passed the National Bank Act of 1864 (NBA). The NBA established a national banking system that could create a uniform national currency and support an increasingly national economy. The act was passed during the Civil War, a time of great conflict between many states and the federal government. As such, the act was also intended to protect the new national banking system from potential state interference. The NBA established the Office of the Comptroller of the Currency (OCC) External Link, under the Department of the Treasury as its implementing agency, and gave it the responsibility for examining, supervising, and regulating nationally chartered banks.

One of the ways in which the NBA protects national banks is by "preempting," or rendering inapplicable, any state laws that conflict with either the NBA or the regulations promulgated by the OCC pursuant to the NBA. In effect, the NBA provided national banks with an exemption from certain types of legislation enacted by individual states. As a result of granting national banks freedom from a variety of state-level regulation, the NBA has played a particularly significant role in the development of retail financial services. Specifically, by making federal law supreme, the governance structure has eliminated a national bank's need — and a significant cost — to meet a patchwork of state regulation and, at the same time, has facilitated its ability to reach a national customer base.

The NBA's history of preemption has sparked much debate over the last half century about the OCC's powers versus states' rights to regulate the increasingly national credit card industry. Today, national banks account for more than three-fourths of all outstanding credit card loans in the United States.

In his paper titled "The Debate Over the National Bank Act and the Preemption of State Efforts to Regulate Credit Cards," Mark Furletti reviews these and other developments, including the regulatory and judicial history of OCC preemption rulings. He follows up with a discussion of the ways in which these preemption rulings have shaped the development of the national credit card industry and consumers' access to credit. Last, he analyzes the current debate over preemption and suggests policy implications for the future of the payment card industry.

Furletti's paper chronologically presents significant court cases that challenged the NBA's legislative intent to use preemption to "protect national banks" and, at times, tested the OCC's authority to preempt state law. The paper segments these court cases into two distinct strands: those that address price-related terms for credit cards under authority granted in Section 85 of the NBA, and those that address nonprice-related terms under authority granted in Section 24(seventh) of the NBA.

In 1978, the Supreme Court, in Marquette National Bank of Minneapolis v. First Omaha Service Corporation, found that Section 85 of the NBA provided for the preemption of state laws that regulated price-related lending terms. Additionally, in response to later challenges, various courts ruled that credit card pricing terms included not only interest but also certain account fees, such as late, overlimit, and annual fees. Importantly, with respect to this challenge, in a 1996 unanimous decision, the Supreme Court of the United States supported the OCC's authority to preempt state law that attempted to regulate such fees.

The second dimension of preemption, based on section 24(seventh), corresponds to preemption of state laws that regulate nonprice-related credit card terms, such as those that mandate consumer-related disclosures. These issues have been the focal point of recent debate on preemption powers related to the credit card industry.

A particular contribution of the paper is the discussion of how the National Bank Act and subsequent court decisions have shaped the credit card industry. Among the areas covered are the evolution of national markets for credit cards and the broadening of consumers' access to unsecured credit.

In closing, Furletti outlines the current debate on whether the OCC has overstepped its NBA mandate when acting to preempt state consumer protection law. Of particular concern to consumer groups and state regulators, and driving the current debate, is the potential risk to consumers from predatory lending in the mortgage industry. While Furletti concludes that in this current debate there is little overlap with credit card lending, the larger issue of preemption and its impact on national credit card businesses will require continued attention.

The full paper is available on the Payment Cards Center's website PDF and will be published in the Temple Law Review this winter.