A New York trial court has held that a national bank based in South Dakota cannot charge a New York customer interest at a rate in excess of New York’s usury limits unless it can prove that, at a minimum, at least one significant non-ministerial act associated with the account took place in South Dakota. Because the bank failed to establish this fact, it was denied interest above New York’s 25% cap. Citibank v. Hansen, 2010 WL 1641151 (Dist. Ct. Nassau Co. April 23, 2010).
Defendant Jared K. Hansen, a New York resident, opened up a line of credit with Citibank (South Dakota) N.A. (“Citibank”). Citibank provided periodic written statements to defendant, setting forth each transaction in the account, together with any applicable finance and other charges.
When defendant failed to make required payments on his account, Citibank claims it made a demand for the entire balance due and owing in accordance with the terms of the credit agreement. When payment was not made, Citibank commenced suit for the balance due plus interest.
In the defendant’s pro-se answer, he included a defense that “[t]he agreement is unconscionable.” When the matter came up for trial, the defendant defaulted and an inquest was directed. By virtue of defendant’s default, the defendant’s liability was deemed established. The court was then left to determine the applicable damages.
In support of the bank’s claim for damages, it submitted documentary evidence establishing the amount that defendant owed as of January 2009, prior to which date defendant was charged an annual percentage rate of 10%. Starting in January 2009, however, the bank’s statements began showing a substantial increase in the annual interest rate of up to 25.990%.
The Court’s Ruling
The court began by noting that it was without question that the bank was entitled to recover damages in the principal amount of defendant’s indebtedness as shown on the bank’s December 2008 statement, plus interest at New York’s statutory rate of 9%. The court went on to analyze whether the bank was entitled to recover interest at rates above New York’s 25% usury threshold. This issue turned on whether the bank, as a national banking association not based in New York, Citibank had rights under federal law to avoid the application of New York state usury limitations.
The court examined Interpretive Letter #822, issued by Comptroller of the Currency in March 1998, in which the Comptroller concluded that Congress had not completely foreclosed application of a host state’s usury laws to a national bank’s lending and credit activities. Although a national bank’s right to charge home state rates “is not defeated simply because a bank has a branch in the state where the borrower resides,” the host state’s laws and rules would apply when the host state’s branch office was the one actually ‘making the loan.’ In reviewing this and other precedent, the court concluded that “the legality [the bank’s] decision to charge ‘home state’ interest rates hinges on whether it actually conducts certain important non-ministerial functions in its home office.” Noting that interpretations of federal law by the Comptroller of Currency are ordinarily treated with deference, the court wrote, the question at issue was not whether Citibank could avoid New York’s usury laws by structuring its credit line and credit card affairs in an appropriate manner consistent with federal law. Rather, the issue was whether Citibank had in fact so structured its affairs.
The court concluded that it was unclear from the papers submitted whether “Citibank (South Dakota) N.A.” maintained any meaningful role in handling the defendant’s account after it was opened. The court observed that the national bank’s corporate parent, Citigroup, arranged for Ohio affiliates to manage the account. There was no proof, however, suggesting that, pursuant to the criteria set forth in Interpretive Letter #822, there were any non-ministerial acts performed by Citibank from its home state offices in South Dakota.
In addition, the court found that while the bank provided a general warning in its billing statements that the interest rate “may increase,” the court was not provided with any other evidence respecting the terms of the credit agreement. As a result, the court determined that it had no way of knowing whether the increased interest rate was or was not authorized by the agreement, as written.
The court ultimately held that, based on the failure of such proof, it must decline to grant the part of the bank’s claim that sought to impose, after the January 2009 statement, interest charges above New York’s statutory pre-judgment interest rate of 9%.
The ruling in Citibank v. Hansen suggests that when a national bank intends to rely on its home state’s usury limits to the exclusion of those of other states’ limits, it will be required to shoulder a burden above and beyond simply establishing its status as a national bank. The decision suggests New York courts will require that national banks show, through admissible evidence, that at least one significant non-ministerial action associated with a challenged loan took place in the bank’s home state for the court to consider awarding usury fees above established New York state limits.