SMILEY v. CITIBANK (SOUTH DAKOTA)
Barbara Smiley, a resident of California, possessed credits cards issued by Citibank, a national bank located in South Dakota. Under certain circumstances, Citibank will issue late-payment fees. In 1992, Smiley brought a class action against Citibank on behalf of herself and other California holders of Citibank's credit cards, alleging that the late-payment fees charged by Citibank, although legal under South Dakota law, violated California law. In response, Citibank argued that a provision of the National Bank Act of 1864, which permits a national bank to charge its loan customers "interest at the rate allowed by the laws of the State... where the bank is located," pre-empted Smiley's state law claims. After accepting Citibank's argument that late-payment fees constituted "interest," the California Superior Court ruled in its favor. The California Superior Court Supreme Court affirmed.
Does the National Bank Act of 1864 authorize a national bank to charge late- payment fees that are lawful in the bank's home State but prohibited in the States where the cardholders reside?
Legal provision: 12 U.S.C. 85
Yes. In a unanimous opinion delivered by Justice Antonin Scalia, the Court held that the National Bank Act of 1864 authorizes such charges because a regulation adopted by the Comptroller of the Currency, which defined interest to include late-payment fees, was a reasonable interpretation of the act and entitled to deference. The Court rejected arguments that late-payment fees do not constitute interest because they do not vary based on the payment owed or the time period of delay and because they are penalties.
Argument of Michael D. Donovan
Chief Justice Rehnquist: We'll hear argument next in number 95-860, Barbara Smiley v. the CitiBank of South Dakota.
Mr. Donovan: Mr. Chief Justice, and may it please the Court:
This case concerns the meaning of the phrase 85 of the National Bank Act, which was passed by Congress originally in 1864.
In particular, this case brings before the Court the question of whether Congress intended "interest" and "rate" in that section... in that phrase to include some certain late fees that are not measured by time or based upon an unpaid balance or unpaid late payment, so as to preempt State contract laws, State laws governing liquidated damages that regulate such late fees in a borrower's home State.
The briefs of the parties here, Your Honors, have presented three contrasting views as to what Congress meant when it used the phrase 85.
In Petitioner's view, Congress meant a charge measured by time, based upon an unpaid balance.
In Respondent's view, Congress meant all lending charges; that is, all charges that have an impact upon the borrower/lender relationship so as to affect the yield that the lender receives from a loan.
There's a third contrasting view here, and that's presented by the Government that has filed an amicus brief in support of the bank in this case.
That view, espoused by the OCC recently, is that "interest at the rate" does not mean all lending charges, even though it might have meant that at one point, but it means something now or something less than all lending charges, but the agency will tell us precisely what interest charges are interest at the rate and what interest charges are not interest at--
Unknown Speaker: Well, Mr. Donovan, if... if the term "interest" is open to some interpretation, there either is or is going to be, I gather, a comptroller's interpretation of the term.
Mr. Donovan: --That is correct, Your Honor.
Unknown Speaker: Do we owe any deference to that, where it will expressly include late fees?
Mr. Donovan: The question of deference to the comptroller ought to be looked at initially by looking at the Statute itself, to determine whether the Statute itself addresses that, so as to whether there should be any need to turn to the comptroller.
And here, we believe that there are at least four phrases in the Statute or in the National Bank Act itself which give guidance to this Court as to why neither deference is appropriate and why "interest at the rate" mean... means what Petitioner says it means.
First, Your Honors, is the phrase "interest at the rate" itself.
Interest, both in 1864 and commonly today, was conceived of a charge that was somehow connected to the time during which money is received by a borrower and the time in which it's paid back.
It is also a charge that has some relationship to the amount of money received by the borrower and... and the time in which the borrower would then have to return that amount.
Another phrase that is in the Statute itself, Section 85 of the National Bank Act, is found further down in the Section, and it refers to a common type of lending practice that was prevalent in the mid-1800's, and that was the advance collection of interest on discounted notes, where a borrower would tend... tender his notes in exchange for a currency, and the bank would discount that note at the outset to collect interest.
Unknown Speaker: That's still done now, isn't it?
That... that's not disappeared?
Mr. Donovan: --No.
In fact, it still happens today, Justice Scalia.
But what Congress allowed in Section 85 was that you may collect interest in advance... and I'll... and using the words of this Statute,
"reckoning the days for which the note, bill or other evidence of debt has to run. "
Now, reckoning isn't a common word today, but it was referring to some xx of calculation of time and amount, reckoning the two.
Unknown Speaker: Well, that... that shows that it does include that kind of interest, the... the normal kind, but it doesn't show that it excludes the other kind.
The trouble I have with your position, Mr. Donovan, is I don't see how effective this provision in the Bank Act would be, which was intended to be a usury provision, if it said it's perfectly okay so long as you put in the loan agreement
"interest shall be 6 percent per year, plus $10 a week no matter what the outstanding balance is. "
I mean that would be wonderful usury, and it... and it would not at all be protected by... protected against by Section 85.
I... I cannot believe that that's what Congress intended.
Mr. Donovan: Well, taking your question, Justice Scalia, as, Why... why would Congress do something like this?
The... the simple answer to that is that Congress... that's all they were asked to do.
That's all they were focusing on doing in... in terms of allowing banks to charge a rate of interest that was tied to the bank's home State.
Unknown Speaker: So any bank could charge 10 bucks a week on the outstanding balance?
Mr. Donovan: Well, Congress--
Unknown Speaker: Not... not matter what the outstanding balance was, you pay $10 a week to the bank; they could do that under this provision?
Mr. Donovan: --That... Your Honor, that would be, under our view of "interest", an interest charge.
That would be a charge that would be based upon the outstanding balance.
Unknown Speaker: Well, it's not based on--
Mr. Donovan: It would be a time-based charge.
It would not be based upon the outstanding balance.
Unknown Speaker: --You have to do both; didn't you say you have to do--
Mr. Donovan: --You would have to do both, yes.
Unknown Speaker: --So it wouldn't be covered by your provision?
Mr. Donovan: No.
That... that's absolutely correct.
Unknown Speaker: It doesn't make sense to me.
Mr. Donovan: How... however, a State could not authorize that type of charge if it just was across the board, if the $10 did not vary based upon the outstanding balance at all.
And the reason why was because Congress was focusing on rate ceilings, so that those rate ceilings could be gauged, both by the borrower and the bank at the outset, to determine whether there was compliance with the usury ceiling.
Unknown Speaker: Mr. Donovan, suppose that CitiBank, instead of having a flat $15 a month late payment said the late payment is 1 percent on arrears, but not less than $15; would that then qualify as an interest rate?
Mr. Donovan: The... let me see if I understand the... Your Honor's question.
Unknown Speaker: Instead of the $15 a month... you're in arrears, the $15 a month no matter what the balance is... instead, the provision is 1 percent, but not less than 15.
So it could be more, but it's going to be at least 15.
Mr. Donovan: If the 1 percent, Your Honor, were calculated on the amount of the late payment, not on the entire outstanding balance of the revolving account.
Then the 1 percent, if it varied based upon time... in other words, it could have--
Unknown Speaker: It would.
But for people who would... it... it would have to be at least $15.
If it... the 1 percent turns out to be less than $15, you still have to pay $15.
Mr. Donovan: --The 15 would be the ceiling?
Unknown Speaker: Not less than, the floor.
The 15 is the floor.
Mr. Donovan: The floor.
The 15 there would not be an interest rate.
It would not be something that would be exportable by the bank in one State to override the laws of the borrower State.
If the 1 percent, Your Honor, were something that was charged not on the late payment... not on the outstanding balance, the aggregate balance, but on the late payment balance itself, which are not the facts here... here we have a charge that's imposed by CitiBank, calculable on the entire outstanding balance, so that it's a flat charge, the.65 percent I'm referring to... but if the 1 percent were calculated on the late payment amount, and that 1 percent accrued or ran, in the words of this... of this Court, then that would be an interest charge.
Unknown Speaker: Given your answer to Justice Ginsburg, why don't you try... why don't you challenge the 50-cent charge in this case?
Mr. Donovan: In terms of the cash advance fee or the minimum finance charge that is involved here?
Unknown Speaker: I... I think it's the minimum finance charge, isn't it.
No matter what your balance is, you've got to pay at least 50 cents a month, isn't that what it provides?
Mr. Donovan: That... that is CitiBank's practice.
We did not... we do not allege that in the complaint here.
Unknown Speaker: But that... if you're correct, that... that is forbidden, too, or that is not covered by the... by the Statute?
Mr. Donovan: The... the 50-cent charge that is the minimum finance charge for when a borrower chooses to revolve is... would be a charge that would not fit our definition of interest rate.
Unknown Speaker: Just like the $15 in Justice Ginsburg's example?
It's a floor.
Mr. Donovan: It--
Unknown Speaker: And it's... it's a floor without reference to... to a particular amount over a particular time.
Mr. Donovan: --Yes.
Unknown Speaker: So it would be outside the Statute, just as the $15 would be, isn't that right?
Mr. Donovan: The difference, Justice Souter, would be that the $15 charge, if it is imposed looking backward, based upon a default, as opposed to looking forward, which is... which is what the 50-cent charge is... the 50-cent charge is a charge that when you do not clean up your revolver at the end of the month, the minimum that you're going to have is... is 50 cents.
Unknown Speaker: Yes.
Mr. Donovan: And that's a going-forward charge, because it's anticipated that for each day that you revolve that balance, that you will then be accruing a finance charge at the 19.8 percent interest rate.
It, too, would not have the characteristics that we have identified.
Unknown Speaker: Maybe California didn't prohibit that.
Maybe that's why it wasn't in your complaint.
Mr. Donovan: At the time, we focused on the late fee here, Justice Scalia.
So, to be honest, we just did not include that in the complaint.
I... I don't have the California law here, so--
Unknown Speaker: May I ask you a... a slightly changed version of Justice Ginsburg's question.
Forget about the $15 for a moment and assume the charge was 1 percent of the arrearage on the 30th day of the month, period.
Regardless of how long the arrearage was taking place, but every 30th day, it's 1 percent.
Would that be an interest charge?
Mr. Donovan: --No, it would not, Your Honor, because that 1 percent charge would not vary based on time.
Unknown Speaker: Okay.
Mr. Donovan: If the arrearage were only 2 days--
Unknown Speaker: I understand.
I just wanted to be sure that was your position.
Mr. Donovan: --Yes, that... that is... that is our position.
Unknown Speaker: But I... I thought that interest historically a payment for damages... originally... was a payment for damages for the money that wasn't paid in time.
And it seems to me that this charge that's in question here fits very well within that definition.
Is your point that our understanding of interest or the meaning of interest changed from, say, the 1700's to the time when of the Civil War, when this statute was enacted?
Mr. Donovan: --No, Justice Kennedy.
Our point is that the definition you identify, a charge for the use of forbearance or detention of money, whereas damages of its detention describes when interest may be charged.
It doesn't describe what interest is.
It doesn't describe what the components of interest are.
The case here questions what the components of interest are.
We don't deny that this would be a detention situation, so that an interest charge could be imposed.
What we state here is that the charge... the form of the charge here does not have the components of an interest charge.
In fact, the components here are the components of a liquidated damage of penalty charge.
Unknown Speaker: We'll accept that in... in the context, I suppose... I don't know if the argument has been... been made... of ease of administration.
A flat charge, it seems to me, may very well reflect the cost to the lender of administering a large scheme like this.
Mr. Donovan: The distinction, Your Honor, is that here the flat charge is imposed in addition to a daily accruing finance charge, an interest charge that's measured by time and amount, which is accruing on the entire detained balance.
Here, if you detain the late payment, you still have the accrual of the interest finance charge going on, and you have a special damage amount imposed on top of that.
Unknown Speaker: Why should there be a difference if it's in addition in... in... in... or in lieu of?
You... you suggested if it's in lieu of, it would be permissible?
Mr. Donovan: If--
Unknown Speaker: Why does it cease to be interest?
It's just greater interest, it seems to me.
Mr. Donovan: --I'm not suggesting that it's in lieu of.
I am suggesting that it's a different type of charge that is not a greater... greater interest charge.
Here, CitiBank could impose a greater interest charge, and we don't dispute that.
If CitiBank said, If you were late on a payment, you must pay an additional 3 percent, so that your interest rate will raise from 19.9 percent to 15.9 percent.
What CitiBank may not do... because that charge would then vary, depending upon how much the credit card holder had and how much time was involved.
What CitiBank may not do, though, is impose a sum-certain charge that doesn't vary whether the payment is $20 or $2,000, and it doesn't vary whether the payment is 1 day late or 2 day... 2 days late.
The reason being, Your Honors, is the difference between... if I... if I may focus on the words "rate" and "amount" in the statute that Congress enacted.
Here, Congress envisioned a difference between the words 85.
When Congress was referring to rate, it was referring to a charge that was reckonable, to use the words of the Statute, over the number of days that the note, bill or other evidence of debt were... were outstanding.
That word 85, or the first part of Section 30, which enacted both Section 85 and 86.
The word 86, and it refers to a flat penalty-type of provision, an aggregate sum, that's a... a calculable sum.
And it refers to what the bank owes the borrower when the bank overcharges or commits usury.
So an amount is a flat amount that the bank has to write a check and pay back to the borrower when the bank violates the usury ceiling.
The rate is a ratio... just basic English... is a ratio charge.
So, the difference that I am trying to explain I... hopefully... is that the rate here... or the charge here... is not a rate charge.
It's a flat amount that's imposed on a default.
Unknown Speaker: But you wouldn't object to a flat amount as a ceiling, would you?
I mean you explained to me that you would as a floor.
But suppose it's 2 percent, but never more than $50 a month; that would be okay, even though the... the $50 is a... is a flat amount, as opposed to what you call a rate?
Mr. Donovan: No.
Unknown Speaker: Two percent of the arrears, but never more than $50 a month.
Mr. Donovan: --Yes.
The... the $50 a month, again, would be a increment, but would not be an interest charge.
It would be a penalty charge or a noninterest charge.
The 2 percent, if it was varying based upon the amount that you owed and the time that you owed it... in other words, you... you're saying 2 percent a month, Your Honor, but I'm not sure, by that hypothetical, whether you... whether you're... you mean--
Unknown Speaker: On the arrears.
Mr. Donovan: --And... and if the arrears are paid back on the 2nd day of the month, do I have to pay the entire 2 percent for the... for the 30 days?
Unknown Speaker: No.
I'm... I'm just giving you, in both cases, what you define as interest, but in one case with a flaw and the other case with a cap.
Mr. Donovan: Understood.
In both cases, the flat sums in those hypotheticals would be noninterest charges.
Whether the percentage charges in both cases are interest charges depends upon whether that percentage is being calculated or reckonable over the days.
So it can't just be a 1 percent for 30 days.
Unknown Speaker: But Mr.... Mr. Donovan, you're... you're hinging your... your whole argument upon "at the rate allowed".
But, you know, any flat charge can be expressed as a rate.
For example, if you have a State law that says you may charge $100 a year on any loan, you know, $100 loan processing charge may be... may be applied to any loan.
You there have a State law which allows interest at the rate of $100... at the rate of what--
Mr. Donovan: One hundred dollars per loan you would have.
You wouldn't have 100--
Unknown Speaker: --You would know what the maximum rate it allows, assume a... assume a 1 penny loan.
You know, as much as you have to multiply 1 penny to get $100, that's the rate.
Any... any flat amount can be converted into a rate, once you know what the... what the... you know, what the outstanding loan that the flat amount is applied to is.
It's... it's simply a matter of mathematics.
Any flat amount is... is... is a rate of the loan to which it is applied.
Mr. Donovan: --Justice Scalia, to be sure, after the fact here a rate can be calculated once you know... once a late fee is imposed--
Unknown Speaker: Right.
Mr. Donovan: --and you know what the balance is--
Unknown Speaker: Right.
Mr. Donovan: --that it's being imposed against--
Unknown Speaker: Right.
So why can't the Statute be read that way, "interest at the rate"?
Now, if you have a flat fee that's permitted by State law, you can't go above the rate that that flat fee would amount, assuming the smallest possible loan.
Mr. Donovan: --Here the fact is that you cannot calculate that rate until after the fact, after the imposition of the charge.
In the other instances that you describe--
Unknown Speaker: Why is that crucial?
Why do you have to be able to calculate--
Mr. Donovan: --Because... I'm sorry, Your Honor, because if you cannot calculate that rate after... until after the charge has been imposed, one, it's a rate looking backwards and not forwards; and, two, it's not a rate that somebody can anticipate, either borrower or a bank, in order to determine whether the charge is complying with Section 86's usury ceiling.
And it's unlikely or implausible that Congress would have intended to subject banks to the severe forfeiture penalties of Section 86 if the bank couldn't know whether it was complying with 86 until after it violated that Section.
Unknown Speaker: --But, Mr. Donovan, don't you have a simpler answer to that example?
It also is not a function of the time that the arrearage is... is in effect.
Mr. Donovan: Well, in this--
Unknown Speaker: Isn't that your... your basic answer?
Mr. Donovan: --Yes.
Unknown Speaker: It's a one-time charge.
And your... your answer is one-time charges are never a rate of interest; they always have to be a function of time?
Mr. Donovan: Yes--
Unknown Speaker: But my point is that you... you derive that argument from the word "rate", and that it... that... it need not be derived from the word "rate", because you can convert a flat charge into a rate, once you know what the amount that the flat charge is applied to.
Mr. Donovan: --Well, Justice Scalia, here the... the rate that... that you're deriving is a rate that is only applied after the number of days have already been identified, after the imposition of the charge has been imposed.
So that it is not a rate that's accruing as the days they go on.
It's not a reckonable charge.
Unknown Speaker: I understand.
But we're only looking for the maximum rate that the State allows.
So all you have to figure out is the shortest amount of time to which this could possibly apply under State law, and the smallest amount of money to which this could possibly apply under State law, and, voila, you have the maximum rate allowed by State law.
Mr. Donovan: That maximum rate allowed by State law, Your Honor, would make it very difficult for a bank to know what that maximum rate is, because it would obviously vary, in this instance, by each consumer with whom the bank dealt.
So that... because obviously that rate is going to change depending upon the number of days that the consumer pays that late payment.
Unknown Speaker: Mr. Donovan, are we talking about something that would be eminently fixable by CitiBank if it said, forget Federal law, we're going to put a choice-of-law clause into every application, credit application, and we're going to say that all terms and conditions of this agreement shall be construed in accordance with the law of South Dakota.
So this agreement is governed by the law of South Dakota, which permits these charges.
Would that be binding?
Mr. Donovan: First, Your Honor, there is such a clause that says... that's similar to that in the CitiBank agreements.
CitiBank makes its agreements subject to South Dakota and Federal law.
Second, in many States, including my client's State, the State provides that notwithstanding choice-of-law agreements by companies in consumer contracts, this State will apply its choice-of-law provisions where those are form contracts and the customer, in this case, accepted the solicitation in the State and signed the solicitation in the State.
So those are common types of choice-of-law provisions under consumer laws in various States.
What we would then have would be a conflict between the choice-of-law language selected by CitiBank and the State public policy, and we would basically have a conflicts of law question, which is not the question that's at issue here, Your Honors.
The... the question at issue here is that CitiBank can override those choice-of-law provisions by a broad construction of the word 85.
The other evidence of the Congress's intent when it passed this Statute was what Congress was looking at.
At the time, Congress was looking at other State interest ceilings that were in existence.
And all of the legislative debates that refer to this section demonstrate that the members of Congress were focusing on a time-based, amount-based charge.
They refer to the percentage ceiling in my State as 10 percent per annum, the common law that has been issued by this Court, beginning in the mid-1800's and proceeding since then, has all recognized a difference between flat penalty charges that are imposed on top of prejudgment interest for processing costs or for collection costs.
In fact, in the case decided by this Court, New Orleans v. Piaggio, this Court recognized that there was a difference between special damages on top of prejudgment interest and prejudgment interest.
In United States v. Texas, this Court recognized that as well.
If I may, Your Honors, to get back to Justice O'Connor's question about deference to the OCC.
In addition to the statutory language that we have here, there are two important reasons why the OCC's position is not entitled to deference.
First, the OCC's recent interpretation of "interest at the rate" does not purport or even attempt to rely on any of the agencies' expertise in banking or finance.
There is no textual analysis of the Statute.
There is no functional characteristic analysis by the OCC, because the OCC has not examined what the differences are between an annual fee, for example, and an appraisal fee or a document preparation fee.
There is not even an economic study or even a banking basis for the OCC's interpretation here.
In fact, what the OCC admits is that it is interpreting the Statute--
Unknown Speaker: Have we required that sort of thing before we defer?
Mr. Donovan: --You have, Your Honor, in your post-Chevron line of authorities.
In fact, one... one case involving the Federal Reserve Board against Dimension Financial and in other cases cited in this Court's decision.
In Adam's Fruit, you have required at least some sort of explanation by the agency as to its interpretation.
In other words, when the Court has required a reasonable construction of the Statute, it's required reasons.
Here, the OCC--
Unknown Speaker: One thing the controller gave as a reason: I think the banks want this.
Mr. Donovan: --I would submit... I would submit, Your Honors, that... that this Court would hold that that is not a reasonable construction of the Statute; that that is an irrational, biased construction.
If that is the reason here, I would submit that that type of interpretation would have to be found to be an irrational, biased construction of the Statute.
Unknown Speaker: Why would it be irrational if the banks want it?
Because it makes banks generally more solvent and more profitable and so forth, it protects depositors.
I mean you could add a little language, but the basic bottom line is banks want it because they think it's healthy for the banking industry.
Why is that irrational?
Mr. Donovan: Well, in... in the economic sense, it's rational for the banks, because it makes them better off.
The question, though, is whether it's a rational reading or a rational interpretation of the statutory text.
Here, it would not be a rational interpretation, because then the statutory text would mean whatever the banks want, they can do.
And that's not what Congress asked.
Unknown Speaker: Well, what you're doing is taking out the expertise of the agency in regard to what's good for the banking industry and so forth.
That... it just has to be an expert in reading statutes.
Mr. Donovan: No.
Unknown Speaker: That's what you're saying.
Mr. Donovan: No, I don't mean to imply that, Your Honor.
Unknown Speaker: Fine.
Mr. Donovan: What I mean here is that what the agency has not done is it has not gone and looked at what is the economic basis or the functional characteristics of these charges.
For example, when this Court examined whether... whether deposits and commercial loans were similar, or annuities even, it has focused on the fact that the OCC has determined or the regulator has determined that these are functionally similar to different types of financial products.
The OCC has not done that with... well, late fees are functionally similar to interest and appraisal fees aren't; attorney's fees are functionally similar, but... but... but these other document preparation fees aren't.
That's not what it's done here.
It has instead said, We make this interpretation because that's what the current case law says.
Well, what the OCC is asking for, then, is deference not to an expert view, but to lower court opinions.
And this Court doesn't need an agency to tell it whether to defer to lower court decisions or not.
In addition, here the agency has not explained the fundamental or important distinctions between those fees that it has now determined are noninterest and those fees which it considers to be interest.
It doesn't tell us what's the difference between... what about an appraisal fee makes it noninterest and what about a prepayment charge or an attorney's fees or a late fee would make those interest.
It has absolutely no explanation whatsoever that this Court can look to and say, Oh, that's a reasonable... that's a reasonable explanation, or, We can... we can respect that determination.
That's not what it does at all.
The omissions from the list are... equally demonstrate the irrationality of the OCC's position.
I see that my time has almost expired.
I will reserve the remainder.
Unknown Speaker: Very well, Mr. Donovan.
Argument of Richard B. Kendall
Mr. Kendall: Mr. Chief Justice, and may it please the Court:
Petitioner concedes that if this higher charge were stated as a percentage, no matter how high, then it would be interest.
Unknown Speaker: I don't think that's right.
He said it's not interest unless it's based on the function of time.
I asked him that very question.
Because I was unclear from his brief.
Mr. Kendall: But if it's stated as a percentage as a function of time, he would say--
Unknown Speaker: Right, if it's a function of time.
Mr. Kendall: --So... so, to begin with, he would say that if CitiBank were to charge 100 percent interest--
Unknown Speaker: Per period of time.
Mr. Kendall: --per unit of time.
Unknown Speaker: Right.
Mr. Kendall: And I'd like to address in a moment, Justice Scalia, the question of the unit of time.
But per unit of time, then that would be interest.
Now, that would mean that CitiBank could charge 50... 50 percent each month, 100 percent each month, or, to take Justice Ginsburg's example, why couldn't CitiBank charge 50 percent each month but, up to a cap, and then just say, We won't charge any more?
Why should it matter that the late charge happens to be stated in another way?
It is still a price that the lender is charging the borrower for using and detaining its money.
So the function of this charge has not changed because of the way it was expressed.
The form of the charge does not alter its function.
Unknown Speaker: Well, I'm... I'm not sure that that analysis is entirely consistent with the Statute.
The Statute talks about a... a rate of interest.
And, you know, you can have all sorts of hypothetical examples that posit one situation and posit another.
But there is a considerable difference between a late charge that is not based on the amount that is overdue and that is not based on any stated rate, as compared to a percentage of interest on... on, say, a loan of $1,000.
You say you're going to charge him 7 percent or 2 percent per month or something.
There... there is that difference.
And all the hypotheticals in the world don't obscure it.
Mr. Kendall: The case law of the time and the statutes of the time when Congress enacted the National Bank Act deal directly with this issue, Your Honor.
Many of the State statutes... in fact, by my count, all of the State statutes use a phrase to set the ceiling of... of interest, whether it's prematurity interest or postmaturity interest, they use a phrase "the rate of interest".
And the statutes say a lender can charge interest up the rate of X. And generally that rate is stated as a percentage.
And it has always been the case that that phrase "rate of interest", in a statute regulating the amount of interest that could be charged, captured all forms of charges, and it has to.
Because if it didn't, a lender... let's say that the rate is 15 percent, a lender could say, Well, I'm going to charge you 14-and-a-half percent, plus a $1,000.
And the $1,000 isn't interest, so I don't have to worry about the rate ceiling.
The phrase "rate of interest" not only has a dictionary definition that includes all forms of charges, but it was always used by statutes and by courts interpreting those statutes to capture all forms of lending charges that had to do with the use or detention of money.
Unknown Speaker: I take it you're talking about the State statutes as of 1864, when this was enacted?
Mr. Kendall: That's correct.
And to respond to Justice Stevens' point about the unit of time, in the Citizens Banks against Donnell case that was decided by a unanimous Court, authored by Justice Holmes, one of the questions that arose was whether the method of calculation as to unit of time in compounding was something that the Statute, that Section 85, gave to the law of the State.
In other words, did the... did the language allowed by the laws of the State in Section 85 adopt the manner in which the rate of interest was to be calculated?
Because in that particular case, there was a dispute about how many times per year it was compounded.
And, Justice Stevens, I believe that the opinion by Justice Holmes is very clear on this point, that the question of the unit of time is up to the law of the State where the bank is located.
Like the amount of the charge, like the ceiling rate, if you will, the manner of computation... the unit of time... is committed to the legislature of the State where the bank is located.
Unknown Speaker: Mr. Kendall, I think... the biggest problem I have with... with your... with your case is that I don't see how the... how the alternative set forth in the Statute makes sense unless you're dealing with a charge that is expressed as a rate.
That is to say, Section 85 reads that any national bank may... may charge interest at the rate allowed by the laws of the State where the bank is located or... here's the alternative... or at a rate of 1 percent in excess of the discount rate on 90-day commercial paper, whichever may be greater.
That alternative doesn't make any sense when it's applied to a flat $1,000 charge.
And... and that suggests that... that what goes before the alternative only describes nonflat charges.
Do you understand my point?
Mr. Kendall: I... I do.
And I respectfully disagree, and here's why.
The State statutes of the day had a very similar phrase and very similar language.
They, too, had rate caps expressed in the forms of percentages.
And lenders have always had to determine (A) how much interest have we charged this particular borrower?
(B) what's the amount of the loan?
(C) how long has this loan been outstanding?
And then (D) perform a simple mathematical calculation, have we exceeded the cap?
And so, to apply the alternative Federal rate, which of course was added in 1933, but, nevertheless, is an existing alternative standard--
Unknown Speaker: Right.
Mr. Kendall: --CitiBank would have to act in just the following way, Your Honor.
First, it happens to be in a State, South Dakota, that does not have a rate ceiling.
So this is not a problem for CitiBank under... the first part of the--
Unknown Speaker: The alternative--
--You say... you say it happens to be there?
It moved, didn't it?
Mr. Kendall: --When--
Unknown Speaker: Right, right, it happens to find itself in a State, how about that?
Mr. Kendall: It happens to find itself.
Unknown Speaker: In that banking metropolis of Rapid City.
Mr. Kendall: We... in... in complying with a percentage rate ceiling, whether it would be a Federal one or if were in a State that had a percentage rate ceiling, would simply have to analyze what is the total interest charged and compute it against the rate cap to see whether it had been exceeded.
Unknown Speaker: Convert to a rate, in other words, as... as I was discussing earlier with--
Mr. Kendall: --That's right.
And banks have always been required to do just that.
And we have cited the cases on page 24, a half dozen or so cases that show that that in fact has always been the law.
But, further, I would point out that the statutory language "rate" and "amount" does not have any percentage limitation, in any event.
First, within the Statute, I would point out that the third sentence--
Unknown Speaker: --But before you go on, let me ask you how that works if... suppose you have a State that, on all loans, allows a 5... no matter what the amount of the loan, anybody can charge a $500 loan... loan servicing charge or whatever.
Now, how do you convert that into the alternative clause?
That means, you know, 1 penny for what... 1 penny for 1 year, I guess 1 penny for 1 day and $500 is the interest on that.
Wow, that's a very high rate.
Mr. Kendall: --You wouldn't be able to--
Unknown Speaker: And my... and that means that the alternative "or", you know, the... my goodness, the State... the State interest would... would have no usury limit at all then, right?
Mr. Kendall: --If you were in a State that provided for a charge that would, if computed against a Federal rate cap, would cause you to exceed the cap, you simply couldn't charge the charge.
If... if you say to me, I will loan you $100 and at 10 percent interest, you're not going to be able to also charge me $50 extra without being subject to the rate cap.
Unknown Speaker: I don't see how it works.
If... well, let's assume that... that... that the smallest amount of money for the shortest amount of time, with a $500 minimum flat charge, amounts to a million percent interest.
I... I don't know what it does.
Let's say it amounts to a million percent interest.
That means that any State that allows a 500 percent... a $500 flat charge permits interest at the rate of a million percent.
Is... is that what you're saying?
Mr. Kendall: Well--
Unknown Speaker: Or do you have to consider not interest in gross, but you have to say, oh, only flat charges of the same type that the State allows can be charged at that rate?
Mr. Kendall: --Well, let's not mix up now what a State is allowing, because that's a question you answer under the first clause of Section 85, with what the Federal Government alternative rate would permit.
We have... it's important to keep those analytically distinct.
So if a... let's... let's take the section of Section 85 that we are focusing on here in this case.
South Dakota allows any rate of interest, as did Arizona in the Daggs case that this Court considered in 1900.
And what that means is that a national bank located in the State of South Dakota is entitled to charge whatever rate of interest is agreed upon between itself and a borrower, just like all the other lenders in South Dakota, because that's the most-favored-lender principle.
Now, if the bank, instead of using the South Dakota law as its basis for the charge, were to use the provision of the Statute that comes later that, Justice Scalia, you are referring to, it would have to have a ceiling of a 7 percent or whatever that... that cap would come out to... just as if it had been under a State statute in 1862, before the National Bank was enacted.
It would have been under a State cap of, say, 7 percent.
And what would have happened was... would have been that... that a court reviewing whether a charge was usurious would have asked the following question: How much interest has been charged?
Let's now compute it as a percentage and annualize it over a year.
And would that exceed 7 percent?
Unknown Speaker: Well, does this mean that every... every charge made by the bank against the $1,000, say, that's loaned, has to be considered interest?
I mean, supposing that a bank says, We're going to charge you $15 for quick processing.
In other words, you pay us $15 and you can have your loan processed in 5 days.
Other people have to wait 30 days.
Now, is that interest?
Mr. Kendall: In your example, yes, Your Honor, because it is the price that the bank is charging for making available the credit and the use and... and money on the terms provided.
There are many, many different terms and different relationships, and expedited money may cost more.
Unknown Speaker: Well, what... what if the bank says you're going to have to pay $40 for an insurance premium on your life?
Mr. Kendall: Your Honor, we would argue that that is not for the extension of credit.
That is a discrete service.
That is... now you're not being charged for the borrowing of the money... in... in the hypothetical as you stated it... you're being charged for a separate service.
Unknown Speaker: And how... how can you tell which is the separate service and which isn't?
How can you tell the... the separate service in the first hypothetical isn't the quick process?
Mr. Kendall: Well, to take the credit card example as one, after you get a credit card, you'll often find... or after you get a mortgage, you'll often find you'll receive in the mail solicitations from people who will say, We'd like to give you insurance in case you are disabled.
You didn't have to pay that charge in order to get the credit.
And it's a separate service entirely.
It's not for the extension of credit.
Unknown Speaker: I can understand that when the thing comes in the mail after the loan is complete.
But if the bank asked it right at the time, I don't quite understand the distinction.
Mr. Kendall: If it... if it was a condition of providing the credit in the first place, it was required and it is integral to the making available of the credit, then in that situation... which is not the ordinary case... in that situation it might be interest.
That's not the ordinary case, which is why I believe, in the OCC regulation, it is not considered ordinarily interest, and we do not normally... we do not consider it ordinarily interest, and I don't think it would be.
The key question is: Is this a price that's being charged for actually making available credit and for the use and detention of the bank's money?
Unknown Speaker: Well, how do you answer Mr. Donovan's argument that you could put all these extra charges in, and you could call everything interest, it would all fit into your definition?
Mr. Kendall: If... if what Mr. Donovan is saying is that our definition is inclusive of all charges that are for the use or detention of money, then we would say that that definition has a proud history in the usage of the term "interest", the usage of the term "rate", the statutory history, the statutory purpose, and the administrative agencies' interpretation.
So we are not suggesting that charges that are not for those purposes constitute interest, but we do... we do believe... and... and this Court has... has a definition since the mid-19th century that interest is... is what a lender is charging for the use and detention of money.
Unknown Speaker: May I ask you to tell me again why you think the Citizens National Bank opinion by Holmes helps you?
Mr. Kendall: Yes.
Unknown Speaker: I'm not sure I caught your point before.
Mr. Kendall: There are two... two ways in which it... it helps us.
There... there are two points that are made in that opinion.
The opinion, first, addresses whether the method of compounding that was used by the bank violated the... violated Section 85 because it exceeded the method of compounding permitted by the home State.
And the answer was, by Justice Holmes, yes.
Because instead of compounding only once per year, which was his analysis of what the State required as to the unit of time, the bank had compounded oftener than that.
And so I offer that... that part of Donnell for the proposition that the law of the State as to the method of computation is adopted by Section 85.
In other words, that... that question--
Unknown Speaker: Because that's where the law of the State prohibited rather than permitted it?
Mr. Kendall: --Correct.
Unknown Speaker: Yes.
I... I see your point there.
Mr. Kendall: And then, of course, Donnell also makes another point which is very important.
Which is that a charge, even if it could be labelled a penalty, because it's too high in someone's estimation, is still interest and thus that... what the parties contended... what the borrower was contending was... what the bank, excuse me, was contending was penal interest and therefore not usurious, not covered by Section 85.
They lost that argument, Justice Holmes saying you have to forfeit all of that interest.
It is interest even though it was penal.
And of course, this Court, in Library of Congress against Shaw, has said the same; that the character of interest does not change even if a charge could aptly be called a penalty.
The purpose of this Statute requires a meaning of interest that would, for example, prevent a State where a bank is located from saying to a credit union, You can charge late fees, but not giving that privilege to other lenders.
Because then we could become the least-favored lender in the State.
Interest has to have a capacious definition for the purpose of capturing those lending charges that could be the basis for discrimination.
This Court has... in... in the Tiffany case, in the Marquette case, shown that the congressional purpose to favor national banks has to be respected in understanding the meaning of the... of the statutory terms.
The case comes to the Court on this issue of the meaning of the term "rate of interest", with not only the history of the word "interest", the... the word "rate", which Black's Law Dictionary defines, without any reference to the form of a charge, as simply the amount of a charge.
Noah Webster, in 1828, a similar definition: Price or amount stated or fixed on anything.
What I would want to emphasize is that the term "rate of interest", that was simply the cap... that... that is the way that States, and then the Federal Government, went about regulating the amount that could be charged.
The term "rate" and "amount" is used interchangeably in the Statute.
The last sentence of the Statute, which happens to deal with foreign bank branches... branches of national banks located outside the United States... uses those terms interchangeably.
Unknown Speaker: Along with the rate goes the manner.
I mean if... if... if a State allows a million percent as a late charge, you couldn't charge a million percent as something other than a late charge?
Mr. Kendall: That's right, Your Honor.
Unknown Speaker: Okay.
Thank you, Mr. Kendall.
Mr. Gornstein, we'll hear from you.
Argument of Irving L. Gornstein
Mr. Gornstein: Mr. Chief Justice, and may it please the Court:
The Comptroller of the Currency has issued an interpretive regulation concluding that late fees are interest.
Our position is that the Comptroller's interpretation is reasonable and that under established principles of administrative deference, the Court should defer to that interpretation.
Unknown Speaker: Just as a matter of curiosity, Mr. Gornstein, I've been on the Court 23 or 24 years and heard a number of these cases.
And I've never heard of a case in which the Comptroller ruled against the banks.
Do you know of any?
Mr. Gornstein: Do I know of any case in which the Comptroller has ruled against--
Unknown Speaker: I mean gave an interpretive regulation which was adverse--
Mr. Gornstein: --Adverse to the banks?
Unknown Speaker: --Yes.
Mr. Gornstein: Well, I... I would suggest that this very regulation that you find here favors the banks in some respects and does not favor the bank in other respects.
And so... because some of the charges are... are treated as interest and some are not, whereas probably the banks would like to have all of them treated as interest so that they could be exported.
Unknown Speaker: Why is... why is this a matter that the Comptroller must resolve for himself in performing his duties under the Act?
Mr. Gornstein: The Comptroller has the responsibility to make sure that national banks comply with all provisions of the National Bank Act, including the limit set on taking interest in Section 85.
Section 85 says that a bank can take no more interest than the most favored lender in the State in which the bank is located.
Unknown Speaker: And he has enforcement responsibility?
Mr. Gornstein: He does.
Unknown Speaker: So he must interpret it in the course of executing that?
Mr. Gornstein: That... that's right.
That under... because of that enforcement responsibility, under this Court's decisions in Chevron and in NationsBank, that carries with it the authority to issue reasonable interpretations of the meaning of interest under Section 85.
Unknown Speaker: Does the Comptroller actually monitor these rates?
Is there an office down there that's keeping track of all the rates that are being charged?
Mr. Gornstein: I... I don't know the answer to that question, Justice Souter.
Unknown Speaker: Does the administrative fee, the $15, have to bear some reasonable relationship to the administrative cost?
Mr. Gornstein: --Under the Statute, it has to be based on the law of the State in which the bank is located to determine whether the fee is excessive or not, once it is interest.
Unknown Speaker: Suppose it bears no relationship to the administrative cost associated with the lateness.
Mr. Gornstein: It is still interest, and it is excessive interest by some States' standards... perhaps California's... but it is not excessive interest when judged by South Dakota's standards, where the national bank is located.
Unknown Speaker: If... if you're breaking out of the 9 percent they normally charge that portion of the 9 percent that reflects not the payment for refraining from consumption, but the payment for the associated administrative costs, and charging it in the form of a flat fee... if that's the theory of what's going on, how could you justify an excessive amount?
And if it isn't the theory of what's going on, what is?
Mr. Gornstein: --On a late fee, it is... the Comptroller concluded that a late fee does two things, at least.
One, it accounts for the increased risk that somebody who pays late presents to the bank.
It is a bigger credit risk, and therefore banks want to charge a higher rate of interest to account for that risk.
And the second thing the Comptroller concluded that the late fee accounts for is the administrative costs associated with that.
But once you--
Unknown Speaker: Suppose the State does not allow a late fee, how do you decide whether, in charging a late fee, a bank violates the rate specified in the Statute... namely, 1 percent above whatever it is?
Do you follow me?
Mr. Gornstein: --Well, I think that... that you... again, there are two--
Unknown Speaker: The State rate is the alternative.
It's either that or the federally specified rate, whichever is higher.
Now, how do you know whether a $15 late fee violates the federally specified rate?
Mr. Gornstein: --You do not look to State law to determine that.
You look to just the percentage ceiling and you look to the rate it charges--
Unknown Speaker: Okay.
Mr. Gornstein: --together with whatever late fee they impose, to see whether that exceeds the percentage ceilings set under the Federal standard.
The State law would have nothing to do with that.
Unknown Speaker: Okay.
In practice, does that Federal limit ever operate or is it nowadays that the bank picks a State and the State--
Mr. Gornstein: I believe it hardly ever operates.
I'm told that it may operate in Arkansas, still, where there is a constitutional limitation on the taking of interest, but... above a certain amount... but everybody else, I believe, is following the... the law of the State in which the bank is located.
The... the second point I wanted to make here is that the Comptroller reasonably started with the premise that a... interest in the lending context could potentially include any charge for the use or the detention of money.
That is the formulation that this Court adopted in Brown against Hiatt at around the time that the Statute was enacted.
And it was clearly not unreasonable for the Comptroller to adopt that same basic approach to the meaning of "interest".
The third point I want to make is that the Comptroller here did reasonably conclude that late fees are interest.
A late fee is a charge that a borrower pays as a condition of receiving an extension of credit.
It is imposed when the borrower fails to pay on time.
It is part of the price for using the credit card, and therefore reasonably viewed as a charge for the use of detention of money.
And the final point I want to make is that the Comptroller reasonably determined that it should not make any difference, for purposes of Section 85, whether the late fee is charged as a percentage of the outstanding balance or whether it is charged at a flat rate, such as $15 per month.
That is a matter of form rather than substance.
If you have a State which has, for example, a 10 percent limit on late fees and you have a borrower with a balance of $100, it should not make any difference whether a national bank charges 15 percent late fees or a $15 flat late fee.
Unknown Speaker: --Mr.... Mr. Gornstein, this Statute came on the books, I guess, what, 1864?
Mr. Gornstein: Yes.
Unknown Speaker: And the Comptroller never had a... a regulation until February of this year?
Mr. Gornstein: That's correct.
No, I... I... I take that back.
The Comptroller did have a regulation on the books, which is still part of the regulation here.
Unknown Speaker: Is that the one in February 1955?
Mr. Gornstein: I... I cannot give you the date on the other regulation.
But at page 3a of our brief, where it says (b) Authority> ["], it... it... it ran something like the second sentence of that, which is: If State law permits interest charges on specified classes of loans, a national bank making such loans is subject only to the provisions of State law relating to that classes of loans that are material to the determination of the permitted interest rate.
And in deciding a lot of questions about what was or wasn't interest before the issuance of this regulation, the judgment was made about whether it was quote, unquote, material to the determination of the rate of interest that the innovation of this regulation, which was built on the 1995 Williams letter that preceded it, which stated the Comptroller's view, was to adopt a Federal definition of interest that tracked this Court's definition in Brown v. Hiatt as the basic concept of interest, but to still leave the material to the determination of interest, but not have it play so big a role in determining what the meaning of interest was under Section 85.
If the Court has no further questions--
Unknown Speaker: Thank you, Mr. Gornstein.
Mr. Donovan, you have a minute remaining.
Rebuttal of Michael D. Donovan
Mr. Donovan: Thank you, Your Honor.
I'll be brief.
One, the definition adopted and proposed by the OCC here has no real logical stopping point, which is the primary problem with the definition of use, forbearance or detention.
Virtually any charge can be characterized as a charge for a detention of money: an attorney's fee, a court cost, any collection fee.
However, Congress did not intend to embrace all of those charges into 85.
In fact, Congress had another provision, Section 24, which authorized banks to make contracts and to... subjected those banks to State contract laws.
The Comptroller admits that that section prevents discrimination by home States against banks with regard to contract charges such as these.
That section takes care of Respondent's credit union hypothesis, that there could be discrimination unless Section 85 means everything.
That can't happen, and it's not the case here.
They haven't challenged the credit union measure.
Chief Justice Rehnquist: Thank you, Mr. Donovan.
Mr. Donovan: Thank you.
Chief Justice Rehnquist: The case is submitted.
Unknown Speaker: The honorable court is now adjourned until Monday next at ten o'clock.