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were permitted to charge the maximum rate permitted by state la for
Tenders generally, but if siate law made special exceptions for state
banks, thereby authorizing thea to charge a higher rate than that per-
mitted to other lenders, national banks could also levy the higher rate.
Tiffany v. National Bank of Missouri, 85 U.S. (18 Hall.) 409, 411-412,
21 7. Ed. 862(1873); Northway lancs v. ilackley Union National Bank &
Trust Co., 334 F. Supp. 723, 726-727 (W.D. Mich. 1971), aff'd 464 F. 2d
855 T6 Cir. 1972); Parta in v. First National Bank of Montgomery,
336 F. Supp. 65 (11.D.

Ala. 1977), rev'd on other grounds, 467 F. 2d 167
(5 Cir. 1972); Coma'r. of Small Loans v. First National Bank of Maryland,
300 A2d 690 (14d. 1973).

In 1933, Congress amended 12 U.S.C. 85 to permit national banks to charge interest at a rate 1% in excess of the discount račc on ninetyday commercial paper in effect at the district Federal Reserve Bank. The amendment is phrased in the disjunctive, giving national banks the privilege of charging "whichever may be the greater" between the state usury limit, on the one hand, and a rate of 1% in excess of the ninetyday corrmercial paper rate, on the other.

That Congress intended to read the amended statute in the alternative is clearly indicated by the description furnished in the committee reports on the legislation knorn as the "Banking act of 1933." Soth the Senate Report (s. Rep. No. 77, 738 Cong., 1st Sess. 17) and the House Report (H.R. Rep. No. 150, 73d Cong., ist Sess. 4) describe the amendment in identical language, using the disjunctive "or." According to the committee reports, the amendment

Limits the interest that may be charged by a national
bark to that which may be charged by local banks in
the state where the national, bank is located, or to
a rate 1% higher than the discount rate on 90-day
conmercial paper in effect at the Federal Reserve bank
If no rate is fixed by state law, the maximum rate the
national bank may charge is limited to 7 percent, or
15' in excess of such discount rate, whichever is greater.
(Emphasis added.)

Thus, since the enactment of the 1933 amendment, national banks have had a choice:

1. They can charge interest at the highest rate alloved by

sta te law to lenders generally, but if state banks are permitted still a higher rate, national banks are authorized to charge that rate; or

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2. ¡hey can charge interest at 1% above the discount rate on

ninety-day cocinercial paper in effect at the district Federal
Reserve Bank.

The only 'case to our kno:ledge which has construed the 1933 amendineni is an unreporied opinion rendered last year in the Court of Common Pleas of York County, Pennsylvania. In National Central Bank v. Heindel (civ. Actions tos. 2064, 2065, 2065 and 2057, pay Terin 1970), defendant homeowner's petitioned to re-open judgments entered against ühen: by confession in 1970. The grounds for the petition was that National Central Cank had charged interest at 7% in violation of Pennsylvania's 6% usury limit. The court held that, regardless of state law, the bank's status as a national bänk permitted it to charge interesa ai a ratc of 1% above the discount rate on ninety-day commercial paper. Since its discount rate in effect at the Federal Reserve Bank of Philadelphia vas 6% at the time, the bank uas permitted to charge 7%.

The statute, as it no!! stands, is not a model of clarity. Without a knokledge of its original purpose, the Supreme Court's holding in Tiffany and the exact wording of the 1933 amendinent, one will find the syntax baffling. Not surprisingly, then, some erroneous notions have ariser concerning its interpretation. The principal misconception is that the statute is intended to assure that rational banks and state banks are on an equal footing when charging interest. This idea was disposed of in Tiffany, where the Suprene Court, taking note of the critical importance that Congress placed upon the establishment of a strong national banking system to provide a unifora currency for the country, declared

[The statute) speaks of alloliances to National banks
and limitations upon State banks, but it does not declare
that the rate limited to state banks shall be the maxima!!
raic allo:ed to Rational banks Hational banks have been
National favorites. They were established for the plii*pose
in part, of providing a currency for the whole country, and
in part to create a market for the loans of the General
government. It could not have been intended, therefora,
to expose thein to ine hazard of unfriendly legislation by
the States, or to ruinous competition with State banks. On
ine contrary, much has been done to insure their taking
the place of Statc banks. The latter have been substan-
tially taxed out of existence. A duty has been imposed
upon their issues so largo as to manifest a purpose to

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compel a withdrawal of all such issues from circulation.
In harmony with this policy is the construction we think
should be given to the thirtieth section of the act of
Congress i:e have been considering. It gives advantages to
National banks over their State competitors. It allo:75 such banks
to charge slich interest as State banks may charge, and more,
if by the Talis of the State nore may be charged by natura

persons. (Emphasis added.)

In light of the above, we hereby confirm the advice furnished to you by Mr. Barrett on the telephone that, regardless of Michigan's usury Michigan National Bank may charge interest on all loans at 1% in excess of the discount rate on ninety-day commercial paper in effect at the Federal Rank of Chicago. Since the discount rate is presently 7 1/2%, Michigan National may charge 8 1/2%.

For your information, we enclose a legal opinion from the law firm of barner, Norcross & Judd, of Grand Rapids, Michigan, in which views similar to ours are expressed.

If we can be of further assistance, please call upon us.

Very truly yours,

Thomas S. Aleshan

Thomas G. Deshazo
Deputy Comptroller of the Currency

Enclosure

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prime commercial paper (4- to 6-month maturities) averaged

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Interest rate on a loan to an individual or unincorporated

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rate for funds, often find that they are legally unable

to obtain financing. As a result, they find themselves

faced with the choice of either circumventing the law

to obtain the desired funds or else losing out to other

borrowers who may not be willing to bid as much, but who

are legally able to contract because of the nonuniformity

of usury laws.

Despite the credit market distortions

caused by ceilings on interest rates, usury laws have been

retained in most jurisdictions.

It is the intent

of this article to provide some insight and perspective

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stated, "Thou shalt not lend upon usury to thy brother,

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1/ A previous discussion of interest rate controls by

this Bank was given by Clifton B. Luttrell, "Interest Rate Controls Perspective, Purpose, and Problems," this Review (September 1968), pp. 6-14; see also Charlotte E. Ruebling, "The Administration of Regulation 0," this Review (February 1970), pp. 29–40.

2/ See Sidney Homer, A_History of Interest Rates (New

Brunswick, New Jersey: Rutgers University Press, 1963).

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