We are a national bank with one location in Illinois. We recently were purchased by an out-of-state bank holding company. We are told that the other state’s law establishes a usury limit of 10%. The holding company is concerned about our document preparation fee for small-dollar, short-term loans, which can cause these loans’ APRs to exceed the other state’s 10% cap. Are these loans subject to the other state’s interest rate cap?

First, we should note that we are not experts on the other state’s law, and we cannot opine as to whether its restrictions on interest rates would apply to document preparation fees.

Having said that, we do not believe that your bank’s document preparation fees are subject to the other state’s interest rate limit. As a national bank, your bank benefits from preemption of certain state laws under the National Bank Act, and the OCC has issued regulations confirming that a national bank may charge non-interest fees without regard to state law. These regulations also expressly exclude document preparation fees from the definition of “interest,” and consequently your charging of document preparation fees should be covered by the OCC’s position as to non-interest fees. We know of at least two out-of-state cases confirming this conclusion; i.e., that state law limitations on document preparation fees are preempted by the OCC’s regulations for national banks.

In any event, as a national bank headquartered in Illinois, your interest rates are not subject to the other state’s usury ceiling. And as an aside, we note that Illinois law permits banks to charge document preparation fees (as a non-interest item), as confirmed by the Illinois Supreme Court in a 2005 decision.

For resources related to our guidance, please see:

12 CFR 7.4002 (“(a) A national bank may charge its customers non-interest charges and fees, including deposit account service charges. . . . (b)(2) The establishment of non-interest charges and fees, their amounts, and the method of calculating them are business decisions to be made by each bank, in its discretion, according to sound banking judgment and safe and sound banking principles. . . .”)

12 CFR 7.4002(d) (“State law. The OCC applies preemption principles derived from the United States Constitution, as interpreted through judicial precedent, when determining whether State laws apply that purport to limit or prohibit charges and fees described in this section.”)

Final Rule, OCC, Dodd-Frank Act Implementation, 76 Fed. Reg. 43549, 43556, 43558 (July 21, 2011) (“Accordingly, because we conclude that the Dodd-Frank Act preserves the Barnett conflict preemption standard, precedents consistent with that analysis — which may include regulations adopted consistent with such a conflict preemption justification — are also preserved. . . . We did not propose changes to 12 CFR 7.4002, 34.21, and 37.1 and therefore make no changes to these provisions in this final rule. However, we agree with commenters that these rules remain in effect.”)

12 CFR 7.4001(a) (“The term ‘interest’ as used in 12 USC 85 . . . does not ordinarily include appraisal fees, premiums and commissions attributable to insurance guaranteeing repayment of any extension of credit, finders’ fees, fees for document preparation or notarization, or fees incurred to obtain credit reports.”)

Martinez v. Wells Fargo Bank, N.A., 2007 WL 963965 at * 8 (Dist. Ct. N.D. Cal. 2007) (“[T]he fees at issue in this action [are] . . . document preparation fees, and other similar settlement services fees related to closing of a mortgage loan . . . . The OCC’s regulations in section 7.4001 establish that the setting of non-interest fees and charges for real estate loans are business decisions within a national bank’s discretion and that such decisions are considered to fall within safe and sound banking principles if the decision considers certain factors. Here, the fees charged by Wells are not alleged to exceed the authority conferred by the National Bank Act and the regulations thereunder. Therefore, to the extent plaintiffs contend that Wells’s conduct nevertheless constitutes unfair or deceptive business practices or acts under [California law], such claims are preempted by the National Bank Act and regulation 12 C.F.R. § 7.4002 thereunder.”)

Fuchs v. Wachovia Mortg. Corp., 2005 WL 3076343 at * 5 (N.Y. Sup. Nov. 15, 2005) (“In view of the foregoing, this Court finds that charging a document preparation fee is permitted under the federal law and regulations as a “safe and sound” banking practice. To the extent that any New York statute purports to prevent federally chartered banks from collecting such a fee, they are preempted by federal statutes and regulations.”)

National Bank Act, 12 USC 85 (“Any association may take, receive, reserve, and charge on any loan or discount made . . . interest at the rate allowed by the laws of the State, Territory, or District where the bank is located . . . .”)

King v. First Capital Fin. Servs. Corp., 215 Ill.2d 1 (2005) (“For these reasons, we are not persuaded by plaintiffs’ arguments that the mere charging of a fee for document preparation, when the conduct is otherwise within the pro se exception, changes the nature of the transaction to one that becomes the unauthorized practice of law. Accordingly, we hold that the charging of a fee, without more, for the preparation of the loan documents by the lenders’ employees did not transform their conduct into the unauthorized practice of law.”)