Can States Tax National Banks to Educate Consumers about Predatory Lending Practices?
Jackson, Howell E., Anderson, Stacy A., Harvard Journal of Law & Public Policy
INTRODUCTION I. NATIONALIZATION OF BANKING MARKETS AND FEDERAL PREEMPTION OF STATE LAWS A. State Usury Statutes B. Preemption Rulings of the Comptroller of the Currency C. The Dilemma for States and the Appeal of Consumer Education D. A Model Act II. THE TAXING POWER OF STATES A. History of 12 U.S.C. [section] 548 B. Plain Meaning of the Statute C. Judicial Precedents in Analogous Contexts D. The Regulatory Dimension of State Taxation E. The Role of Federal Banking Agencies in Interpreting 12 U.S.C. [section] 548 F. Judicial Review of the Model Act 1. Does the Act Discriminate Between National Banks and State Institutions? 2. Is the Act a Reasonable Exercise of State Taxing Powers? III. LEGAL BARRIERS TO THE TAXATION OF OUT-OF-STATE BANKS A. Statutory Challenge to Economic Nexus. B. Constitutional Challenges to Economic Nexus C. Constitutional Challenges to the Model Act. IV. CONCLUSION APPENDIX: A MODEL ACT FOR THE PROVISION AND PUBLIC FINANCING OF CONSUMER FINANCIAL EDUCATION
Over the past quarter-century, consumer lending markets in the United States have become increasingly national in scope, with large national banks and other federally chartered institutions playing an ever more important role in many sectors, including credit card lending and home mortgages. At the same time, in a series of judicial decisions, courts have ruled that a wide range of state laws regulating abusive credit card and predatory mortgage lending practices are preempted, at least as applied to national banks and other federally-chartered institutions. Given the dominant role of such institutions in U.S. lending markets, these rulings have narrowed the capacity of states to police local lending transactions. As an alternative to direct regulation, the California Assembly recently considered legislation designed to improve consumer understanding of financial transactions through educational efforts. The measure would be financed by a new state tax on income from certain problematic loans made to California residents by financial institutions, including national banks and other federally-chartered institutions. This Article considers whether a tax of the sort proposed in California could survive a preemption challenge under recent court rulings, as well as other potential constitutional attacks. Although the States have quite limited powers to regulate federally chartered financial institutions, Congress explicitly authorizes states to tax national banks in 12 U.S.C. [section] 548. This Article explores the scope of state taxing authority that [section] 548 confers and the relationship between that authority and recent preemption rulings. After reviewing a range of legal precedent, the Article concludes that a state tax of the sort considered in California--imposing modest levies on federally chartered entities but not preventing them from engaging in otherwise authorized activities--should qualify as a legitimate exercise of state taxing power under [section] 548 and should withstand scrutiny both under the Due Process and Commerce Clauses to the extent the tax is imposed on out-of-state banks.
In February 2005, California Assemblyman Joe Nation introduced a bill proposing a novel approach to consumer protection in the financial services industry. A.B. 1375, the Consumer Protection and Anti-Interest Rate Manipulation Act, (1) would have imposed a supplemental tax on lenders, including national banks, that include in their credit card agreements with California residents a controversial interest rate repricing mechanism known as a universal default provision. (2) Proceeds from the levy were to be dedicated to "educating consumers regarding predatory lending practices." (3) Although the measure has yet to be reported out of committee, the legislation raises a number of important and unresolved questions regarding the authority of states to finance consumer education efforts through the imposition of taxes on national and out-of-state banks. …