On September 17, the Federal Deposit Insurance Corporation (FDIC) Board of Directors approved a notice of proposed rulemaking that would amend the agency’s regulations to promote parity between out-of-state state banks and national banks with respect to the application of host state laws.

What the Proposed Rule Would Do

Under the proposal, when a host state’s laws do not apply to a national bank operating in that state, those same laws would not apply to certain out-of-state, state bank providing services in that host state, regardless of whether the state bank maintains a branch there. Instead, consistent with § 24(j) of the Federal Deposit Insurance Act (FDI Act), the law of the state bank’s chartering state would govern.

Specifically, the amendments would provide that, for purposes of § 24(j), host state laws apply to a branch in the host state of, or services provided in the host state by, an out-of-state state bank only to the same extent those laws apply to a branch in the host state of, or services provided in the host state by, an out-of-state national bank.

The proposed rule would not alter the interest rates state banks are permitted to charge on their loans, which remain governed separately by § 27 of the FDI Act.

Why the FDIC Is Acting Now

The FDIC pointed to recent litigation involving an Illinois law on payment card transactions as having created uncertainty about which state’s laws apply to state-chartered banks offering services outside their home state. According to the FDIC, this uncertainty:

• Creates risk of disruption and confusion for merchants relying on payment card transactions and the consumers they serve;
• Creates a competitive imbalance between national banks and state banks; and
• Undermines the dual banking system that Congress has periodically acted to preserve, including through the McFadden Act of 1927 and the Depository Institutions Deregulation and Monetary Control Act of 1980.

Consistency Rationale

Beyond addressing the national bank/state bank parity issue, the FDIC noted the proposed rule would also make treatment more consistent among state banks themselves: an out-of-state state bank offering services in a host state without a branch would be treated the same as an out-of-state state bank performing the same services through a branch there.

Comment Period

Comments on the proposed rule are due 60 days after its publication in the Federal Register.

Our Take

This proposal would resolve a live source of regulatory uncertainty stemming from state-level payment card litigation by anchoring the applicable law to the state bank’s chartering state, mirroring how national banks are treated under similar circumstances. Banks operating across state lines, particularly those active in payment card and similar cross-border services, should watch the Federal Register publication date closely to preserve their opportunity to comment within the 60-day window.