Wednesday, April 28, 2010

Wednesday's Weird But True Legal Cases - Are Banks Truly Exempt From Criminal Usury

This week's weird but true legal case looks at the question of when a bank can be exempted from New York's criminal usury laws.

I can recall from my early days in the trenches of the District Courts of Nassau County, well before the great recession and credit crunch, listening to a pro se individual arguing that it was unfair that his credit card issuer was exempt from New York's criminal usury laws merely because it claimed to be from South Dakota.

For those of you who may be unaware, under New York Penal Law sec 190.40, it is illegal to charge interest in excess of 25%. Although this law may have been useful to prevent loansharking, it has proved useless to prevent consumers from being subjected to incomprehensible interest rates charged by the big banks. This is because the large banks claim to be national banks and therefore exempt from the local usury laws.

In Citibank v. Hansen, 2010 WL 1641151 (Dist Nass Cty Apr 23, 2010) a pro se defendant challenged his bank's assessment of a 29.99% interest rate based on his default in payment on a credit line.

As noted by Judge Ciaffa in his decision:

The monthly statements sent to defendant regarding his “CitiFlex Line” account advised him that the annual percentage rate of interest on the account could be increased if he failed to make certain required monthly payments toward his indebtedness.But there is nothing in the papers submitted that explains why Citibank should be entitled to a monetary judgment that includes interest rates and fees that significantly exceed New York's criminal usury rate of 25% (P.L. § 190.40), and which effectively double the permissible civil rate on loans and debts subject to New York law. Are such otherwise “usurious” interest charges properly recoverable in a District Court proceeding brought by a national bank against a New York resident debtor?

In framing the issue before the Court, Judge Ciaffa noted Citibank's status as a national bank, but noted that:

a national bank's right to exceed this state's usury limits is not established simply by alleging its status as a “national bank.” Instead, under applicable provisions of federal law, a greater showing is required. At a minimum, the bank must demonstrate, through proof in admissible form, that at least one significant non-ministerial action associated with the account took place in the bank's “home state.”
After a discussion of the relevant state and federal banking laws as applied by the Federal Courts, Judge Ciaffa observed that:

the issue presented, here, is whether Citibank has, indeed, so structured its affairs. The Court shares the concerns expressed by several of my fellow judges as to whether national banks and other credit card issuers have been literally following the letter of the law, or have been abusing it for their enrichment at the expense of our state's citizens.
After reviewing the evidence presented by Citibank, Judge Ciaffa refused to grant judgment applying the 29.99% interest rate as Citibank had failed to demonstrate that it had performed non-ministerial acts from its "home state" of South Dakota.

[I wonder if there is a CitiField (home of the NY Mets) or Citibank Park (home of the Long Island Ducks) in South Dakota].

You can find the decision here .

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