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US District Court : CREDIT | BANKS - failure to state claim for excessive interest

Individually, and on Behalf
of All Others Similarly
Civil File No. 06-4228 (MJD/RLE)
Robert D. Brownson, Brownson & Ballau, PLLP, on behalf of Plaintiff.
Joseph J. Mihalek, Fryberger Buchanen Smith & Frederick, PA, on behalf of
Before the Court is Defendants Motion to Dismiss [Doc. No. 4]. Oral
argument was heard on February 2, 2007.
The following recitation of the facts takes all the facts in the Complaint as
true. See Westcott v. City of Omaha, 901 F.2d 1486, 1488 (8th Cir. 1990).
On May 5, 2006, Plaintiff borrowed 00 from Defendant, and secured the
loan with a motorcycle. (Compl. 11.) The loan was for a term of thirty-six
months, the original interest rate was 8.140 percent, and the monthly payments
on the principal and interest were .28 a month. (Id.; Compl. Ex. A at 1.) As a
condition of receiving the loan, Plaintiff was required to pay a Prepaid Finance
Charge of .00, which was added to the principal of the loan. (Id.) The
Disclosure Statement provides the following:
Prepaid Finance Charges: .00
Financed: .00
(Id.) In addition, a one-time Grant Fee of .50 was also added to the principal,
bringing the total principal loan amount to 67.50. (Id.) After including all the
various costs in the principal, Plaintiffs interest rate became 9.425 percent on the
principal amount borrowed. (Id.)
The promissory note executed at the time Plaintiff received the loan
provides that in the event of prepayment, Plaintiff may be entitled to a refund of
part of the prepaid finance charges, and [Plaintiff] will not have to pay a penalty.
(Id. at 2.) The promissory note further provides that [t]o the extent not
preempted by federal law, this loan is made under Minnesota Statutes, Section
47.59. (Id. at 3.)
On August 14, 2006, Plaintiff prepaid the loan in full. Plaintiff received no
refund for any of his prepaid finance charge when he prepaid the loan. According
to Plaintiff, prepaying his loan resulted in his paying an annual interest rate on his
loan greater than what is provided for in the original loan documents.
Although Plaintiff never sought a refund for any interest at the time he paid
off the loan, Plaintiff filed the instant lawsuit on behalf of himself and others
similarly situated asserting that he paid a total of .93 in interest on the loan
before he paid it off, and that since he did not receive a refund or credit on the
prepayment amount, the annual percentage rate on the loan was usurious under
12 U.S.C. 85. (Compl. 17.) Plaintiff further alleges that Defendant has failed
to properly refund several thousand other customers who prepaid their loans.
(Id. 24.) Thus, Plaintiff alleges that Defendant knowingly, and willfully,
charged, and continues to knowingly and willfully charge, an excessive, illegal,
and usurious interest rate on loans made to Plaintiff, and members of the Class, all
in violation of 12 U.S.C. 85. (Id. 44.)
A. Legal Standard
The Court must construe the allegations in the pleadings in a light most
favorable to the nonmovant, including taking the facts alleged in the Complaint as
true. Westcott, 901 F.2d at 1488. The Complaint should be liberally construed in
Plaintiffs favor and should not be dismissed under Rule 12(b)(6) unless it appears
that Plaintiff can prove no set of facts which would entitle him to relief. Id.
Under this standard, dismissal is granted only in the unusual case in which a
plaintiff includes allegations that show on the face of the complaint that there is
some insuperable bar to relief. Gephardt v. ConAgra Foods, Inc., 335 F.3d 824,
829 (8th Cir. 2003) (quoting Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546 (8th
Cir. 1997)). A court may consider materials necessarily embraced by the
pleadings and materials that are part of the public record. Porous Media Corp. v.
Pall Corp., 186 F.3d 1077, 1079 (8th Cir. 1999) (citations omitted).
B. Preemption
Under 12 U.S.C. 85, national banks are prohibited from knowingly
charging or receiving interest rates greater than the rate allowed by the laws of
the State . . . where the bank is located. The federal remedy for usurious interest
paid on bank loans is found in 12 U.S.C. 86, and provides that an aggrieved party
who has already paid interest may recover twice the amount of interest thus
paid. Id.
Federal law preempts state law with respect to usury claims against national
banks. Beneficial Natl Bank v. Anderson, 539 U.S. 1, 11 (2003) (holding that
there is, in short, no such thing as a state-law claim of usury against a national
bank). Accordingly, the provisions of 12 U.S.C. 85 and 86 supercede both the
substantive and the remedial provisions of state usury laws and create a federal
remedy for overcharges that is exclusive. Id. at 11.
Defendant is a national bank, and the interest rates that Defendant can
charge are thus governed by federal law. Marquette Natl Bank of Minneapolis v.
First of Omaha Serv. Corp., 439 U.S. 299, 308 (1978) (citation omitted). With
respect to usury claims against national banks, state law provides only the
maximum rate of interest that can be charged by the bank, and the rest of the
claim is governed by federal law. Beneficial Natl Bank, 539 U.S. at 10 (citing
Evans v. Natl Bank of Savannah, 251 U.S. 108, 114 (1919)).
In Minnesota, for loans of the type at issue here, banks can charge a
maximum annual percentage rate not exceeding 21.75 percent. Minn. Stat.
47.59, subd. 3(a).
C. Whether the Charge Was Interest
Plaintiffs case is premised on the prepaid finance charges he paid.
Specifically, Plaintiff asserts that he paid a total of .93 in interest on the loan
before he paid it off, and that since he did not receive a refund or credit on the
prepayment, the interest rate was usurious. Defendant responds that the charge
was not interest under the applicable statutes, and thus cannot provide the basis
for a finding of usury.
The Supreme Court defers to the Comptroller of Currency with regard to the
meaning of the countrys banking laws. Smiley v. Citibank, 517 U.S. 735, 739
(1996) (citing Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,
842-45 (1984)). The Comptroller defines interest in the following way:
[I]nterest as used in 12 U.S.C. 85 includes any payment
compensating a creditor or prospective creditor for an extension of
credit, making available of a line of credit, or any default or breach by
a borrower of a condition upon which credit was extended. It
includes, among other things, the following fees connected with
credit extension or availability: numerical periodic rates, late fees,
creditor-imposed not sufficient funds (NSF) fees charged when a
borrower tenders payment on a debt with a check drawn on
insufficient funds, overlimit fees, annual fees, cash advance fees, and
membership fees. It 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.
12 C.F.R. 7.4001(a) (emphasis added).
The payment at issue is called a Prepaid Finance Charge in the loan
documents. Under Minn. Stat. 47.59, subd. 1(j), finance charge is given the
meaning from 12 C.F.R. 226, with certain exceptions. A prepaid finance charge is
any charge payable directly or indirectly by the consumer and imposed directly or
indirectly by the creditor as an incident to or a condition of the extension of
credit. 12 C.F.R. 226.4(a). Finance charges include interest. 12 C.F.R.
226.4(b)(1). A fee that is only charged to successful loan applicants is a finance
charge. Oiciyapi Fed. Credit Union v. Natl Credit Union Admin., 936 F.2d 1007,
1009 n.1 (8th Cir. 1991).
Plaintiff argues that since the prepaid finance charge was only charged to
successful loan applicants, it is a finance charge under federal law that should be
calculated into the interest Plaintiff paid on the loan.
Defendant responds that the charge was a loan documentation fee that is
specifically not included in the Comptrollers definition of interest. Defendant
notes that on the Disclosure Statement, the Prepaid Finance Charge is broken into
two parts: .00 for LOAN ADMINISTRATION FEE and for something called
HMDA CENSUS. (Compl. Ex. A at 1.) Defendant argues that it did this not
because it admits that the total fee is interest, but rather because Minnesota
disclosure law requires the financed closing costs to be included in the finance
charge for purposes of the Truth in Lending disclosure.
At this juncture, the Court must accept the allegations in the Complaint as
true. Thus, although a fact question may exist as to the true purpose of this
charge, the Court will treat it as interest for purposes of this motion. Defendants
own documents characterized the fee as a prepaid finance charge which qualifies
as interest under 12 C.F.R. 7.4001(a). Thus, the .93 payment is interest, and
the case need not be dismissed on the basis that it is not.
D. Whether the Interest Rate Was Lower Than the Maximum Rate
Permitted Under Minnesota Law
1. Minn. Stat. 47.59 subd. 3(f)
As discussed above, the federal courts look to state law to determine the
maximum legal interest rate. Under Minn. Stat. 47.59 subd. 3(a), the maximum
interest rate is 21.75%.
Plaintiff avers that for purposes of determining usury, the Court must
consider not only the maximum interest rate under subd. 3(a), but also the interest
cap discussed in subd. 3(f) of the same statute. That section provides the
[I]f the finance charge is calculated or collected in advance, or
included in the principal amount of the loan, and the borrower
prepays the loan in full, the financial institution shall credit the
borrower with a refund of the charge to the extent the annual
percentage rate yield on the loan would exceed the annual percentage
rate on the loan as originally determined under paragraph (a) and
taking into account the prepayment.
Minn. Stat. 47.59, subd. 3(f) (emphasis added). Plaintiff argues that under this
statute, .93 of the fee was interest that should have been refunded when
he prepaid the loan, and that Defendant had to refund a portion of the Prepaid
Finance Charge, sufficient to not increase the rate to one higher than the rate
contained in the original loan documents. Failure to provide this refund, argues
Plaintiff, is usury, even though the final interest rate does not exceed 21.75
The Court agrees with Plaintiff that Subd. 3(f) is part of the same statute
that sets the top interest rate that lenders can charge. 12 U.S.C. 85 prohibits any
interest in excess of the the rate allowed by the State, and subdivision 3(f)
provides an additional cap in the case of prepayment. It contains the directive that
lenders shall reimburse interest payments. Thus, subdivision 3(f) is not optional,
and must be considered by the Court when determining whether Defendant is
guilty of usury.
The Court finds, however, that Plaintiff misconstrues subdivision 3(f).
Subdivision 3(f) refers specifically to subdivision 3(a) which provides that lenders
may charge interest not to exceed 21.75%. Subdivision 3(a) does not state that
lenders may charge interest not to exceed the amount originally contracted for.
Thus, under the laws of Minnesota a lender must only reimburse a borrower who
prepays when that prepayment results in an interest rate above 21.75%.
2. Interest Rate
Even if Plaintiff paid interest in an amount higher than the amount he
originally contracted for, he did not pay interest in excess of 21.75%. That is all
that is at issue in this case. Thus, even accepting all Plaintiffs factual allegations as
true, Plaintiff has failed to state a claim upon which relief can be granted under 12
U.S.C. 86.
Accordingly based upon the files, records, and proceedings herein, IT IS
1. Defendants Motion to Dismiss [Doc. No. 4] is GRANTED; and
Dated: August 20, 2007 s / Michael J. Davis
Michael J. Davis
United States District Court


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