Could a national bank in Washington charge credit card interest above the state retail charge cap and add an annual card fee?

Plain-English summary

Two legislators asked whether a national bank could charge more interest on unpaid credit card purchases than Washington's cap for retail charge agreements, and whether it could add a card membership fee. The AG said federal law governed the national bank's interest rate to the extent 12 U.S.C. § 85 permitted the higher charge. It treated card purchase balances as debts within that federal provision even though the transactions involved retail sales.

The AG separated interest from a fee charged for holding and using the card regardless of particular purchases. It said the unrelated membership fee was not federal-law interest, but was a “service charge” under Washington's retail installment law. On the law then in effect, the fee could be no more than $1 monthly or $12 annually. The opinion did not withdraw its earlier view that state retail charge rules otherwise applied to bank card purchases.

“this membership fee may not exceed $1 per month or $12 per year.” (Official opinion)

Currency note

This opinion was issued in 1980. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: Could a national bank charge a higher rate on credit card purchases than the state retail cap?
A: The AG said yes, to the extent 12 U.S.C. § 85 permitted that interest rate for the national bank. The opinion treated purchase balances as covered debts.

Q: Did federal interest law also exempt a separate membership fee from state limits?
A: No. The AG said a fee unrelated to any particular transaction was not interest under the federal provision. It applied Washington's service charge limit to that fee.

Q: What card fee limit did the AG identify in 1980?
A: The opinion stated a maximum of $1 per month or $12 per year for the periodic membership fee under the state law it analyzed.

Q: Was the opinion limited to cash advances?
A: No. The first question specifically concerned goods or services bought from participating vendors with a national bank card, and the AG answered that question in the affirmative.

Background and statutory framework

The AG compared the state Retail Installment Sales Act's service charge rules with 12 U.S.C. § 85 of the National Bank Act. It treated interest on card purchase balances as subject to the federal provision's priority over conflicting state law. It then classified an unrelated membership fee under the state definition in RCW 63.14.010(8) and applied the limit in RCW 63.14.120.

Citations and references

The opinion discussed 12 U.S.C. § 85, RCW 63.14.120 and RCW 63.14.010(8).

Source

• Landing page: https://www.atg.wa.gov/ago-opinions/regulation-bank-credit-card-transactions

Original opinion text

Attorney General Slade Gorton

BANKS AND BANKING ‑- INTEREST ‑- SALE ‑- REGULATION OF BANK CREDIT CARD TRANSACTIONS

(1) To the extent permitted by 12 U.S.C. § 85, where the holder of a bank credit card issued by a national bank uses that card to purchase goods or services from a participating vendor, the issuing bank may impose a monthly interest charge on any resulting unpaid balances due which is higher than the maximum service charge permitted by RCW 63.14.120 in connection with a retail charge agreement.

(2) In addition to imposing such a monthly interest charge in connection with merchandise purchase transactions, a national bank may lawfully charge its credit card holders a periodic credit card membership fee unrelated to any particular transactions involving use of the card during the period covered; however, that membership fee may not exceed $1 per month or $12 per year.

May 16, 1980

Honorable Shirley J. Winsley
State Rep., 28th District
Honorable John S. Eng
State Rep., 37th District
205A House Office Building
Olympia, Washington 98504

Cite as: AGO 1980 No. 11

Dear Representatives Winsley and Eng:

By recent letter you requested our opinion on two questions which we paraphrase as follows:

(1) Where the holder of a bank credit card issued by a national bank uses that card to purchase goods or services from [[Orig. Op. Page 2]] a participating vendor, may the issuing bank, under the authority of 12 U.S.C. § 85, impose a monthly interest charge on any resulting unpaid balances due which is higher than the maximum service charge permitted by RCW 63.14.120 in connection with a retail charge agreement?

(2) In addition to imposing such a monthly interest charge in connection with merchandise purchase transactions, may a national bank lawfully charge its credit card holders a periodic credit card membership fee unrelated to any particular transactions involving use of the card during the period covered?

We answer both questions in the affirmative for the reasons, and subject to the qualifications, set forth in our analysis below.

ANALYSIS

In AGO 1968 No. 6, copy enclosed, this office concluded that where a bank credit card is used to purchase goods or services from a participating vendor, the transaction is governed by those provisions of the State Retail Installment Sales Act (chapter 63.14 RCW) pertaining, inter alia, to maximum service charges which apply to transactions made pursuant to a "retail charge agreement" as defined in RCW 63.14.010(7). At that time, the maximum monthly service charge permitted by the act was one and one‑half percent of the outstanding balance‑-or 18 percent per year computed monthly. But thereafter, as a consequence of the passage of Initiative 245 in 1969, this maximum monthly charge was reduced to one percent of the outstanding balance or twelve percent per year computed monthly. See, RCW 63.14.120.

Earlier this year, however, a national bank doing business in this state (namely, Rainier National Bank) began charging its VISA card customers, in connection with all transactions involving the use of those credit cards, at the higher rate of 14 percent per year computed monthly. In addition, the same bank installed an annual credit card membership fee which, as we understand it, is unrelated to any particular [[Orig. Op. Page 3]] transactional use of the card. And, therefore, in your respective capacities as executive chairwoman and chairman of the House Financial Institutions Committee, you responded by requesting our opinion on the legal issues thus raised.

Question (1):

The first question to be considered involves the legality of a monthly service charge in excess of that allowed by RCW 63.14.120 (3) (d), supra. In urging that we sustain such a charge, an attorney for the bank whose announced action first precipitated your request1/ has urged,inter alia, that we overrule AGO 1968 No. 6 in the light of the subsequent decision of our State Supreme Court in National Bank of Commerce v. Thomsen, 80 Wn.2d 406, 495 P.2d 332 (1972). However, while it is true that there is dicta in the Court's opinion in that case which, read in isolation, may appear to militate against some of the reasoning of our prior opinion2/ we do not believe it either necessary or appropriate to dispose of the instant matter on that basis. In the first place, while it involved a somewhat analogous transaction, theThomsen case simply did not relate to the use of a bank credit card in connection with the purchase of goods or services. Therefore, the question of what constitutes a "retail charge agreement" under RCW 63.14.010 (7)3/ ‑-as opposed to a "retail installment contract" as defined in RCW 63.14.010(6)‑-was not there presented. And secondly, in view of what now appears to be the applicable rule of federal law, we find it unnecessary here, in any event, to reach the characterization issue which was addressed in AGO 1968 No. 6.

[[Orig. Op. Page 4]]

12 U.S.C. § 85 is a section of the National Bank Act which governs the rate of interest a national bank may charge. That section reads (in material part) as follows:

"Any association may take, receive, reserve, and charge on any loan or discount made, or upon any notes, bills of exchange, or other evidences of debt, interest at the rate allowed by the laws of the State, Territory, or District where the bank is located,or at a rate of 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal reserve bank in the Federal reserve district where the bank is located. . . whichever may be the greater, and no more, except that where by the laws of any State a different rate is limited for banks organized under State laws, the rate so limited shall be allowed for associations organized or existing in any such State under this title, . . ." (Emphasis supplied)

Under the Supremacy Clause of the United States Constitution,4/ this provision must be deemed to take precedence over any conflicting state statute. Therefore, regardless of how a credit card "merchandise purchase" transaction is characterized under state law, it necessarily follows that the alternative5/ rate of interest permitted by the federal statute may be charged by a national bank if, under that statute, such obligations as are incurred when a credit card holder uses his or her card to purchase goods or services constitute ". . . other evidences of debt, . . ."

Parenthetically, we should at this point note that this office has often in the past refrained from issuing opinions on questions requiring the interpretation of federal, as distinguished from state, statutes. Where, however, the federal [[Orig. Op. Page 5]] statute in question has already been considered and uniformly interpreted in the federal courts, the underlying basis for that policy of restraint no longer exists. And, insofar as the question here presented is concerned, such appears to be the case.

We first take note of a recent federal district court decision in United Missouri Bank of Kansas City v. Danforth, 394 F.Supp. 774 (1975). There, the Court specifically ruled that even through purchases of goods or services by means of a bank credit card were governed by the Missouri Retail Credit Sales Act (a law much like our own Retail Installment Sales Act), those same transactions resulted in "evidences of debt" within the purview of 12 U.S.C. § 85,supra, in cases where the credit cards involved were issued by a national bank. In so ruling the Court reasoned (at pp. 782-3) as follows:

"The Court is in agreement with the assertion of the defendant that Missouri decisional law has traditionally distinguished loans of money from the extension of credit in connection with a retail sale. The decision in Wyatt v. Commercial Credit Corporation, supra, one of the most recent Missouri decisions noting this distinction was authorized by the undersigned judge while serving on the Kansas City Court of Appeals. However, the Court does not agree with the defendant's conclusion that that traditional distinction removes transactions governed by the provisions of the Missouri Retail Credit Sales Act from the purview of Section 85 of Title 12, United States Code.

"The conclusion that can be drawn from the traditional distinction in Missouri law between 'loans' of money and the extention of 'credit' in connection with a retail sale is that under Missouri law these are deemed to be different classes of debt. Notably, Section 85 of Title 12 is not limited to permitting national banks to charge the highest rates of interest permitted to competing lenders under state law on 'loans'. Rather the statute provides in pertinent part:

[[Orig. Op. Page 6]]

"'Any association may take, receive, reserve, and charge on any loan or discount made, or upon any notes, bills of exchange, or other evidences of debt, interest at the rate allowed by the laws of the State . . .' (Emphasis added.)

"Notwithstanding the Missouri decisional law which establishes that a retail credit sale of goods or services is not a 'loan' within the meaning of the Missouri usury statutes, it cannot be disputed that a transaction governed by the provisions of the Missouri Retail Credit Sales Act in which 'credit', as defined in that Act, is granted to a retail buyer involves the incurring of a 'debt' within the context of the Act and as the term is generally used. The 'retail time transactions' and 'retail charge agreements' made in connection with these credit transactions constitute 'evidence of debt' within the meaning of Section 85 of Title 12 . . ."

Next, we observe that although this particular decision was not appealed to a higher federal court, it was nevertheless later cited with approval by the Court of Appeals for the Eighth Circuit in another case, Fisher v. First National Bank of Omaha, 548 F.2d 255 (1977). And there, in likewise rejecting any distinction between cash advance and merchandise purchase transactions insofar as 12 U.S.C. § 85, supra, is concerned the Court said, at page 260:

". . . if a person desires to buy merchandise worth $100.00 on installment credit, it makes no practical difference whether he gets the money from a small loan company and pays cash for the merchandise or whether he obtains the merchandise in the first instance by using a credit card and ultimately discharges the obligation by installment payments to the bank."

[[Orig. Op. Page 7]]

Additionally, the same view (in terms of the scope of that federal statute) appears simply to have been assumed, without discussion, in two other recent federal Court of Appeals' decisions. See,Fisher v. First National Bank of Chicago, 538 F.2d 1284 (1976), a ruling by the Seventh Circuit and Partain v. First National Bank of Montgomery, 467 F.2d 167 (1972), a case decided by the Fifth Circuit. On the other hand, our research has disclosed no federal cases to the contrary.6/

We therefore answer your first question in the affirmative. To the extent permitted by 12 U.S.C. § 85, supra, as thus interpreted by the federal courts, in a case where the holder of a bank credit card issued by a national bank uses that card to purchase goods or services from a participating vendor, the issuing bank may impose a monthly interest charge on any resulting unpaid balances which is higher than the maximum service charge permitted by RCW 63.14.120 in connection with a retail charge agreement.7/

Question (2):

We turn now to your second question which, as above paraphrased, asks:

In addition to imposing such a monthly interest charge in connection with merchandise purchase transactions, may a national bank lawfully charge its credit card holders a periodic credit card membership fee unrelated to any particular transactions involving use of the credit card during the period covered?

[[Orig. Op. Page 8]]

In generally answering your first question in the affirmative while adhering to our own AGO 1968 No. 6, supra, as a still valid interpretation ofstate law, we accepted the premise urged by legal counsel for the bank8/ that 12 U.S.C. § 85, supra, nevertheless permits a national bank to charge its credit card holders interest at a rate higher than the 12 percent per annum maximum service charge permitted under a retail charge agreement by RCW 63.14.120(3) (d),supra. Accord,United Missouri Bank of Kansas City v. Danforth andFisher v. National Bank of Omaha, supra. It is of critical importance to note and understand, however, that the Danforth and Fisher cases were decided not only on the basis that the subject obligations incurred constituted ". . . other evidences of debt, . . ." but, in addition, that the monthly service charge being imposed was a form of "interest," as that term is also used in the federal statute. Here, on the other hand, in urging that we also answer your second question in the affirmative counsel argues that an annual credit card membership fee unrelated to any particular transactions involving use of the card during the year is not a form of "interest" under 12 U.S.C. § 85, supra and, therefore, is unrestricted by that section of the National Bank Act.

Having considered the arguments and authorities which counsel has submitted to us in support of that proposition, we likewise agree on that count;i.e., that such an annual credit card membership fee does not constitute interest under the federal statute. But having so concluded, we are of the further opinion that this same annual fee, by entitling the credit card holder to have and use the card for all permitted purposes‑-including both identification and proof of credit worthiness in the abstract and the privilege of purchasing specific goods or services on credit‑-does amount to a "service charge" as that term is defined in our state law. See, RCW 63.14.010(8) which provides that:

"(8) 'Service charge' however denominated or expressed, means the amount which ispaid or payable for the privilege of purchasing goods [[Orig. Op. Page 9]] or services to be paid for by the buyer in installments over a period of time. It does not include the amount, if any, charged for insurance premiums, delinquency charges, attorneys' fees, court costs or official fees;" (Emphasis supplied)

Therefore, for the very reason that the annual membership fee is not "interest" within the meaning of the preemptive federal statute upon which counsel relied in connection with question (1), it follows, in accordance with our analysis in AGO 1968 No. 6, that this annual fee‑-unlike the monthly "interest charge"‑-is subject to RCW 63.14.120(3) (d), supra. And, once again, that provision (here set forth in full for ease of reference) now reads as follows:

"The monthly service charge may not lawfully exceed the greater of one percent of the outstanding balance (twelve percent per year computed monthly) or one dollar."

Accordingly, while we agree that such a periodic credit card membership fee may be charged, in addition to the monthly interest charges imposed, we further conclude that this membership fee may not exceed $1 per month or $12 per year.

We trust that the foregoing will be of assistance to you.

Very truly yours,
SLADE GORTON
Attorney General

PHILIP H. AUSTIN
Deputy Attorney General

*** FOOTNOTES ***

1/Following our receipt of your letter, we contacted the law firm representing Rainier National Bank and invited it to submit, in writing, its justification for the questioned practices. We subsequently received that requested input in the form of a letter dated April 4, 1980, a copy of which, we note, was also sent directly to each of you.

2/Specifically, our partial reliance on Hafer v. Spaeth, 22 Wn.2d 378, 156 P.2d 408 (1945) at pp. 4-5 of AGO 1968 No. 6.

3/Cf., the further and more important basis for our conclusion is AGO 1968 No. 6 at pp. 5-11.

4/U.S. Const., Art. VI.

5/And now higher in view of the current Federal Reserve Bank discount rates on commercial paper.

6/It will also be noted that all four of these federal cases, like our own state court decision in National Bank of Commerce v. Thomsen, supra, postdated the issuance by this office of AGO 1968 No. 6,supra.

7/As of April 1, 1980, we note that similar federal legislation became effective with respect to state‑chartered financial institutions insured by federal agencies such as FDIC, FSLIC and NCUA. See, §§ 521-523 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (Public Law 96-640).

8/See, again, footnote 1, supra.