Federal Preemption of State Banking and Usury Laws: True Lender Rules

Federal preemption of state usury laws is why a credit card issued by a bank in South Dakota can legally charge a borrower in a 12% cap state an interest rate near 30%. Two statutes do the work: 12 U.S.C. § 85 for nationally chartered banks, and Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980, codified at 12 U.S.C. § 1831d, for FDIC-insured state banks. Both let a bank charge interest at the rate allowed by the state where the bank is located, regardless of any lower cap in the state where the borrower lives.¹²

The Supreme Court set this framework in 1978. In Marquette National Bank of Minneapolis v. First of Omaha Service Corp., the Court held that a national bank in Nebraska could charge its Minnesota credit card customers Nebraska’s rate, even though Minnesota’s cap was lower. The Court acknowledged that “exportation” of interest rates would undermine state usury laws but said any fix had to come from Congress.³ Within a few years, Delaware and South Dakota eliminated their rate ceilings, major banks moved their credit card operations there, and the modern national credit card market took shape.

Which State’s Law Controls Your Rate

For a national bank, the state that counts is the state where the bank’s main office sits. Branches in other states don’t change the analysis. A national bank headquartered in Utah with branches in forty other states uses Utah’s rate authority on all its loans.¹ The same principle applies to FDIC-insured state banks under Section 1831d: the bank uses the law of the state where it is located.

Section 85 also provides a federal floor. A national bank can charge the rate allowed by its home state or one percent above the Federal Reserve’s discount rate on ninety-day commercial paper, whichever is higher. Section 1831d gives state-chartered banks the same alternative.

National banks have one more edge. Under OCC regulations, a national bank can charge the highest rate that any state-licensed lender in the bank’s home state is allowed to charge, a doctrine regulators call “most favored lender” status.⁴ If the state permits small-loan companies to charge 60% but limits bank lending to 18%, a national bank in that state can use the 60% figure. The bank effectively borrows the most permissive rate available to any licensed creditor in the state.

Congress gave FDIC-insured state banks the same rate-exporting power as national banks when it passed DIDMCA in 1980. Before then, state-chartered banks were locked into their home state’s usury limits while national banks exported rates freely.

Why “Interest” Covers More Than the APR

Federal preemption reaches further than the number on the loan agreement. OCC regulations define “interest” under Section 85 to include any charge that compensates a lender for extending credit, keeping credit available, or dealing with a borrower’s default. The definition expressly covers late fees, overlimit fees, annual fees, cash advance fees, membership fees, and creditor-imposed insufficient-funds fees.⁵ A bank can set these fees at whatever level its home state permits, even if the borrower’s state caps late fees or bans overlimit fees entirely.

Can a State Opt Out

DIDMCA includes an escape valve. Section 525 allows a state to opt out of the federal interest rate framework for state-chartered banks and reinstate its own usury limits on loans connected to the state. Seven states did so in the early 1980s: Colorado, Iowa, Maine, Massachusetts, Nebraska, North Carolina, and Wisconsin. Puerto Rico opted out as well. Six of the seven states eventually reversed course, concluding that the opt-out put their own state-chartered banks at a competitive disadvantage. Iowa has kept its opt-out in place continuously since 1980.

The scope of these opt-outs is contested. The statute reaches “loans made in such State,” and that phrase has two readings. Lenders argue a loan is “made” where the bank sits, so an opt-out only limits banks chartered in the opting-out state. Consumer advocates argue a loan is also “made” where the borrower lives, so an opt-out blocks out-of-state banks from exporting higher rates into the state.

Colorado tested the question in 2023 with a new opt-out law aimed at out-of-state state-chartered banks lending to Colorado residents. A federal district court initially blocked the law in June 2024, siding with industry. The Tenth Circuit reversed in November 2025, holding that “loans made in such State” covers loans where either the lender or the borrower is located in the opt-out state.⁶ If that reading holds, an opt-out can shield residents from higher rates charged by out-of-state state-chartered banks. Other circuits have not addressed the question, so the law is unsettled outside the Tenth Circuit.

One hard limit: opt-outs only touch state-chartered banks operating under DIDMCA. They do nothing to national banks, whose rate authority comes from the National Bank Act. A state that opts out of DIDMCA still cannot cap the rate charged by a nationally chartered bank headquartered elsewhere.

When a Non-Bank Buys or Services the Loan

Banks sell loans constantly. The buyer may be another bank, but it could also be a debt collector, a hedge fund, or a fintech partner. The question is whether the rate that was legal when the bank made the loan stays legal after the loan moves to a buyer without federal preemption authority.

Valid-When-Made

Both federal regulators have codified rules confirming that a transfer does not disturb the rate. For loans originated by national banks, 12 C.F.R. § 7.4001(e) says interest permissible under Section 85 is not affected by the sale, assignment, or other transfer of the loan.⁵ For loans originated by state-chartered banks, 12 C.F.R. § 331.4(e) does the same, and adds that the rate survives later changes in state law or in the commercial paper rate.⁷

Before those rules took effect, the Second Circuit went the other way. In Madden v. Midland Funding, LLC (2015), the court held that a non-bank buyer is not entitled to National Bank Act preemption from state usury claims merely because it bought the loan from a national bank.⁸ Madden binds only courts in New York, Connecticut, and Vermont, and the OCC and FDIC rules were finalized in part to answer the uncertainty it created. Outside the Second Circuit, most courts and market participants treat valid-when-made as settled.

Who Is the “True Lender”

The exportation principle works because banks have federal rate authority. Non-bank lenders don’t. That creates a strong incentive for fintechs and other non-banks to partner with a chartered bank: the bank nominally originates the loan and immediately sells it to the non-bank partner, which markets, underwrites, services, and bears the risk. Critics call these “rent-a-charter” arrangements because the non-bank could not legally charge the same rate on its own.

Courts look past the paperwork to decide who the true lender really is. If the non-bank funds the loans, designs the product, controls underwriting, and absorbs default risk, a court may find the bank is a pass-through and strip federal preemption from the arrangement. The OCC tried to lock in a bright-line test in 2020 making the named lender or funder the true lender, but Congress repealed the rule under the Congressional Review Act, with the repeal signed on June 30, 2021.⁹ The repeal bars the OCC from issuing a substantially similar rule without new authorization. Courts continue to apply fact-intensive, multi-factor tests, with no single federal standard in place.

What You Can Recover If a Bank Overcharges

Federal rate authority is wide but not unlimited. A bank that knowingly exceeds the rate permitted under federal law triggers specific remedies.

For a national bank, charging more than Section 85 allows forfeits all interest on the loan. If you already paid the excess, you can sue to recover twice the amount of interest paid. The lawsuit must be filed within two years of the overcharge.¹⁰ Section 1831d(b) imposes the same structure on FDIC-insured state banks: forfeiture of all interest when the rate is knowingly exceeded, and recovery of twice the interest paid in a civil action filed within two years.² The two-year clock runs from the date of payment, not the date the loan was originated. A borrower who finds an overcharge on an old account may still have a claim if a recent excess payment falls inside the window.

A Note on Federal Credit Unions

Federal credit unions are not banks and don’t operate under either Section 85 or Section 1831d. The Federal Credit Union Act sets a default ceiling of 15% per year on the unpaid balance, inclusive of all finance charges. The NCUA Board can lift the ceiling to 18% when market conditions warrant, and has done so repeatedly. The most recent extension keeps the 18% ceiling in place through September 2027.¹¹ Credit unions can charge up to 28% on payday alternative loans under NCUA rules. A credit union that knowingly exceeds its ceiling forfeits all interest, and the borrower can recover the total interest paid, not double. The same two-year statute of limitations applies.¹²

1
Office of the Law Revision Counsel. 12 USC 85 – Rate of Interest on Loans, Discounts and Purchases
2
Office of the Law Revision Counsel. 12 USC 1831d – State-Chartered Insured Depository Institutions and Insured Branches of Foreign Banks
3
Legal Information Institute. Marquette National Bank of Minneapolis v First of Omaha Service Corp
4
Office of the Comptroller of the Currency. Interpretive Letter 954
5
eCFR. 12 CFR 7.4001 – Charging Interest by National Banks
6
Tenth Circuit Court of Appeals. National Association of Industrial Bankers v Weiser, No 24-1293
7
eCFR. 12 CFR 331.4 – Interest Rate Authority
8
Justia Law. Madden v Midland Funding LLC, No 14-2131
9
Federal Register. National Banks and Federal Savings Associations as Lenders
10
Office of the Law Revision Counsel. 12 USC 86 – Usurious Interest, Penalty for Taking, Limitations
11
National Credit Union Administration. Permissible Loan Interest Rate Ceiling Extended
12
Office of the Law Revision Counsel. 12 USC 1757 – Powers