On September 17, the FDIC’s Board of Directors approved a notice of proposed rulemaking that would amend its regulations at 12 CFR Part 331 to promote parity between out-of-state state-chartered banks and national banks in the application of host state laws. Under the proposed rule, when host state laws do not apply to a national bank operating in a state, those laws would likewise not apply to an out-of-state, state-chartered bank providing services in that state, regardless of whether the state bank maintains a branch there. Consistent with Section 24(j) of the FDI Act, the law of the state bank’s chartering state would instead apply.

The rulemaking was prompted by litigation challenging the Illinois Interchange Fee Prohibition Act (previously covered by InfoBytes here). After the OCC issued an interim final order concluding that federal law preempts the Illinois law as to national banks (covered by InfoBytes here), a federal district court granted a permanent injunction barring enforcement against national banks, federal savings associations, and out-of-state state-chartered banks “subject to” Section 24(j) of the FDI Act (covered here). However, the FDIC explained that the parties disagreed over whether Section 24(j) protections extend to out-of-state state banks that do not maintain a branch in the host state, creating a parity gap that the FDIC’s proposal is intended to resolve. The agency noted that, since the enactment of Riegle-Neal, banking activity has increasingly migrated to non-branch channels, and requiring a state bank to establish a branch in a host state to gain parity with national banks would be inconsistent with the structure and purpose of Section 24(j).

The proposed rule would not affect the interest rates state banks are permitted to charge on loans, which are separately governed by Section 27 of the FDI Act, and would not constitute a determination that any particular host state law is preempted by federal law. The FDIC estimated that, in the context of the Illinois law alone, the rule would save affected state banks approximately $308 million in one-time system upgrade costs and $6.7 million in ongoing annual compliance costs that would otherwise be incurred to segregate tax and gratuity portions of interchange fee transactions. Comments are due 60 days after publication in the Federal Register.