Can States Tax National Banks to Educate Consumers About Predatory Lending Practices

Abstract

Over the past quarter century, consumer lending markets in the United States have become increasingly national in scope with large national banks and other federally chartered institutions playing an ever important role in many sectors, including credit card lending and home mortgages. At the same time, a series of court decisions have ruled that a wide range of state laws regulating credit card abuses and predatory mortgage lending practices are preempted at least as applied to national banks and other federally chartered institutions. Given the dominant role of federal institutions in our country's lending markets, these rulings have narrowed the capacity of states to police local lending transactions. As an alternative to direct regulation, the California Assembly recently considered legislation designed to improve consumer understanding of financial transactions through educational efforts to be financed by a new state tax on income from certain problematic loans made to California residents by financial institutions, including national banks and other federally chartered institutions. In this Article, we consider whether a tax of the sort proposed in California could survive a preemption challenge under recent court rulings as well as other potential constitutional attacks. While the States have quite limited powers to regulate federally chartered financial institutions, Congress in 12 U.S.C. Section 548 explicitly authorizes states to tax national banks. We explore the scope of state taxing authority that Section 548 and the relationship between that authority and recent preemption rulings After reviewing a range of legal precedents, we conclude that a state tax of the sort considered in California - which imposes modest levies on federally chartered entities but does not prevent these from engaging in otherwise authorized activities - should qualify as a legitimate exercise of state taxing powers under 12 U.S.C. Section 548 and also should withstand scrutiny under the Due Process and Commerce Clauses to the extent the tax is imposed on out-of-state banks.