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Usury Playing Field Still Not Level, Big Banks Say.

THE GRAMM-LEACH-BLILEY Act and a recent federal appeals court decision upholding its precedence over the Arkansas usury limit was supposed to level the playing field for banks chartered in Arkansas.

Instead, interstate megabanks are grumbling that it has given in-state banks a slight competitive advantage.

Specifically, they say, the underwriting, funding or notice of approval of a loan must be done out-of-state if a higher interest rate is to be "imported" from the bank's home state -- a burden the banks chartered instate don't have.

"Now, in some respects, it is easier for Arkansas banks to use the federal preemption [to the state usury limit] that was adopted for them than it is for the [out-of-state] banks to use the federal preemption that was adopted long ago for them," said Gary Garrett, a lawyer at Rose Law Firm whose clients include Bank of America.

The extra step necessary to import a rate wasn't an issue at all until repeated lowering of the Fed's discount rate put the usury limit in Arkansas at historic lows, Garrett said.

"Goodness gracious, the highest rate that can be charged under the Arkansas law is 6.5 percent. How ridiculous is that?" he asked.

The Arkansas constitution limits interest rates charged in the state to 5 percentage points over the Federal Reserve discount rate, which is currently 1.5 percent. Interstate banking laws and federal regulators at the Office of the Comptroller of the Currency have long allowed national banks to apply interest rates from their home states, giving the megabanks flexibility to make higher-risk loans than the banks chartered in Arkansas.

But the Gramm-Leach-Bliley Act, also called the Financial Modernization Act of 1999, specifically extended to Arkansas banks the right to import the same interest rates available to their out-of-state competitors. A test case survived both a federal court ruling in U.S. District Court in Fayetteville and an appeal to the 8th U.S. Circuit Court of Appeals in St. Louis.

The October appeals court decision was hailed as the final seal of approval needed for Arkansas banks to begin the same higher-risk lending available to out-of-state charters. From the perspective of the megabanks, however, the ruling tilted the scales in favor of the Arkansas banks, be they state or national charters.

How burdensome it is to meet one of the three tests for importing a higher interest rate may depend on the individual bank's internal loan-approval procedure, Garrett said. For instance, a multi-state bank that uses an institutional "scorecard" for determining loan approval meets the OCC's test for importing rates.

"Where we perceive we are limited right now is in the commercial lending area," said Wilson Moore, a senior executive of North Carolina-chartered Bank of America in Little Rock.

Ray Skelton, local president of Ohio-chartered Firstar Bank in North Little Rock agreed, saying his bank is still limited to 6.5 percent "on commercial deals that we elect to approve in-state." But it hasn't stopped the bank from making just such loans, he said.

"I don't know how many hours we've spent trying to understand this issue," Skelton said. "The intent [of the Gramm-Leach-Bliley Act] was to bring parity for the Arkansas state banks ... They just did not accomplish it."
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Title Annotation:banking regulations
Comment:Usury Playing Field Still Not Level, Big Banks Say.(banking regulations)
Author:Moritz, Gwen
Publication:Arkansas Business
Article Type:Brief Article
Geographic Code:1U7AR
Date:Nov 26, 2001
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