The Learning Curve

New tricks for an old dog.

Washington Mutual (WaMu) credit cards

Active duty military or their dependents with WaMu credit cards.

Hypothetical example –

An active duty member of the Army stationed at Ft. Campbell, Kentucky has a credit card issued by Washington Mutual (WaMu), with a $2500 balance and paying 22% interest A.P.R.  If, prior to September 25, 2008 when Washington Mutual banking operations were seized by the F.D.I.C. and sold to J. P. Morgan Chase, a late payment charge of $39 was imposed by WaMu. In this situation, applicable Federal law would count the $39 late charge as “interest”, thus pushing the effective rate of interest for the month to exceed 40%.  That rate is more than what is allowed by the State of Nevada, and it is also in violation of Federal law.  This individual would be authorized by Federal statute to bring a lawsuit against Washington Mutual, or its successor in interest, to recover double the amount of all interest paid on that credit card account for the preceding two years, or to have that amount set-off against the balance of the account.

Summary argument –

(1) As a resident of the Commonwealth of Kentucky, this individual would normally be protected by Kentucky usury laws limiting interest rates on revolving credit accounts to 21%,  Kentucky Revised Statutes §286.3-740 (applicable to “banks”), or 19% under Kentucky’s general usury statute KRS §360.010.

(2) Although Washington Mutual, Inc. is located in Washington State, it is a bank holding company and the relevant regulated banking institution is Washington Mutual Bank of Henderson, Nevada, a savings bank regulated by the Office of Thrift Supervision (OTS), U.S. Department of Treasury.

See: J. P. Morgan Chase & F.D.I.C. purchase and assumption agreement of Washington Mutual Bank, Henderson, NV

Assume that Washington Mutual is “located” in the State of Nevada.

(3) Federal law 12 USC §1463(g)(1) – Preemption of State usury laws, provides, in part:

“Notwithstanding any State law, a savings association may charge interest on any extension of credit at a rate of not more than 1 percent in excess of the discount rate on 90-day commercial paper in effect at the Federal Reserve bank in the Federal Reserve district in which such savings association is located or at the rate allowed by the laws of the State in which such savings association is located, whichever is greater.”

(4) The relevant Nevada statute, NRS §99.050, provides:

“Except as otherwise provided in section 670 of the John Warner National Defense Authorization Act for Fiscal Year 2007, Public Law 109-364, or any regulation adopted pursuant thereto, parties may agree for the payment of any rate of interest on money due or to become due on any contract, for the compounding of interest if they choose, and for any other charges or fees. The parties shall specify in writing the rate upon which they agree, that interest is to be compounded if so agreed, and any other charges or fees to which they have agreed.”

(5) Although the phrase “parties may agree for the payment of any rate of interest” might seem to allow the imposition of a 40% A.P.R., “section 670 of the John Warner National Defense Authorization Act for Fiscal Year 2007”, now codified in 10 USC §987, provides, in part:

“A creditor who extends consumer credit to a covered member of the armed forces or a dependent of such a member . . . may not impose an annual percentage rate of interest greater than 36 percent.”

and

“The term ‘interest’ includes all cost elements associated with the extension of credit, including fees, service charges, renewal charges, credit insurance premiums, any ancillary product sold with any extension of credit to a service member or the service  member’s dependent, as applicable, and any other charge or premium with respect to the extension of consumer credit.”

(6) Thus, under this Federal statute, the $39 late payment fee is argued to be interest which puts the monthly rate in excess of 36%, in violation of Federal law, and Nevada law by express incorporation.

(7) 12 USC §1463(g)(2) provides:

“If the rate prescribed in paragraph (1) exceeds the rate such savings association would be permitted to charge in the absence of this subsection . . . .”

Arguably it does, assuming that the Kentucky law limiting interest to 21% would apply but for the Federal preemption.

(8) 12 USC §1463(g)(2) continues:

“. . . . the receiving or charging a greater rate of interest than that prescribed by paragraph (1), when knowingly done, shall be deemed a forfeiture of the entire interest which the extension of credit carries with it, or which has been agreed to be paid thereon. If such greater rate of interest has been paid, the person who paid it may recover, in a civil action commenced in a court of appropriate jurisdiction not later than 2 years after the date of such payment, an amount equal to twice the amount of the interest paid from the savings association taking or receiving such interest.”

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Written by Tom Fox

02/25/2009 at 12:09 am

One Response

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  1. See more detailed information about Washington Mutual, Inc. here.

    Boring Details

    02/25/2009 at 12:49 am


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