New York Decision Favors Consumers: Citibank v. Mahmoud, 2008 NY Slip Op 51091U (Richmond County Civ. Ct, 2008)

I read the surprisingly consumer friendly decision in Citibank v. Mahmoud in today's NY law journal.  The case is in the Richmond County (Staten Island) Civil Court, and involves a $16,000 Citibank credit card debt, plust a claim of $3000 in attorneys' fees. Apparently, however, much of the debt is derived from a default rate that Citibank began assessing in 2006 of 31.240% for purchases and 56.148% 3 for advances.

As Judge Phillip Straniere explains, under the National Banking Act, 12 USC 85, "national banks, such as plaintiff, are permitted by federal law to charge the highest rate of interest allowed by the state where the bank is located." The judge ruled, however, that a hearing was required to determine "if the practices of Citibank are in conformity with the federal law so as to entitle it to summary judgment in this and similar actions." The judge also asked, "Parenthetically, is it possible that there is a link between the inability of homeowners to keep their mortgages current, the subsequent high default rate in home mortgage loans and the inability of many of these individuals to timely pay their credit cards accruing interest charges of 30% or more?"

Judge Straniere goes on to comment that "recognizing that federal statutes have preempted the rights of the states to protect their citizens from usurious loans, at some point an excessive interest rate, although not usurious by federal standards may shock the conscience of the court and violate the public policy of New York law. The New York State Banking Board sets the generally effective civil interest rate, which is currently 16.00% per annum (3 NYCRR. 4.1; L. 1980, ch. 883). The courts of New York may not be able to void the rates charged in this case by plaintiff or other federally regulated creditors because of this policy created by Congress. However, the existence of a federal law, the effect of which is so egregious, does not require New York to enforce agreements which common sense and reasonable persons would conclude have so gone beyond the intentions of Congress in passing legislation to insure that federally chartered banks were on the same competitive footing as their state chartered rivals that it has become unconscionable, especially when the legislation affects the economic well being of its citizens individually and the general public."

But there's more. Citibank claims to be located in South Dakota, hence the "Citibank (South Dakota) NA" on their stationary, and South Dakota allows banks to charge any interest rate they want: even rates that would be criminal in New York. Apparently, however, Citibank is incorporated in Delaware and it's corporate address is in Missouri, so reason #1 the court ordered a hearing was that the bank failed to show that South Dakota Law applied. This won't make much of a difference in the long run, since Delaware Law is almost as biased as South Dakota, but, again, there's more.

The defendant also disputed that the credit agreement under which Citibank asserted its interest rate and claimed legal fees applied to him. The bank argued that the defendant was given a copy of the agreement with his credit card, agreed to the terms by activating the card, and was periodically informed of changes in the agreement. The bank, however, did not have any evidence that it ever provided any such agreement or updates.

The problem of banks not having evidence of ever providing an agreement is a practical issue that may be helpful for many litigants in this situation, but there's still more. Here's what I think is the biggest point. Part of the hearing the judge ordered will relate to the fact that the National Banking act says "when no rate is fixed by the laws of the State,… the bank may…charge a rate not exceeding 7 per centum or 1 per centum of the discount rate on ninety-day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve district where the bank is located, whichever is greater,…" and the court wants to know "why is not this the rate to be charged on the account and not the rate selected by the plaintiff?"

If Judge Straniere interprets the National Banking Act to mean that where state law does not set a usury rate, then the rate can only be 7% (or 1 per cent of the 90 day commercial paper discount rate), this would, in theory, mean that most credit cards, nationwide, are grossly overcharging their customers. South Dakota, Delaware and Virginia, where most banks claim to be "located," use phrases like "any reasonable rate" rather than actually setting a usury rate, and allow banks to charge whatever they want. If the judge ruled that the National Banking Act's 7% provision applied in these circumstances, that decision would undoubtedly be appealed to the Appellate Term, then to the Appellate Division, then to the N.Y. Court of Appeals, and -- if it went that far -- fought all the way to the U.S. Supreme Court. Thus far, banks have won every battle in their unending campaign to pillage as much money as possible from their poorest customers, but (particularly with the current financial crisis) this may be a turning point. Either this case will finally lead to a just interpretation of the National Banking Act, or perhaps public outcry will force legislators to finally act on this issue.