3 by pengtt


                                      IN THE
                         UNITED STATES COURT OF APPEALS
                             FOR THE SECOND CIRCUIT

Pacific Capital Bank, N.A.,

State of Connecticut; Richard Blumenthal, in his official capacity as Attorney General
of the State of Connecticut; and John P. Burke, in his official capacity of Banking Commissioner
of the State of Connecticut,
                                          Defendants- Appellants.
                           FOR THE DISTRICT OF CONNECTICUT

                      AND ARGUING FOR REVERSAL

                                          CHI CHI WU
                                          National Consumer Law Center
                                          77 Summer Street, 10th Fl.
                                          Boston, MA 02110
                                          (617) 542-8010 (phone), (617) 542-8028 (fax)

                                          (Additional counsel listed on inside cover page)

                                          Dated: December __, 2006
Kathleen Keest
302 W. Main Street
Durham, NC 27705
(919) 313-8548 (phone), (919) 313-8595

Deborah Zuckerman
601 E Street, NW
Washington, DC 20049
(202) 434-2060 (phone), (202) 434-6424

Gail Hillebrand
1535 Mission St.
San Francisco, CA 94103
(415) 431-6747 (phone), (415) 431-0906

Ira Rheingold
1730 Rhode Island Avenue, NW, Ste 805
Washington, DC 20036
(202) 452-1989 (phone), (202) 452-0099

Attorneys for Amici Curiae
                RULE 26.1 DISCLOSURE STATEMENT

      The National Consumer Law Center (“NCLC”) is a national research

and advocacy organization focusing specifically on the legal needs of low

income, financially distressed, and elderly consumers. NCLC is a non-

profit, tax exempt Massachusetts corporation qualified under section

501(c)(3) of the Internal Revenue Code. NCLC is recognized nationally as

an expert in consumer credit issues, including refund anticipation loans, and

has drawn on this expertise to provide information, legal research, policy

analyses, and market insights to federal and state legislatures, administrative

agencies, and the courts for over 36 years. Since 2002, NCLC has issued

annual reports on the refund anticipation loan industry, as well other

publications regarding RALs. NCLC also is author of a sixteen-volume

Consumer Credit and Sales Legal Practice Series that includes, inter alia,

treatises on The Cost of Credit: Regulation, Preemption, and Industry

Abuses and Truth in Lending. NCLC frequently is asked to appear as amicus

curiae in consumer law cases before trial and appellate courts throughout the

country and does so in appropriate circumstances. Note that NCLC is co-

counsel in putative class action lawsuit against plaintiff-appellee Pacific

Capital Bank, N.A. filed in California state court. Hood v. Santa Barbara
Bank & Trust, Case No. 1156354 (Cal. Super. Ct. County of Santa Barbara).

NCLC has never issued shares or securities.

      Consumer Federation of America (“CFA”) is a non-profit membership

association of some 300 pro-consumer non-profit organizations established

in 1967 to advance the interests of consumers through research, education,

and advocacy. It is organized under the laws of New York and is tax-

exempt under section 501(c)(3) of the Internal Revenue Code. CFA does

not issue stock or securities, and it has no parent corporation. CFA has long

worked to curb abusive credit and lending practices that take advantage of

consumers. CFA has co-authored annual reports with NCLC on the refund

anticipation loan industry, as well other publications regarding RALs.

Through its empirical research, comment letters on pending regulation and

in testimony before Congress the organization has highlighted areas of

unfair lending practices and advocated for strengthened consumer protection

enforcement. Through trainings and the publication of materials CFA also

has provided guidance to consumers on banking and other financial services.

      The Center for Responsible Lending (“CRL”) is a non-profit

supported organization under the Internal Revenue Code. CRL‟s supporting,

or parent, organization is the Center for Community Self-Help, which is tax-

exempt under section 501(c)(3) of the Internal Revenue Code. The Center
for Community Self-Help‟s mission is to create ownership and economic

opportunities for minorities, women, rural residents, and low-wealth

families. Neither CRL nor the Center for Community Self-Help has issued

shares or securities.

      The Internal Revenue Service has determined that AARP is organized

and operated exclusively for the promotion of social welfare pursuant to

section 501(c)(4) (1993) of the Internal Revenue Code and is exempt from

income tax. AARP is also organized and operated as a non-profit

corporation pursuant to the provisions of title 29 of chapter 6 of the District

of Columbia Code 1951. Other legal entities related to amicus curiae AARP

include AARP Foundation, AARP Services, Inc., Andrus Foundation, Legal

Counsel for the Elderly, and Financial Services, Inc.

      Consumers Union is a nonprofit membership organization chartered in

1936 under the laws of the State of New York to provide consumers with

information, education, and counsel about goods, services, health and

personal finance; and to initiate and cooperate with individual and group

efforts to maintain and enhance the quality of life for consumers.

Consumers Union‟s publications and services carry no outside advertising

and receive no commercial support. Consumers Union does not issue stock
or securities, and it has no parent corporation [DESCRIPTION AND


       The National Association of Consumer Advocates is a non-profit

membership organization of law professors, public sector lawyers, private

lawyers, legal services lawyers, and other consumer advocates. It is

organized under the laws of the State of Massachusetts and is tax-exempt

under section 501(c)(6) of the Internal Revenue Code. It has no parent

corporation, nor has it issued shares or securities.

       The National Association of State Public Interest Research Groups

and its federal advocacy office, U.S. PIRG, represent the interests of state

PIRGs and their 500,000 individual members around the country. PIRGs are

non-profit, non-partisan consumer advocacy organizations that have long

been concerned with financial industry compliance with all consumer and

lending laws, and with the ability of states to protect their residents from

unfair lending practices. The association does not issue stock nor do any of

its affiliates.

       Consumer Action is a national non-profit consumer education and

advocacy organization founded in San Francisco and serving California

consumers since 1971. Consumer Action serves consumers and its members

nationwide by advancing consumer rights, referring consumers to complaint-
handling agencies, conducting educational outreach to communities and

publishing multilingual educational materials. Consumer Action also

advocates for consumers in the media and before lawmakers. Consumer

Action does not issue stock or securities, and it has no parent corporation.


DATED: December __ , 2006              Respectfully submitted,

                                       CHI CHI WU
                                       National Consumer Law Center
                                       77 Summer St., 10th Fl.
                                       Boston, MA 02110
                                       (617) 542-8010 (ph), (617) 542-8028
table of contents
table of authorities
                      I. STATEMENT OF INTEREST

      Amici curiae National Consumer Law Center, Consumer Federation

of America, Center for Responsible Lending, AARP, Consumers Union,

National Association of Consumer Advocates, U.S. PIRG, the National

Association of State Public Interest Research Groups, and Consumer Action

are nonprofit organizations that work on behalf of consumers. Amici and

their members have extensive experience on a wide range of consumer

protection matters, including efforts to fight predatory lending and refund

anticipation loans. Amici are interested in this appeal because they believe

the Connecticut Refund Anticipation Loan Act, Conn. Gen. Stat. § 42-280,

is critical for protecting Connecticut consumers from the abuses of the RAL


                             II. BACKGROUND

A. Refund Anticipation Loans are an Abusive Product that Drains Hundreds
of Millions of Dollars from the Tax Refunds of Vulnerable Consumers,
including Recipients of the Largest Anti-Poverty Program in this Country

      Refund anticipation loans (RALs) are part of the fringe financial

industry that includes payday loans, auto title loans, pawns and rent-to-own

transactions. RALs provide quick credit to vulnerable consumers at steep

prices, and at the potential risk of ruined credit ratings and debt collection

harassment. RALs target low- to moderate-income consumers with few
resources and great financial needs. Consumers often are misled into

thinking of RALs as “quick refunds,” not understanding that they are loans.

      RALs puts cash into the consumer's hand in one or two days after the

consumer files his or her taxes. What many consumers who want their

refunds quickly don‟t realize is that electronic filing of a tax return cuts the

wait to 8 to 15 days, if the consumer has a bank account into which the

refund can be direct deposited by Treasury. IRS, Publication 2043: e-file

2006 Refund Cycle Chart (May 2006), available at

http://www.irs.gov/pub/irs-pdf/p2043.pdf. Thus, a RAL is only one to two

weeks faster than an electronically delivered refund. For speeding up refund

monies by this short amount of time, RAL lenders charge $30 to over $100.

See Chi Chi Wu and Jean Ann Fox, NCLC and CFA, Another Year of

Losses: High-Priced Refund Anticipation Loans Continue To Take a Chunk

Out Of Americans’ Tax Refunds (January 2006) at 15-18, available at


port.pdf [hereinafter Wu and Fox and Woodall, 2006 RAL Report].

      Thus, RALs usually outstanding for a duration of about 7-14 days.

Because of this short time frame, the fees for these loans translate into triple

digit annualized interest rates. Pacific Capital Bank (PCB) has stated that

the average annual interest rate for its RALs is 115%. Pacific Capital Bank,
N.A. v. Conn., No. 3:06-CV-28 (PCD), 2006 WL 2331075, *1 (D. Conn.

Aug. 10, 2006). If all of the fees charged for the loan are included in the

APR calculation, the estimated Annual Percentage Rates (APRs) for RALs

to range from 40% to over 700%,. Wu and Fox, 2006 RAL Report at 8.

      RALs drain billions from the pockets of consumers and the U.S.

Treasury. In 2004, RALs cost consumers an estimated $1.24 billion dollars

to receive their own tax refund monies a week or two earlier. In addition,

some of these taxpayers paid hundreds of millions more in “application,”

“document preparation,” “electronic filing” or other fees. Wu and Fox, 2006

RAL Report at 5 and 8.

      RALs are targeted at the working poor. About 79% of those who

receive RALs had adjusted gross incomes of $35,000 annually or less. Wu

and Fox, 2006 RAL Report at 9. Over 50% receive the Earned Income Tax

Credit, (EITC), a refundable credit provided through the tax system and

intended to boost low-wage workers out of poverty. The EITC is often

referred to as the largest anti-poverty program in the United States. In 2004,

RALs skimmed $700 hundred million from the benefits of the EITC

recipients. Id. at 9-10.

      Indeed, the Seventh Circuit Court of Appeals has noted the high cost

of RALs and that the “lion‟s share” of borrowers are from poor, distressed
neighborhoods. Kleven v. Household Bank, 334 F.3d 638, 639-40 (7th Cir.

2003). The Seventh Circuit believed that “an attack on RALs based on

fairness and equity would certainly have some appeal.” Id. at 640.

      RALs also present risks to low-income taxpayers. If the consumer‟s

refund is not issued by the Internal Revenue Service (IRS) or is held up in

some way, the consumer is liable for the full amount of the loan. Thus, in

addition to draining the refund of taxpayers, RALs put them at risk of

unmanageable debt if the loan is not repaid. Consumers who owe past RAL

debts are also at risk from the particularly abusive tactic of cross- collection,

in which their current refunds are seized to repay old RAL debts when these

consumers try to get another RAL, even from a different tax preparer and

lender. See Hood v. Santa Barbara Bank & Trust, 49 Cal.Rptr.3d 369 (Cal.

Ct. App. 2006). Tax preparers play a critical role in cross-collection,

because they act as debt collectors in soliciting consumers for the

subsequent transactions in which consumers agree (often unwittingly) to

permit seizure of their tax refunds to repay old RAL debts. Id. at 374-75.

B. The Role of RALs in the Fringe Banking Sector

      In order to fully appreciate the nature of RALs, it is important to

understand the nature of the market in which they are offered. RALs are

part of an industry popularly referred to as “fringe banking” or the
“alternative financial sector”. See Roger Swagler, et al., The Alternative

Financial Sector: An Overview, 7 Advancing the Consumer Interest 7

(1995); John R. Burton, et al., The Alternative Financial Sector: Policy

Implications for Poor Households, 42 Consumer Interests Annual 279

(1996). Fringe banking targets low-income, working poor, and minority

consumers, and those with blemished credit histories, who cannot access

traditional sources of money or credit. This has resulted in the establishment

of a two-tiered economy, often referred to as a system of “financial

apartheid” or the “second-class” marketplace, in which middle-income and

affluent consumers are served by reasonably-priced credit from banks, and

the poor and near-poor are relegated to expensive and, in many cases, poorly

regulated alternatives. See Lynn Drysdale & Kathleen Keest, The Two-

Tiered Consumer Financial Services Marketplace: The Fringe Banking

System and its Challenge to Current Thinking About the Role of Usury Laws

in Today’s Society, 51 S.C. L. Rev. 589, 591 (2000).

      While many consumers have other ways to obtain short-term,

unsecured loans, such as credit cards, the poor and near-poor lack access to

these traditional sources of credit. Coupled with the decline in t he

availability of small, unsecured loans from banks and finance companies,

many consumers, particularly those with modest incomes or impaired credit,
find that the fringe lenders represents their only source of this type of credit.

Well aware that they serve as one of the few ways these consumers can get

necessary cash, lenders in this market charge extremely high fees, translating

into triple digit APRs. Even if they do serve an underserved market, that

fact neither justifies the practices that harm the very consumers these lenders

claim to help nor supports providing them with a reduced level of legal


                               III. ARGUMENT

A. The District Court‟s Decision Would Eviscerated the States‟ Well-
Established Practice of Regulating Loan Brokers Under Their Police Powers

      The District Court‟s decision that the National Bank Act (NBA)

preempts Conn. Gen. Stat. § 42-280 would nullify an entire area of law in

which the states have traditionally functioned as the primary regulator - loan

brokering. These loan brokering laws have been enacted as part of the

state‟s well-established role as the regulator of consumer protection laws, a

role which the Attorney General‟s brief discusses in detail.

      Fundamentally, Conn. Gen. Stat. § 42-280 is a law that governs loan

brokering. It is the activity of “facilitating” a high rate loan, not the loan

itself, that is prohibited by this law. Thus, the product itself is not banned or

void or contraband, but the conduct of acting as an intermediary that is

      States have long been the primary, if not sole, regulator of loan

brokers in our country‟s history. There are only a handful of federal laws

that govern loan brokers, such as the Real Estate Settlement Procedures Act,

12 U.S.C. § 2607 (prohibiting kickbacks for referral of settlement services).

More importantly, federal laws do not govern the registration or licensing of

loan brokers, nor do they set minimum standards for the occupation.

      In contrast, over a 30 states regulate non-mortgage loan brokers. One

of the earliest of these state loan broker laws was passed in 1934

(Massachusetts). These loan broker laws include: Ala. Code § 5-19-1 to 5-

19-33; Ariz. Rev. Stat. §§ 6-601 to 6-638 and §§ 6-1301 to 6-1310; Ark.

Code §§ 23-39-401 to 23-39-405; Cal. Fin. Code §§ 22000 to 22754; Conn.

Gen. Stat. §§ 36a-615 to 36a-620; Florida Stat. Ann. §§ 687.14 to 687.148;

Ga. Code Ann. §§ 7-3-5, 7-3-14 and §§ 7-7-1 to 7-7-6; Idaho Code §§ 26-

2501 to 26-2506; Ill. Comp. Stat. Ann. Ch. 815, §§ 175/15-1 to §§ 175/99-1;

Indiana Code §§ 23-2-5-1 to 23-3-5-22; Iowa Code Ann. §§ 535C.1 to

535C.11; Kansas St. §§ 50-1001 to 50-1018; Kentucky Revised Stat. §§

367.380 to 367.389; Louisiana Stat. Ann. §§ 9:3572.1 to 9:3572.12; Me.

Rev. Stat. Ann. tit. 9-A, §§ 10-101 to 10-401; Mass. Gen. Law c. 140, § 96;

Miss. Code Ann. §§ 81-19-1 to 81-19-35; Missouri Stat. §§ 367.300 to

367.310; Neb. Rev. Stat. §§ 45-189 to 45-191.11; Nevada Rev. Stat. Ann.
§§ 675.060 to § 675.160; NJ Stat. Ann. §§ 17:10B-1 to 17:10B-8; New

Mexico Stat. Ann. 1978, § 56-8-7; N.Y. General Obligations Law § 5-531;

N.C. Gen. Stat. §§ 66-106 to 66-112; N.D. Cent. Code §§ 13-04.1-01 to 13-

04.1-13; 7 Pa. Cons. Stat. Ann. §§ 6201 to 6219; R.I. Stat. Ann. §§ 19-14.1-

1 to 19-14.1-12; S.C. Code 1976 §§ 34-36-10 to 34-36-90; and Tex. Fin.

Code Ann. § 342.051.

      Some of these statutes include prohibitions against brokering loans

that exceed certain caps on the interest rate, just as Conn. Gen. Stat. § 42-

280 does. See, e.g., Ala. Code § 5-19-1 to 5-19-33 (regulating “creditors”

include arrangers of loans; maximum finance charge prescribed); Ariz. Rev.

Stat. §§ 6-601 to 6-638 (regulating persons who procure loans; maximum

finance charge prescribed); Cal. Fin. Code §§ 22000 to 22754 (requires

licensing of consumer loan brokers; maximum interest rate prescribed); Ga.

Code Ann. § 7-3-5 (prohibiting brokerage transactions in excess of rates

authorized by Georgia Industrial Loan Act); Mass. Gen. Law c. 140, § 96

(prohibiting brokering loans over cap set by Commissioner of Banks); 7 Pa.

Cons. Stat. Ann. §§ 6201 to 6219 (prohibiting brokering loans over 24% per

year); R.I. Stat. Ann. § 19-14.1-2 (capping interest rates per R.I. Stat. Ann. §

6-26-2); and Tex. Fin. Code Ann. § 342.051 (limits interest rate to amount

set forth in Finance Code).
       In addition to general loan broker laws, approximately 40 states have

laws that specifically govern brokers of mortgage loans. These laws often

provide for licensing, a right to cancel within a certain number of days,

disclosures, and prohibitions against advance fees. See Elizabeth Renuart

and Kathleen Keest, National Consumer Law Center, The Cost of Credit:

Regulation, Preemption, and Industry Abuses, Appendix B (3rd ed. 2005

and Supp.)(listing state laws that regulate mortgage brokers).

      Finally, many states have Credit Services Organization Acts that also

govern loan brokers. These Acts regulate entities that “in return for the

payment of money or other valuable consideration . . . obtain a loan or other

extension of credit for a buyer.” See, e.g., Cal. Civ. Code §§ 1789.10. Most

of these laws require registration, bonding, restrictions on advance payment,

disclosures, and a right to cancel within a certain number of days. See

Anthony Rodriguez, et al., Fair Credit Reporting, Appendix B (5th ed. 2002

and Supp.)(summarizing state laws governing credit reporting, including

state credit services organization acts).

      There are compelling public policy reasons why so many states have

established comprehensive schemes to regulate loan brokers. The triangular

relationship among the loan broker, borrower and creditor creates many

complications. A loan broker is assumed to be the borrower‟s agent, and to
have a duty of care to the borrower. However, this relationship is breached

by many of the practices common to the brokers. Loan brokers are often

paid by lenders and have monetary incentives to get the worst (most

expensive) deal, but consumers assume they are assisting consumers in

getting the best deal possible. Brokers may misrepresent or fail to exp lain

their role or their fee. They may misrepresent the nature or value of the

credit they obtain for the borrower. In the mortgage context, brokers are

often key players in predatory lending abuses. See Elizabeth Renuart, An

Overview of the Predatory Lending Process, 15 Housing Pol‟y Debate 467,

470, 488, and 491-92 (2004), available at


       Thus, the states have well-founded reasons for establishing

comprehensive regulatory schemes to protect their consumers. Upholding

the preemption of state loan broker laws by the NBA would eviscerate these

loan broker laws when the loans involve banks, leaving a gaping void in

their wake.

B. The State Of Connecticut Has A Compelling Interest In Regulating Tax
Preparer As Loan Brokers

       The State of Connecticut‟s decision to regulate loan brokering

activities of tax preparers is particularly critical, because there little

regulation of the tax preparation industry. The State has a compelling
rationale in ensuring that consumers are protected at least with respect to one

aspect of the activities of this almost unregulated profession.

      There is a common perception that tax preparers must be accountants,

certified public accountants or some other sort of credentialed professional

with an advanced or college degree. In reality, any person can become a tax

preparer in most states without having any training or experience in the field.

There is no federal law, and only two state laws,1 that provide entry

requirements to be a tax preparer, i.e., there is no minimum level of

education required, there is no testing or certification in most states, and

there is no licensing in most states. According to the National Taxpayer

Advocate “[a]nyone can prepare federal tax returns for others for a fee

regardless of his or her education, training, experience, skill, or knowledge.”

National Taxpayer Advocate, FY 2003 Annual Report to Congress,

December 31, 2003, at 270, available at http://www.irs.gov/pub/irs-


  These states law are from California and Oregon. See Cal. Bus. & Prof.
Code §§ 22250 to 22259; Or. Rev. Stat. §§ 673.605 to 673.740.
  The National Taxpayer Advocate has noted the problems with tax
preparers on several occasions. Statement of National Taxpayer Advocate
before the Subcommittee on Oversight of the House Ways and Means
Committee, July 20, 2005, available at http://www.irs.gov/pub/irs-
utl/nta_2003_annual_update_mcw_1-15-042.pdf; National Taxpayer
Advocate, FY 2002 Annual Report to Congress, December 31, 2002, at 70,
available at http://www.irs.gov/pub/irs-
         The major tax preparation chains, such as H&R Block and Jackson

Hewitt, do provide some training, consisting of an 11 to 12 week course.3

However, the vast majority of tax preparers do not work for a tax

preparation chain, but are independent in nature. Independent preparers

have a large share of the paid tax preparation market, with estimates as high

as 70%. Wu and Fox 2005 Report at 15. These independent preparers can

range from highly educated CPAs to used car dealers and check cashing


         Despite this lack of professional certification or licensing, taxpayers

rely heavily on paid preparers. There is a strong degree of trust in the tax

preparation relationship. This trust relationship creates enormous potential

for exploitation, including with respect to the RALs sold by preparers. Thus,

the state has a compelling interest to protect vulnerable consumers in that

trust relationship against unscrupulous preparers who would exploit that


utl/nta_2003_annual_update_mcw_1-15-042.pdf; Nina Olson, Olson
Testimony at Ways and Means Oversight Hearing on 2001 Filing Season,
Tax Notes Today, April 4, 2001.
  H&R Block‟s training consists of an 11 week course with 66 hours of
instruction. H&R Block, Income Tax Course, at
11; Jackson Hewitt‟s course is 12 weeks and can be taken on-line. Jackson
Hewitt, Learn & Earn, at http://www.jacksonhewitt.com/learn_courses.asp.
C. The District Court Erred in Holding that Section 85 of the NBA
Indirectly Preempted State Laws Regulating Non-Bank Entities.

      In holding that Section 85 of the NBA preempted Conn. Gen. Stat. §

42-280, the critical flaw in the District Court‟s ruling is its failure to

following the plain language of the statute. Section 85 clearly states that:

      ”Any association [i.s. national bank] may take, receive, reserve, and
      charge on any loan or discount made, or upon any notes, bills of
      exchange, or other evidences of debt, interest at the rate allowed by
      the laws of the State, Territory, or District where the bank is located,

      12 U.S.C. § 85 (emphasis added).

      Thus by the clear terms of its language, Section 85 unambiguously

applies only to national banks. The parties are all in agreement that Section

85 of the NBA preempts any rate limitations with respect to a national bank.

To the extent that Conn. Gen. Stat. § 42-280 might be construed to limit the

interest that the bank may charge – an interpretation that would be incorrect

as discussed in the Attorney General‟s brief - the application directly to

national banks is preempted. The issue is whether Section 85 indirectly

preempts a law that regulates non-bank third parties, prohibiting them from

brokering loans over a certain interest rate.

      In this regard, the most relevant Court of Appeals decision to date is

Bankwest v. Baker, 411 F.3d 1289 (11th Cir. 2005), which concerned the

preemptive effect of an analogous banking statute, Section 27(a) of the
Federal Deposit Insurance Act (FDIA). Although the decision in Bankwest

v. Baker was vacated due to mootness, 446 F.3d. 1358 (11th Cir. 2006), and

thus of no precedential effect, the reasoning of the Eleventh Circuit is

persuasive. The Eleventh Circuit held that the Georgia payday loan law,

which prohibited non-bank payday loan stores from acting as agents for

banks in certain circumstances, was not preempted by Section 27(a) of the

FDIA, the equivalent of Section 85 of the NBA for state-chartered banks.

      In holding that the Georgia payday loan law was not preempted, the

Eleventh Circuit viewed as critical the fact that the state law only applied to

the non-bank payday loan stores, yet “the language of § 27(a) refers only to

state banks, and does not address non-bank businesses, such as payday

stores, at all.” 411 F.3d at 1304. The Eleventh Circuit further explained:

      § 27(a) refers to “State banks” and certainly protects its subsidiaries,
      various employees, divisions, and the like. Section 27(a) does not
      address or purport to protect an out-of-state bank's ability to use any
      local, non-bank vendors as agents or to have any form of agency
      relationship with non-bank vendors. There is also nothing in § 27(a)
      that preempts a state's power to regulate local, non-bank entities
      operating within the state as independent contractors or agents for an
      out-of-state bank. Thus, in the absence of some “clear and manifest”
      expression of Congressional purpose that States may not regulate non-
      bank payday stores' agency relationships which effectively enable the
      non-bank stores to do what Congress permits out-of-state banks to do,
      the Georgia statute is not preempted.

      Id. at 1306.
      Like § 27(a) of the FDIA, Section 85 of the National Bank Act only

refers to „associations‟, i.e., national banks, and does not address non-bank

businesses, such as tax preparation stores. There is nothing in Section 85 of

the NBA that preempts a state‟s power to regulate local, non-bank entities

operating within the state. In this case, these third parties are not even

agents of the bank but - as discussed in section III.D, infra - are entirely


      The majority‟s opinion decision in Bankwest v. Baker also rebutted

reasoning that was similar to the one used by the District Court in this case.

In addressing the dissent‟s argument that the Georgia payday loan law

indirectly restricted the bank‟s authority under Section 27(a), the Eleventh

Circuit noted that “these theories implicitly recognize that the Georgia Act

does not directly encroach upon the authority granted by § 27(a).” The

Eleventh Circuit responded that Ҥ 27(a) directly restricts only interest-rate

limitations and cannot be so expanded to cause indirect preemption ....” Id.

at 1305, n. 25 (emphasis in original).

      A number of District Courts have also held that the NBA only

preempts state laws with respect to national banks or their subsidiaries, and

not with respect to non-bank third parties. The courts in each of these cases

was confronted with an argument similar to the one in this case, i.e., that a
state law regulating a third party “impaired” a national bank‟s rights under

the NBA. In each case, the court rejected this argument. See Fleming v

Dollar Tree Stores, No. C06-03409, 2006 WL 2975581 (N.D. Cal. Sept. 15,

2006) (“An entity that is neither a national bank, nor a wholly-owned

subsidiary of a national bank may not claim preemption under the NBA”);

SPGGC v. Blumenthal, 408 F.Supp.2d 87, 95 (D. Conn. 2006) (“preemption

by the NBA does not apply to a non-bank entity, even if it has an agency

relationship with a national bank.”); Carson v. H & R Block, Inc., 250

F.Supp.2d 669, 674-75 (S.D. Miss. 2003) (holding that the NBA did not

preempt state claims against tax preparation service); Colorado ex rel.

Salazar v. ACE Cash Express, Inc., 188 F. Supp.2d 1282 (D. Colo.

2002)(entity with an agency relationship with a national bank cannot claim

preemption because the NBA regulates only national banks). Cf. Weiner v.

Bank of King of Prussia, 358 F. Supp. 684, 687 (E.D.Pa. 1973) (confirming

that the purpose of the NBA is to regulate national banks and only national

banks); Wiley v. Federal Land Bank of Louisville, 657 F. Supp. 964, 965

(S.D. Ind.1987)(NBA regulates only the conduct of national banks);

Criswell v. Production Credit Assoc., 660 F. Supp. 14, 16 (S.D. Ohio 1985)

(“[i]t is well settled that the National Bank Act regulates only the conduct of

national banks”).
      Indeed, a federal statute that has an even broader and express

preemptive effect has been found not to preempt state law claims against

third parties. At least two federal Courts of Appeal have held the

Employment Retirement Income Security Act of 1974 (ERISA) does not

preempt state regulation of agents of ERISA-covered insurance plan.

Morstein v. National Insurance Services, 93 F.3d 715, 722 (11th Cir. 1996),

cert. denied sub. nom, Shaw Agency v. Morstein, 519 U.S. 1092 (1997) (state

law claims brought against a non-ERISA entity are not preempted if they do

not affect relations between ERISA entities); Wilson v. Zoellner, 114 F.3d

713, 718-19 (8th Cir. 1997) (same). In these two cases, plaintiffs brought

state law claims for negligence and misrepresentation against insurance

agents that sold ERISA-covered plans to consumers. Both the Eleventh and

the Eight Circuit held that these state law claims against third party agents

were not preempted, despite the fact that similar claims against an ERISA

entity would be preempted. Engelhardt v. Paul Revere Life Ins. Co., 139

F.3d 1346 (11th Cir.1998).

      Note that the scope of preemption under ERISA is significantly

broader than under the NBA. ERISA contains an extremely expansive

express preemption provision, stating:

      the provisions of this subchapter and subchapter III of this chapter
      shall supersede any and all State laws insofar as they may now or
      hereafter relate to any employee benefit plan described in section
      1003(a) of this title and not exempt under section 1003(b) of this title.

      29 U.S.C. § 1144 (emphasis added).

      In contrast, the preemptive effect of Section 85 of the NBA is not

express, and it is narrower, specifically providing that it is the „association‟

(i.e., national bank) that may charge interest at the rate allowed by its home

state. Thus, the plain language of the NBA establishes that it is only the

national bank that has the protections of preemption and not third parties.

D. The District Court Erred in Extending the Benefits of NBA Preemption
to the Activities of Unrelated Third Parties

      The District Court's error is compounded by the fact that the third

party entities at issue here are unrelated to a national bank. The tax

preparers regulated by Conn. Gen. Stat. § 42-280 are not related to a bank,

nor are they agents controlled by the bank. In fact, tax preparers are legally

prohibited from having any corporate relationship with the bank under the

rules of the IRS. The IRS prohibits tax preparers from being related to the

lender who makes a refund anticipation loan to a taxpayer. IRS, Publication

1345: Handbook for Authorized IRS e-file Providers of Individual Income

Tax Returns (November 2004), at 44, available at www.irs.gov/pub/irs-

pdf/p1345.pdf. Note that PCB never alleged in any part of its Complaint or

its Separate Statement of Undisputed Facts that the tax preparers who
facilitate RALs were its agents. Furthermore, even if they were agents of the

bank, they should not be entitled to the benefits of preemption. 4

      Thus, this case is unlike cases that this court and District Courts in this

Circuit have considered involving the scope of preemption involving non-

bank entities that were owned by or exclusively controlled by banks. In

Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2nd Cir. 2005), 5 for example,

this court upheld a regulation promulgated by the Office of Comptroller of

Currency (OCC) that extended preemption of state laws to operating

subsidiaries of a national bank. In so doing, this Court upheld the OCC‟s

rationale for promulgating the rule, which relied on its belief that operating

subsidiaries are essentially incorporated divisions or departments of a

national bank. Id. at 319-20. This court also noted that operating

subsidiaries are treated distinctly by Congress and the OCC. Id. at 317. In

contrast, this case involves third parties that have no corporate relationship

with the bank, nor are they treated distinctly by the OCC or Congress. The

  For an analysis of why agents of banks have a lower incentive to forego
abusive behavior and thus state laws regulating them should not be
preempted, see Christopher Peterson, Preemption, Agency Cost Theory, and
Predatory Lending by Banking Agents: Are Federal Regulators Biting Off
More Than They Can Chew?, American Law Review (forthcoming), version
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=932698
  Note that the Supreme Court has granted certiorari in a case raising the
same issues as in Wachovia Bank, N.A. v. Burke. Watters v. Wachovia
Bank, N.A. 126 S.Ct. 2900 (2006).
OCC does not examine or supervise tax preparers, unlike the OCC claims to

do with operating subsidiaries.

      In State Farm F.S.B. v. Burke, 445 F. Supp.2d 207 (D. Conn. 2006),

the District of Connecticut upheld an Opinion Letter of the Office of Thrift

Supervision (OTS) that extended the benefits of preemption under the Home

Owners‟ Loan Act (HOLA) to independent agents that work exclus ively for

a federal savings bank. There are several critical distinctions between State

Farm and this case that militate against extending preemption to tax


      The first distinction is that the preemption under HOLA is much

broader than the preemption under the NBA. The OTS has expressly

preempted the field of lending regulation for federal savings associations

under HOLA. 12 C.F.R. § 560.2(a). In contrast, the OCC has expressly

refused to assert field preemption, stating in the preamble to its regulations

that “we decline to adopt the suggestion of these commenters that we declare

that these regulations „occupy the field‟ of national banks‟ real estate

lending, other lending, and deposit-taking activities.” 69 Fed. Reg.

1904,1911 (Jan. 13, 2004). Furthermore, courts have only applied a conflict

preemption test for national banks. See, e.g., Barnett Bank of Marion

County, NA v. Nelson, 517 U.S. 25 (1996).
      Second, the degree of control exercised by the bank over its agents in

State Farm v. Burke was much greater than alleged in this case. In

upholding the OTS Opinion Letter, the court relied heavily on the fact the

bank exercised sufficient control over the agent‟s activities for the agent to

be akin to an operating subsidiary. 445 F. Supp.2d at 218-19. Furthermore,

the court noted that the agent was subject to OTS regulation and supervision.

Id. at 219. The court specifically cited the fact that:

      no other person or entity exercises control over the lending and
      deposit-related activities of the exclusive agents, the agents only
      engage in federal savings association-type activities, and the agents
      operate under operational restrictions (e.g., limitation on their duties)
      and are subject to OTS regulation and examination pursuant to the
      Parity Act. .... Additionally, while State Farm does not own its
      exclusive agents, it exercises control over them in the form of
      mandatory training programs, compliance oversight, and audit
      committee review.”


      Unlike the agents in State Farm, there is nothing in the record to

indicate that the tax preparers regulated by Conn. Gen. Stat. § 42-280 work

exclusively for the bank or that the bank exercises control over the

preparers‟ activities. There are no assertions that the bank supervises, trains,

or audits these tax preparers. The OCC does not claim to examine or

supervise these tax preparers. In fact, as discussed above, PCB never even

alleged in its complaint or Separate Statement of Undisputed Facts that the
tax preparers were acting as its agents, much less that that the bank

controller, monitored, or supervised the preparers. Such allegations by PCB

would have been illogical, since tax preparers are engaged in an entirely

different line of business, in which the preparer and not the bank has the

expertise and experience – tax preparation.

      Also, giving a tax preparer the benefit of preemption as an agent of

the bank would be questionable, because one would assume that if there

were an agency relationship, it would be between the client and the tax

preparer, not the bank. Both the U.S. General Accounting Office6 and a

member of the U.S. Senate7 have recognized the degree of reliance that

taxpayers have on tax preparers. In fact, a few state courts have held there

might be an actual fiduciary duty on the part of the preparer to a client.8

  U.S. General Accounting Office, Tax Administration: Most Taxpayers
Believe They Benefit from Paid Tax Preparers, but Oversight for IRS is a
Challenge, GAO-04-70, October 31, 2003, at 10, available at
  Opening Statement of Senator Norm Coleman U.S. Senate Permanent
Subcommittee on Investigations, Hearing On Tax Related Financial
Products Can Be Costly, April 15, 2005 (noting that “[t]he trust relationship
that exists between a tax payer and a tax preparer should be no less
sacrosanct than the trust relationship that exists between an attorney and
client or a doctor and patient. Consider that your tax preparer probably
knows more about your personal life than your best friend.”), available at
  See Basile v. H&R Block, 777 A.2d 95 (Pa. Super. Ct. 2001); Green v.
H&R Block, 735 A.2d 1039 (Md. 1999). Other states, however, have held
there is no such fiduciary duty. Peterson v. H & R Block Tax Services, 971
      Thus, the critical question is whether Congress intended to preempt

state law limits with respect to their application to unrelated third parties that

merely provide services to banks. Nothing in Section 85 of the NBA

indicates such a Congressional intent.

E. RALs Are the Functional Equivalent of Payday Loans, For Which the
OCC Has Stated Should Not Be Entitled to Preemption For the Activities of
Non-Bank Agents.

      RALs bear significant similarities to the practice of rent a charter

payday lending. In rent-a-charter payday lending, the non-bank payday

lender uses the federal charter of the bank to enable it to escape state usury

limitations. This is the type of payday lending that was at issue in Bankwest

v. Baker, 411 F.3d 1289 (11th Cir. 2005). See also State of Colorado ex rel.

Salazar v. ACE Cash Express, Inc., 188 F. Supp.2d 1282 (D. Colo. 2002);

Goleta Nat’l Bank and ACE Cash Express, Inc. v. Lingerfelt, 211 F. Supp.2d

711 (E.D.N.C. 2002); Goleta Nat’l Bank v. O’Donnell, 239 F. Supp.2d 745

(S.D. Ohio 2002).

      There are many similarities between refund anticipation lending and

rent-a-charter payday lending. In both cases, the non-bank entity solicits the

customer, takes the information necessary for the loan decision, fills in the

loan application, prints out the loan agreement, and issues the loan check.

F. Supp. 1204 (N.D. Ill. 1997); Sorenson v. H & R Block, 107 Fed. Appx.
227 (1st Cir. 2004).
See Bankwest v. Baker, 411 F.3d at 1294; Plaintiff‟s Local Rule 56(a)(1)

Separate Statement of Undisputed Facts at ¶¶ 4-6. The consumers‟ only

point of contact is the non-bank storefront. The non-bank entity is also

involved in the collection of the loan; in the case of RALs, tax preparers play

a critical role in cross collection.

       Indeed, the role of a tax preparer in the making of a RAL is even more

critical in some respects that the payday loan storefront. The tax preparer is

responsible for determining the amount of the loan by properly determining

whether the consumer is entitled to a refund and how much. Thus, the

preparer‟s role is to ensure the loan is repaid. Since this involves the process

of properly preparing a tax return, it is a significant and complex task.

       Tax preparers also sometimes have a significant financial stake in the

RAL loan. PCB has asserted in its Separate Statement of Undisputed Facts

that it “retains a significant majority of the fees charged for the RALs that it

makes and assumes 100% of the associated risk of loan loss and

profitability.” Plaintiff‟s Local Rule 56(a)(1) Separate Statement of

Undisputed Facts at ¶ 5. However, this has not always been true. In years

past, PCB‟s major tax preparation partner, Jackson Hewitt, bore a significant

part of the risk. In its Securities and Exchange filing in 2004, Jackson

Hewitt described how under a previous agreement with Santa Barbara Bank
& Trust (the name which PCB does business under when engaged in RAL

lending), Jackson Hewitt agreed to share the risks of unpaid RALs, stating if

“actual loan losses exceed anticipated loan losses in a given year, we are

obligated to reimburse these financial institutions for a majority of the

deficit. Conversely, if actual loan losses are less than anticipated, we receive

a majority of the surplus.” Jackson Hewitt, Final Prospectus, June 22, 2004,

at 39, available at



Furthermore, Jackson Hewitt described how:

      [A]s of May 5, 2004, . . . , the new agreement provides for Santa
      Barbara to pay us the following fees:
          a fixed fee of $16.00 for each refund anticipation loan
            facilitated by our network;
          an additional fee of $2.00 for each refund anticipation loan
            facilitated by our network if the amount of finance fees received
            by Santa Barbara exceeds uncollected loans by a threshold
            amount . . . ; and
          a variable fee equal to 50% of the amount by which the total
            amount of finance fees received by Santa Barbara exceeds
            uncollected loans by a threshold amount of at least 1.0% of the
            aggregate principal amount of refund anticipation loans made
            by Santa Barbara to our customers.

      If the amount of uncollected loans exceeds the finance fees received
      by Santa Barbara, we have agreed to reimburse Santa Barbara in an
      amount equal to 50% of such difference.

      Jackson Hewitt, Final Prospectus, June 22, 2004, at 39.
      In essence, Jackson Hewitt received $16 plus a potential additional $2

plus 50% of any profit over 1% of the aggregate loan volume of RALs - in

other words, Hewitt received a significant percentage if not the majority of

profits from RALs but shared in a 50% risk if loan defaults resulted in a net

loss to the bank.

      Furthermore, other banks and tax preparers have arrangements in

which the tax preparers even more explicitly bear the risk (and profit) from

these loans. In the case of RALs facilitated by H&R Block, Block buys

back a 49.9% “participation” share from its partner bank in every RAL

brokered by Block. H&R Block Inc., 2005 Form 10-K: Annual Report

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, at 4,

available at



2&pdf=1&xml=1&odef=8&dn=2&dn=3. Thus, Block is a nearly 50%

lender in every RAL transaction it brokers.

      Thus, RALs in many instances bear the same characteristics of risk

sharing between the bank and non-bank entity as the payday loans in

Bankwest v. Baker. While IRS rules prohibit the tax preparers from being

the actual lender, just as Georgia‟s usury laws prohibited payday lenders
from making triple digit APR loans, the preparers have found a convenient

partner in national banks willing to be the formal lender while the preparers

actually sign consumers up for the loan, process the loan documentation, and

bear a large share of the risk.

      New products in the RAL industry are moving even closer to the

payday loan product. For example, the industry now offers “holiday loans”

and “pay stub loans” that are made prior to the tax filing season. These are

high cost, short term loans made based on an estimate of the consumer‟s

forthcoming tax refund based on the consumer‟s pay stub. These loans are

made in early January prior to when the IRS permits tax returns to be filed

electronically. Holiday loans are made as early as November. Chi Chi Wu

and Jean Ann Fox, Pay Stub and Holiday RALs: Faster, Costlier, Riskier in

the Race to the Bottom, National Consumer Law Center and Consumer

Federation of America, November 28, 2006, available at


ystubRALsReport.pdf. In fact, the CEO of H&R Block has even explicitly

admitted: “The economics of [paystub RALs] have more in common with

payday lending than refund lending.” David Twiddy, H&R Block Calls on

Competitors to End “Pay-Stub” Loans, Associated Press, June 11, 2006.
      The similarities between payday lending and refund anticipation

lending are important because the OCC has made it clear that national banks

have no authority to „rent‟ their powers to non-bank payday lenders. In a

joint statement issued with OTS, the OCC warned non-bank payday lenders

that they should not expect the benefits of a bank charter by virtue of a

relationship with a national bank. According to the OCC, arrangements with

non-bank third-party providers in which the non-bank “offers products or

services through the bank with fees, interest rates, or other terms that cannot

be offered by the third-party directly” may constitute “abuse of the national

bank charter.” Third Party Relationships: Risk Management Principles,

OCC Bulletin 2001-47 (Nov. 1, 2001) www.occ.treas.gov/ftp/bulletin/2001-

47.doc; Joint Statement by John D. Hawke, Comptroller of the Currency and

Ellen Seidman, Director, Office of Thrift Supervision (Nov. 27, 2000),

available at www.ots.treas.gov/docs/4/48594.pdf . Subsequently, the OCC

forced out several national banks from the rent-a-charter payday loan

arrangements. In re Eagle Nat’l Bank, OCC No. 2001-104 (Dec. 18, 2001),

available at www.occ.treas.gov/ftp/eas/ea2001-104.pdf; In re Goleta Nat’l

Bank, EA No. 2002-93 (Oct. 25, 2002) (consent order), available at

www.occ.treas.gov/ftp/eas/ea2002-93.pdf; In re Peoples Nat’l Bank, EA No.

2003-2 (Jan. 29, 2003), available at www.occ.treas.gov/ftp/eas/ea2003-
2.pdf; In re First Nat’l Bank in Brookings, EA No. 2003-1 (Jan. 17, 2003),

available at www.occ.treas.gov/ftp/eas/ea2003-1.pdf.

      Finally, the OCC‟s own regulations should prohibit RAL lending, just

as with payday lending, because the regulations prohibit a national bank

from making a consumer loan “based predominately on the bank‟s

realization of the foreclosure or liquidation value of the borrower‟s

collateral, without regard to the borrower‟s ability to repay the loan

according to its terms.” 12 C.F.R. § 7.4008(b). The security interest in the

consumer‟s anticipated tax refund constitutes a form of “collateral” and

RAL lending does not involve a real assessment of ability to repay or debt-

to-income ratios beyond this form of collateral.

      Thus, according to even the OCC, a non-bank entity is not entitled to

the benefits of preemption when it seeks to deliberately circumvent state

usury laws by use of a national bank‟s charter to make payday loans. Given

the similarities between the products, this same reasoning should apply to


F. Extending the Benefits of Preemption to Unrelated Third Party Non-
Banks Would Nullify State Laws Regulating a Host of Entities When Doing
Business with a Bank.

      The District Court‟s decision, if permitted to stand, would put in

jeopardy virtually every single state consumer protection law so long as a
bank was somehow involved in a transaction, reversing over 200 years of

federalism in which the states have been the main protectors of consumers.

The District Court‟s essential reasoning was that Conn. Gen. Stat. § 42-280

should be preempted because “the federal statute authorizes national banks

to charge the interest rate allowed by their home state, and the Connecticut

statute makes it more difficult to do so.” Pacific Capital Bank, N.A. v.

Conn., 2006 WL 2331075, at *8. According to this rationale, any state law

that regulates a third party‟s activities will be preempted if the third party is

providing services to a bank, and the regulation makes it more expensive or

burdensome to do so.

      Thus, any third party that is providing services for a bank would be

free to ignore state law. For example, telemarketers would be immune from

state consumer protections for telemarketing, so long as they were soliciting

for a bank, because these regulations might make it more expensive or

difficult for telemarketers to operate. Attorneys would be immune from

state laws governing the legal profession, so long as they were engaged in

legal work for a bank, because it might be cheaper and more effective for the

attorneys to ignore these rules. The District Court‟s reasoning would

invalidate the state bar rules of 50 states when an attorney was representing a

bank in a lawsuit.
      Indeed, the OCC has listed several dozen activities that a national

bank is authorized by federal law to engage in. OCC, Activities Permissible

for a National Bank 2005 (Feb. 2006), available at

http://www.occ.treas.gov/corpapps/BankAct.pdf. These include “Medicare

and Medicaid counseling”, “data processing equipment leasing” and “acting

as a finder for Internet vendors.‟ Id. at 3, 10-12. Under the District Court‟s

rationale, any third party engaged in these activities is free to ignore state

law, if the activity is to benefit a bank. The District Court‟s reasoning would

result in an absurd plethora of state laws preempted as to non-bank third

parties under the NBA.


      For the reasons cited herein, the district court should be reversed

DATED: December __, 2006

                                         CHI CHI WU
                                         National Consumer Law Center
                                         77 Summer St., 10th Fl.
                                         Boston, MA 02110
                                         (617) 542-8010 (ph), (617) 542-8028
Kathleen Keest
302 W. Main Street
Durham, NC 27705
(919) 313-8548 (phone), (919) 313-
8595 (fax)

Deborah Zuckerman
601 E Street, NW
Washington, DC 20049
(202) 434-2060 (phone), (202) 434-
6424 (fax)

Gail Hillebrand
1535 Mission St.
San Francisco, CA 94103
(415) 431-6747 (phone), (415) 431-
0906 (fax)

Ira Rheingold
1730 Rhode Island Avenue, NW,
Suite 805
Washington, DC 20036
(202) 452-1989 (phone), (202) 452-
0099 (fax)

Attorneys for Amici Curiae

1.   This brief complies with the type-volume limitation of Fed. R.

     App. P. 29(d) and 32(a)(7)(B) because this brief contains ___

     words, excluding the parts of the brief exempted by Fed. R.

     App. P. 32(a)(7)(B)(iii).

2.   This brief complies with the typeface requirements of Fed. R.

     App. P. 32(a)(5) and the type style requirements of Fed. R.

     App. 32(a)(6) because this brief has been prepared in a

     proportionally spaced typeface using Microsoft Word in Times

     New Roman 14 point.

                                 CHI CHI WU
                                 National Consumer Law Center
                                 77 Summer St., 10th Fl.
                                 Boston, MA 02110
                                 (617) 542-8010 (ph), (617) 542-8028

                DATED: December __, 2006
                          PROOF OF SERVICE

   I, Chi Chi Wu, being duly sworn, depose and say:

   1.    I am not a party to this action, and I am over 18 years of age.

   2.    On December __, 2006, I caused to be served true and correct

         copies of the BRIEF FOR AMICI CURIAE NATIONAL







         ARGUING FOR REVERSAL by first class mail, postage prepaid,

         and one portable document format (PDF) copy by electronic mail

         upon the following:

Jane Rosenberg, Esq.
Office of the Attorney General
State of Connecticut
55 Elm Street
Hartford, Connecticut 06106

John P. Burke
Banking Commissioner of the
State of Connecticut
260 Constitution Plaza
Hartford, Connecticut 06103-1800

Thomas Murphy, Esq.
Cowdery, Ecker & Murphy L.L.C.
750 Main Street
Hartford, Connecticut 06103

Stephen M. Ryan, Esq.
Manatt, Phelps & Phillips LLP
700 12th Street, N.W. Suite 1100
Washington, DC 20005

                                   Chi Chi Wu

Dated: December __, 2006

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