Could a Maryland bank in 1980 raise the interest rate on an existing credit card balance after the state's usury ceiling went up?

Plain-English summary

A member of the Maryland House of Delegates asked the Attorney General whether a bank could raise the interest rate on a cardholder's existing credit card balance after Maryland raised its usury ceiling on larger cash advances from 12% to 18% in 1980. In the hypothetical presented, a cardholder had taken a cash advance at 12% before the rate increase, and the bank later sent notice that it would raise the rate to 18% on that existing balance unless the cardholder stopped using the card. The opinion concluded the bank's action was permitted, not because of the new Maryland usury ceiling itself, but because a temporary federal rule, the Federal Reserve Board's Consumer Credit Restraint Regulation (12 CFR §229.6), specifically authorized this kind of change to preexisting balances with 30 days' notice, and that federal rule preempted any conflicting state law for as long as it remained in effect (notices given between April 2, 1980, and September 5, 1980).

Currency note

This opinion was issued in 1982. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

This opinion analyzed a narrow, time-limited federal regulation, the Federal Reserve Board's Consumer Credit Restraint Regulation under the Credit Control Act of 1969, that by its own terms applied only to notices mailed or delivered between April 2, 1980, and September 5, 1980. The regulation itself was allowed to expire decades ago, and both federal consumer credit law and Maryland's usury statutes have had the opportunity to change extensively since 1982. This opinion has no bearing on how credit card interest rate changes are regulated today; anyone researching that question should look to current federal Truth in Lending and Regulation Z rules and current Maryland consumer credit law.

Common questions

Did Maryland's 1980 usury law increase itself allow banks to raise rates on existing credit card balances?
No. The opinion noted that Chapter 691, Laws of Maryland 1980, which raised the usury ceiling on larger cash advances from 12% to 18%, was silent on whether the new rate could apply to debts that already existed before the law took effect.

So what actually let the bank raise the rate on the cardholder's existing balance?
A separate, temporary federal regulation. The opinion found that the Federal Reserve Board's Consumer Credit Restraint Regulation, adopted under the Credit Control Act of 1969, specifically authorized creditors to apply new credit terms, including a higher interest rate, to existing account balances, as long as the creditor gave the accountholder 30 days' written notice and let the accountholder pay off the old balance at the old rate by simply not using the account after the effective date.

Did it matter whether the cardholder used the card for a cash advance versus a regular purchase after getting the notice?
No, according to the opinion. It found the federal regulation's language drew no distinction between cash advances and credit purchases: using the account for either type of transaction after the effective date in the notice caused the new rate to apply to the outstanding balance.

Could the bank have used this federal rule to charge more than Maryland's own usury ceiling allowed?
No. The opinion noted the regulation itself preserved state usury ceilings, meaning it authorized applying a new rate to old balances only up to whatever maximum rate state law already allowed at the time of the change, here, the newly raised 18% ceiling.

Background and statutory framework

The Credit Control Act of 1969 let the President delegate broad authority to the Federal Reserve Board to regulate consumer credit when needed to prevent or control inflation from excessive credit extension. In March 1980, the President issued an executive order giving the Board that authority, and the Board responded by amending its regulations to add §229.6, which let creditors change certain credit account terms, including raising the interest or finance charge, if they gave 30 days' written notice and let the accountholder pay off the existing balance under the old terms as long as the accountholder did not use the account again. The Board later narrowed §229.6 to cover only notices mailed or delivered on or before September 5, 1980, and the underlying executive order authority was revoked as of October 31, 1980, making the whole episode a roughly five-month regulatory window.

The requester argued that state usury law, not this federal regulation, should control, since the Federal Reserve had supposedly avoided touching state usury limits. The opinion disagreed, citing the Supremacy Clause and Fry v. United States for the principle that conflicting state law must yield to a valid federal mandate, and pointing to §229.6's own text, which applied "notwithstanding the terms of any credit agreement or the provision of any other law," plus Federal Reserve Board commentary describing the rule's purpose as establishing a uniform national notice standard. The opinion also relied heavily on interpretive letters from the Federal Reserve Board's staff and from the Comptroller of the Currency, both of which read §229.6 as permitting creditors to apply new terms, including higher rates, to preexisting balances even in states whose usury laws would otherwise have prohibited that. Citing Ford Motor Credit Co. v. Milhollin, the opinion explained that such agency interpretations deserve considerable deference, especially given the near-total absence of case law addressing these issues directly.

The opinion did note one limit built into the federal rule itself: §229.6(b)(1) preserved state usury ceilings, so a creditor could not use the regulation to charge more than the maximum rate state law allowed. Because Maryland's own 1980 rate increase, unlike two earlier Maryland laws raising rates on residential mortgage loans, contained no express provision barring application to preexisting debts, the opinion found no conflict between the federal rule and Maryland's usury ceiling in the hypothetical presented, and concluded the bank's proposed 18% rate on the existing cash advance balance was permissible under §229.6 regardless of whether the cardholder later used the account for a further cash advance or an ordinary credit purchase.

Citations

Statutes:

• Chapter 691, Laws of Maryland 1980
• Credit Control Act of 1969, 12 U.S.C. §1901 et seq.
• 12 U.S.C. §1904(a)
• 12 U.S.C. §1901(e)
• 12 U.S.C. §1905
• Chapter 420, Laws of Maryland 1974
• Chapter 1, Laws of Maryland 1979
• Executive Order 12201, 45 Fed. Reg. 17123 (March 18, 1980)
• Executive Order 12225, 45 Fed. Reg. 45571 (July 7, 1980)

Cases:

• Fry v. United States, 421 U.S. 542 (1975)
• Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 566 (1980)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1982/Volume67_1982.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

CREDIT REGULATION

Open-End Credit—Credit Card Transactions—Change in Terms—Consumer Credit Restraint Regulation

January 22, 1982

The Honorable Luiz R. S. Simmons
Maryland House of Delegates

You have requested our opinion on the ability of a bank to increase the rate of interest imposed on certain credit card obligations that were incurred prior to the enactment of Chapter 691, Laws of Maryland 1980, which raised the usury ceiling on cash advances exceeding $3,500 from 12% to 18%.

Your concerns are illustrated by the following hypothetical situation: Before the enactment of Chapter 691, a cardholder takes a cash advance of $4,000, subject to an interest rate of 12%. Shortly after July 1, 1980, the effective date of Chapter 691, the bank sends the cardholder a notice that it will be increasing the interest rate on such transactions to 18%, effective 30 days from the date of notice. The notice advises the cardholder that he or she may nevertheless continue to pay off the existing $4,000-balance at 12%, as long as the cardholder does not use the credit card after the effective date of the change; however, if the cardholder does use the account after that date, whether for a further cash advance or for a credit purchase, any unpaid portion of the $4,000-balance will then begin to bear interest at the new increased rate of 18%. You ask whether the bank can make this adjustment in the interest rate and, if so, pursuant to what authority.

For the reasons given below, it is our opinion that, because the notice of the increase was given to the cardholder between April 2, 1980, and September 5, 1980, the bank's action was permitted by then governing federal law: the Consumer Credit Restraint Regulation adopted by the Board of Governors of the Federal Reserve System pursuant to the Credit Control Act of 1969. For a specified period, this federal regulation specifically authorized these kinds of changes in credit terms and, by doing so, the regulation effectively preempted the terms of any credit agreement and the provisions of any state law to the contrary.1

I
History of the Federal Act and Regulation

Under the terms of the Credit Control Act of 1969, 12 U.S.C. §1901 et seq., Congress authorized the President to delegate broad regulatory powers to the Federal Reserve Board "[w]henever the President determines that such action is necessary or appropriate for the purpose of preventing or controlling inflation generated by the extension of credit in an excessive volume". 12 U.S.C. §1904(a). On such a delegation, the Board would be authorized "to regulate and control any or all extensions of credit". Id.2 Notwithstanding the relative breadth of this authority, the Attorney General of the United States has ruled that the Act does not transgress the constitutional prohibition against excessive delegation of legislative power. See 43 Op. [U.S.] Att'y Gen. (1980) [Opinion No. 20 (March 13, 1980)].

1 A modification of credit terms outside of the referenced period would be required to comply with other applicable requirements of both State and federal law, as well as the terms and conditions of the underlying contract between the cardholder and the bank. We do not here address or express any opinion on the legality of such a change in terms occurring outside of this period. It would be extremely difficult, if not impossible, for us to do so in the abstract. As you are no doubt aware, the various credit card programs available in this State are subject to different "master agreements", which set forth the contract terms and conditions governing the use of their cards. For such an inquiry, therefore, we would have to review the several terms and conditions of each particular master agreement in order to determine whether, under applicable principles of contract law and the specific statutory requirements of the Commercial Law Article, a particular action was permitted. See also note 6 below.

2 For purposes of the Act, the term "credit" is broadly defined as "the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment". 12 U.S.C. §1901(e). The term "creditor", in turn, is defined as referring to "any person who extends, or arranges for the extension of, credit, whether in connection with a loan, a sale of property or services, or otherwise".

On March 14, 1980, the President issued an executive order authorizing the Federal Reserve Board "to exercise all the authority under the [Act] to regulate and control consumer credit". Executive Order 12201, 45 Fed. Reg. 17123 (March 18, 1980).3 The specific powers thus given to the Board by the President included the authority to adopt regulations that would:

"(7) prescribe the maximum rate of interest, maximum maturity, minimum periodic payment, maximum period between payments, and any other specification or limitation of the terms and conditions of any extension of credit.

(11) prohibit or limit any extensions of credit under any circumstances the Board deems appropriate." 12 U.S.C. §1905.

Pursuant to this authorization, the Board amended 12 CFR Part 229, Subpart A, effective April 2, 1980, by adding a new section, §229.6, which permitted covered creditors to change certain terms relating to their credit accounts, including an increase in the finance or other charge imposed, if two conditions were met. First, the creditor would have to mail or deliver a written notice of the proposed change to each affected accountholder at least 30 days before the effective date of the change. Second, the creditor would have to allow the accountholder to repay any balance outstanding on the effective date of the change, under existing account terms, as long as the customer did not use the credit account after that date; if, however, the consumer used the account after the effective date of the change, the new terms would apply to the outstanding balance plus the new credit. See 45 Fed. Reg. 24444 (April 10, 1980).4

3 On July 3, 1980, the President amended Executive Order 12201, effective July 28, 1980, to read as follows: "The [Board] is authorized to exercise authority under the [Act] to establish uniform requirements for changes in terms in open-end credit accounts for consumer credit; provided however, such authorization is revoked as of October 31, 1980." Executive Order 12225, 45 Fed. Reg. 45571 (July 7, 1980).

Section 229.6 was subsequently amended by the Board, effective July 24, 1980, to limit the authority granted by it to notices "mailed or delivered on or before September 5, 1980". See 45 Fed. Reg. 46064 (July 9, 1980).

For purposes of our analysis here, we assume that the notice sent to the cardholder in the hypothetical described above complied with the specific requisites of §229.6.

II
Application of the Regulation

A. Federal Preemption

In your inquiry, you suggest that "State law governs the answer to [the questions raised by the hypothetical] since the Federal Reserve has deliberately avoided tampering with State Usury Laws". We disagree.

The Board's regulation clearly preempted State law during the period of its effectiveness. The general legal principle enunciated in federal preemption cases is that any conflict between state law and federal law must be resolved in favor of the federal law under the Supremacy Clause of the United States Constitution. For example, in Fry v. United States, 421 U.S. 542 (1975), the United States Supreme Court considered an Ohio salary increase for government workers that conflicted with a 7% maximum authorized by the Pay Board under the Economic Stabilization Act of 1970. The Court struck down the state law:

4 The Board later adopted two technical amendments to §229.6, effective April 14, 1980. The first amendment clarified the application of this section not only to "open-end credit accounts", where the consumer pays in installments, but also to "open accounts" (such as so-called "30-day accounts"), where the consumer may make credit purchases or obtain credit advances from time to time, yet is expected to pay in full on being billed. The second amendment clarified that the change-in-term provisions of the section did not affect the maximum rate allowed by either state law or, for depository institutions, federal law. See 45 Fed. Reg. 26318 (April 18, 1980). As to the effect of the section's reference to state usury limits, see Part II C of this Opinion.

"Since the Ohio wage legislation conflicted with the Pay Board's ruling, under the Supremacy Clause the State must yield to the federal mandate." 421 U.S. at 548.5

In this instance, §229.6(a) specifically provides that its terms shall apply "[n]otwithstanding the terms of any credit agreement or the provision of any other law". The comments published with §229.6 reiterate this obvious preemptive intent:

"The Board believes that the goals of the Credit Control Act and its implementing regulation may be significantly frustrated by prohibition of certain term changes, or by lengthy advance notice requirements before terms of open-end credit accounts can be changed. . . .

The amendment set forth below establishes a uniform, national requirement that advance notice of certain changes must be given at least 30 days before the date that the change is implemented." 45 Fed. Reg. at 24445.

B. Preexisting Balances

The staff of the Federal Reserve Board has responded to specific inquiries in which the application of §229.6 would constitute a clear violation of state usury laws. In an interpretive letter dated June 17, 1980, the staff summarized the conflict between state usury laws and §229.6 as follows:

5 The Economic Stabilization Act was very similar to the Credit Control Act in that it authorized the President to create a board that, in turn, was authorized to issue orders and regulations designed to stabilize wages and salary levels. The constitutional authority to enact such legislation is found in the Commerce Clause. See Fry v. United States, 421 U.S. at 547.

"Recently, several states have raised interest rate ceilings on open-end consumer credit. However, under the revised statutes, creditors are not permitted to impose the higher rates on account balances that were in existence prior to the effective date of the new rates. The laws of several other states impose similar, but more general, prohibitions with regard to application of new credit terms to balances in existence at the time of the effective date of the change in terms."6

In the staff's opinion, the issue was governed by federal law and not state usury statutes:

"We interpret §229.6 as permitting creditors to impose new credit terms on existing balances, even in those states that prohibit that action. As indicated by the Federal Register material accompanying that section, the Board adopted §229.6 not only in response to varying state notice laws, but also in response to state laws that prohibit creditors from imposing new terms on existing balances (45 FR 24445, April 10, 1980)."

Thus, according to the staff of the Board, the application of the new interest rates to existing balances could be accomplished pursuant to §229.6, regardless of any state law to the contrary:

6 Your inquiry does not present such a clear-cut violation of State law. When the General Assembly enacted Chapter 691, Laws of Maryland 1980, to raise the interest rate, it was completely silent concerning the application of the higher rate to debts existing before the effective date of the legislation. In significant contrast, however, on the two recent occasions when the General Assembly raised the interest rate on loans secured by first mortgages or deeds of trust on residential real property, the governing legislation contained express provisions that clearly precluded these higher rates from applying to renewals of preexisting loans or to loans made pursuant to certain preexisting commitments. Cf. Chapter 420, Laws of Maryland 1974; Chapter 1, Laws of Maryland 1979.

Here, we do not have a similar situation in which the charging of a higher interest rate on a preexisting debt has been clearly prohibited by an express provision of law. Nor have we found any reported authority for the suggested proposition that, even absent such an express provision of law, a state's usury law would generally prevent a voluntary renegotiation of a cardholder's existing balance where that renegotiation does not violate any applicable principles of contract or statutory law and the new rate of interest charged is not in excess of the legal rate of interest allowable at the time of the renegotiation.

"[W]e believe that the Board's clear intent was to permit creditors to apply new credit terms to outstanding balances, notwithstanding any state law to the contrary." (Emphasis added.)

This construction of §229.6 was reiterated by the Board's staff in a subsequent interpretive letter dated August 19, 1980:

"The staff interprets §229.6 as permitting [creditors] to impose new credit terms on existing balances, even in those states that prohibit that action. The fact that the prohibition is contained in a state's usury law does not, in the staff's view, affect this conclusion."

Indeed, the application of higher interest rates to preexisting balances, the basic issue raised by your inquiry, was one of the underlying principles of §229.6. The comments accompanying the regulation clearly indicate that its provisions were intended to reach preexisting as well as subsequently incurred debts:

"The amendment also established rules about whether term changes can be applied to existing account balances. . . .

Consequently, the amendment requires that consumers be permitted to choose either to pay off outstanding account balances under the existing terms, or to except the new terms as to both existing and new balances by the use of the account after the effective date of the change." 45 Fed. Reg. at 24445 (emphasis added).

The Comptroller of the Currency, the official charged under federal law with regulating national banks, has also interpreted §229.6 as authorizing the application of higher interest rates to preexisting balances. In an interpretive letter dated June 17, 1980, the Comptroller advised as follows:

"You also expressed concern about the retroactive application of the higher rates to unpaid balances if the cardholder uses the card after [a specified date]. The permissibility of this action is governed by an amendment to a Federal Reserve Board regulation, 12 CFR 229, which implements the Board's consumer credit restraint program."

C. State Usury Ceilings

We recognize that §229.6(b)(1) acts to preserve the integrity of state usury ceilings. It provides, in relevant part:

"This section does not authorize a covered creditor to impose a rate of interest or finance charge in excess of the maximum permitted by state law".

Thus, in our hypothetical, for example, the bank clearly could not have used §229.6 to impose any rate of interest in excess of the new statutorily-set 18% maximum. It does not necessarily follow from this, however, that the new 18% rate was impermissibly imposed on preexisting balances.

As indicated above, the staff of the Federal Reserve Board reviewed the various state statutes that had raised interest rate ceilings but that, in doing so, had also expressly prohibited the imposition of these higher rates on preexisting balances. (Significantly, this is not even the case in Maryland, where we find no similar express prohibition.7) The staff advised that the application of higher rates to preexisting balances was permitted under §229.6, notwithstanding the reference in §229.6(b)(1) to state interest ceilings. In its interpretive letter of June 17, 1980, the staff analyzed §229.6(b)(1) as follows:

7 See note 6 above.

"[I]n our view, the reference in §229.6(b)(1) to state interest ceilings does not extend to those portions of the law that are not directly related to maximum rate limits. We believe that the prohibition you describe, even though contained in a state's rate law, would not prevent a creditor from applying new credit terms to preexisting balances, so long as all of the conditions in §229.6 are met."

In view of the consistent interpretations by the staff of the Board, as well as the comments published with the regulation itself, it is our opinion that the reference in §229.6(b)(1) to a "rate of interest or finance charge in excess of the maximum permitted by state law" was intended to refer only to the maximum rate of interest existing and applicable as of the effective date of the change being implemented under §229.6.

D. Cash Advances and Credit Purchases

The remaining issue raised by your inquiry concerns the application of the higher interest rate to a preexisting cash advance balance when, after the effective date of the notice, the consumer only uses the purchase portion of his or her account. Again, we believe that §229.6 permitted this action.

The express language of §229.6 draws no distinction between a cash advance and a credit purchase. Under §229.6, the consumer is given the opportunity "to repay, under the existing account terms, any debt incurred prior to the effective date of the change, unless the accountholder incurs additional debt on or after that date". Section 229.6(a) (emphasis added).

The form notice contained in the regulation is equally broad and undifferentiating. The accountholder is informed, in part, as follows:

"You may make charges on your account on or after [effective date of change], in which case the new terms described in this notice will apply to what you then owe us and to future charges." §229.6(c)(2).

The comments accompanying the April 14, 1980 amendment to §229.6 militate against any reading of the section that would treat the cash advance balance as being separate and distinct from the purchase balance. In summarizing the original regulation, as adopted on April 2, 1980, the Board described the effect of §229.6 as follows:

"On April 2, 1980, the Board amended its consumer credit restraint regulation ... to permit covered creditors to change certain terms relating to certain credit accounts if two conditions are met. . . . [The second condition is that] the creditor would have to allow the accountholder to repay the balance outstanding on the effective date according to the existing terms unless the consumer made a credit purchase or obtained a credit advance on or after the date; in which case, the new terms would apply to the outstanding balance plus new credit." 45 Fed. Reg. at 26318 (emphasis added).

Similarly, in his interpretive letter of June 17, 1980, the Comptroller made no distinction between the type of transaction effected with the card. Rather, the new terms applied to existing unpaid balances if the cardholder "uses the card" after the effective date in the notice.

E. Agency Rulings

In analyzing the issues presented by your inquiry, we have relied in large part on interpretive rulings by various federal agencies. This approach is necessary given the absolute dearth of case law on these issues.

Nevertheless, it is an established principle that "considerable respect is due 'the interpretation given [a] statute by the officers or agency charged with its administration.'" Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 566 (1980). This "traditional acquiescence" in administrative expertise is "particularly apt" where the officers or agency "has played a pivotal role in 'setting [the statutory] machinery in motion.'" Id. Thus, as the Supreme Court has indicated, an Act of Congress is "best construed by those who gave it substance in promulgating regulations thereunder". Id.

Even more so here, in seeking to determine the intent and scope of an administrative regulation, we are constrained to give considerable respect and deference to the construction placed on that regulation by the very agency that adopted it.

III
Conclusion

In summary, it is our opinion that the actions of the bank described in your hypothetical fact situation were authorized by federal law, assuming that proper notice was given to the cardholder between April 2, 1980, and September 5, 1980, in accordance with former §229.6 of the Federal Reserve Board's Consumer Credit Restraint Regulation.

Stephen H. Sachs, Attorney General
Robert DeV. Frierson, Assistant Attorney General
Avery Aisenstark
Principal Counsel,
Opinions and Advice