## Facts

- A federally chartered national bank located in New York discounted a $2,000, one-month promissory note at an effective rate of 10% per annum.
- New York law generally capped interest at 7% per annum and treated usurious notes as void, with forfeiture of the underlying debt.
- The borrower defaulted at maturity, and the bank sued in New York state court to recover on the note.
- The borrower asserted a usury defense under New York law, arguing the note was void and the debt forfeited.
- The trial court and the New York Court of Appeals ruled for the borrower, applying New York’s usury penalty to the national bank.
- The bank sought review, arguing that the National Bank Act supplied the only applicable usury penalties for national banks.

## Issues

1. Whether the National Bank Act’s usury provision supplies the exclusive penalties and remedies for a national bank’s charging of an unlawful interest rate, precluding state-law forfeiture of the principal or invalidation of the debt.
2. Whether a state may impose additional usury penalties that control or burden the operations of federally chartered national banks beyond what Congress authorized.

## Decision

- The Supreme Court reversed the New York judgment and remanded.
- The Court held that the National Bank Act provides the exclusive consequences for usury by national banks.
- A national bank that knowingly charges an excessive rate forfeits the entire interest on the instrument, but does not forfeit the principal under state usury law.
- The borrower’s additional remedy (if usurious interest has been paid) is the federal statutory action to recover twice the amount of interest paid, subject to the statute’s limitations period.
- State usury penalties that void the obligation or forfeit the principal are inapplicable to national banks.

## Legal Principles

- When Congress prescribes both (i) the permissible interest benchmark for national banks by reference to state law and (ii) the penalties for exceeding that benchmark, the federal penalty scheme displaces state-law penalties as applied to national banks.
- Under the National Bank Act’s usury provision, the forfeiture for knowingly charging an excessive rate is forfeiture of all interest associated with the instrument or agreed to be paid; the debt itself is not voided.
- National banks are federal instrumentalities; states may not regulate them through punitive measures that hinder or control their lending operations beyond congressional authorization.
- Conflicting state penalties must yield where federal law sets the controlling rules for national banks’ interest charges and related remedies.

## Conclusion

The Court held that federal law exclusively governs usury consequences for national banks: the bank forfeited interest, but New York could not void the note or impose forfeiture of the principal under state usury penalties.


Farmers' & Mechanics' Nat'l Bank v. Dearing, 91 U.S. 29 (1875)