WILMINGTON, Del. — Sovereign Bank’s only branch in Delaware, opened last year, is tucked into the corner of an office building here next to a Quiznos sandwich franchise. It has just one ATM, five employees, and no weekend hours.
But in filings with federal regulators, Sovereign has recently started calling this modest, 2,300- square-foot space its “main office,” instead of its corporate headquarters in Boston.
The reason: to avoid usury laws in Massachusetts and other states. Massachusetts, for instance, caps lending rates for banks at 18 percent. But Delaware effectively has no such cap, allowing Sovereign to charge as much as 30 percent interest per year for customers who are late on credit card payments.
Sovereign’s filing is another example of how financial and other companies have come to depend on Delaware to dodge more restrictive laws in other states. More than half of major American corporations are incorporated in Delaware to take advantage of the state’s business-friendly rules. And for three decades, banks that offer credit cards — including Bank of America — have opened physical operations in Delaware and a few other states to avoid local usury laws.
The trend dates to 1978 when the Supreme Court ruled that banks need only comply with the interest rate cap for the state where they are based — even if they operate nationwide. Shortly after, South Dakota dropped its cap on interest rates for banks, luring Citigroup's credit card operations to the state. Delaware and some other states soon followed.
In the case of Sovereign, the addition of a Delaware address won’t mean any immediate changes for its credit card customers because the bank is taking over credit card operations that it previously contracted to a Delaware-based company.
Sovereign joins many major banks that use Wilmington addresses as the main office for at least one of their subsidiaries, including a division of TD Bank and Bank of America's credit card unit. A TD Bank spokeswoman said its corporate headquarters are in Cherry Hill, N.J., and Portland, Maine, but “for regulatory reasons” it uses the Wilmington address instead of Cherry Hill in government filings. Bank of America has long based its credit card operation in Wilmington, even though its corporate headquarters is in Charlotte, N.C.
The agency that regulates Sovereign and many other national banks, the Office of the Comptroller of the Currency, says federal law does not require a bank’s “main office” to match the address of its corporate headquarters or executive offices.
Consumer advocates say it makes no sense that national banks can plop an office in whatever state offers the most lax regulations and then operate nationwide using that state’s laws. Two years ago, former Massachusetts treasurer Timothy P. Cahill pulled more than $200 million in taxpayer money out of Bank of America, Citigroup, and Wells Fargo because they refused to voluntarily abide by the state’s 18 percent cap on lending rates.
But US lawmakers have resisted proposals for decades to cap interest rates on major banks. The 2010 law that created the Consumer Financial Protection Bureau specifically bars the agency from capping interest rates.
“It’s an uphill battle to convince Congress,” said Lauren K. Saunders, managing attorney of the National Consumer Law Center in Washington, which supports legislation that would require financial institutions to abide by state usury laws wherever they offer loans.
Industry groups, however, have vowed to fight any efforts to restrict rates either at the state or federal level. “We oppose government price controls,” said Nessa Feddis, an attorney with the American Bankers Association.
For years, the debate was academic for Sovereign, because it outsourced its credit cards to a unit of Bank of America, FIA Card Services, which is based in Wilmington. Until recently, Sovereign used an address in Wyomissing, Pa., where the company was once basedand still has a major administrative center, as its home office on regulatory documents.
But Sovereign, owned by Spanish banking giant Banco Santander SA, recently decided to issue and maintain its own credit cards instead of relying on Bank of America — meaning Sovereign would then be affected by state usury laws.
To get around the problem, bank executives decided to open a branch in downtown Wilmington and register that as its main office with regulators.
“Designating our branch in Delaware as our main office enables the bank to use the interest rate laws of Delaware,” said Sovereign spokeswoman Holly Berry-Steel in an e-mail.
Sovereign opened the branch in June 2011 and held a formal ribbon cutting with the Wilmington mayor in September. The branch, today plastered with red and white posters promoting student bank accounts, home equity loans, and other products, is Sovereign’s only Delaware location.
Sovereign’s executive offices remain at 75 State St. in Boston, no matter what its regulatory documents suggest, said Berry-Steel, the bank spokeswoman. The bank has 2,300 employees in Massachusetts, compared with five in Delaware.
“For all intents and purposes, Sovereign is headquartered in Boston,” she said.