May 19, 2000
A class action suit against a GE-owned credit card bank is raising questions about whether such banks are legitimate.

A few years ago, Patricia Heaton, a Louisiana consumer, sued Atlanta-based Monogram Bank, a credit card bank owned by General Electric Capital Corp., charging that it had violated Louisiana credit laws by charging her an $18 fee for a late payment. Louisiana law limits such penalties to $15.

Most such cases are quickly thrown out of court. Reason? Banks can choose to be governed by the laws of the state in which they are chartered. Georgia has relatively lenient laws while Louisiana's are strict. So Monogram chose to be governed by the laws of Georgia.

Monogram and the 19 other credit card banks in the U.S. are routinely treated as banks. Founded in the 1980s under a provision in the Bank Holiday Company Act, the credit card banks have no branches and offer few services other than credit cards. No new ones have been created since the practice was outlawed in 1987.

But are these institutions really banks?

The usual definition of a bank is a corporation that receives deposits for later withdrawal. The only deposits most credit card banks receive are those paid as security by cardholders with poor credit histories. Typically, a consumer wishing to re-establish credit might "deposit" $250, which would be used as security against a credit card with a $250 credit limit.

To bolster its contention that it is a legitimate bank, Monogram hired a former general counsel for the Federal Deposit Insurance Corporation (FDIC), who drafted a letter confirming Monogram's status and persuaded an FDIC official to sign it.

That sounded fine to Louisiana Federal District Court Judge G. Thomas Porteous Jr., who found in October 1998 that Monogram was indeed a bank. But when the circumstances surrounding the writing of the letter came out in later depositions, Judge Carl J. Barbier reversed Porteous' finding and upheld Heaton's argument that Monogram is not a bank, thus opening it to Louisiana jurisdiction.

This finding has thrown the credit card banking industry and the FDIC into turmoil. The FDIC has come down hard on the side of Monogram, to the dismay of consumer advocates.

The FDIC's eagerness to defend Monogram "is a really troubling development," Iowa Assistant Attorney General Kathleen Keest said in a recent US Banker story. Heaton's attorney, Louis L. Plotkin, said the FDIC's conduct is "disturbing."

The case is now being appealed. If Monogram loses on appeal, the FDIC and credit card banks are expected to turn to Congress to enact legislation specifying that credit card banks are, indeed, banks and thus able to export rates outside their charter states. This would be a contentious issue and the measure would likely be strenuously opposed by consumer groups and the states.