When Monogram Credit Card Bank of Georgia faced a consumer class-action suit last year, it turned to General Electric Capital Corp., its parent, to enlist the support of the Federal Deposit Insurance Corp.

Monogram then hired a former general counsel of the FDIC who drafted a policy letter incorporating what GE Cap was seeking. He had GE's attorneys check the letter, and directed a lower-level FDIC official to type the letter on the agency's letterhead. The letter then was presented to the federal court as FDIC policy, and the judge ruled in GE's favor.

But when the court learned how the letter came about, in a highly unusual step, it reversed that decision.

There have been numerous usury-type suits brought against bank credit card issuers in recent years, as Federal banking regulations clash with state laws.

Most have been thrown out, but Monogram may break the mold. The case gets to the fundamentals of the issue: Is Monogram really a bank?

The ultimate decision could have a chilling and expensive impact on Monogram.

But more than that, the case raises questions about the way the FDIC operates and the role it plays in disputes between consumers and their lenders.

When Patricia Heaton sued Atlanta-based Monogram in a Louisiana state court for alleged overcharges on her credit card bills, she had no idea she would be squaring off against the FDIC as well as Monogram.

Heaton argued that Monogram had been breaking Louisiana credit laws by, among other things, charging her an $18 fee for a late payment. Louisiana law limits them to $15.

The heart of the debate is whether Monogram is entitled to circumvent a state's usury-like laws. It would be if it were a bank, and that's what is in dispute.

If Monogram is a bank, it can choose which state's usury laws to abide by: the state where it is headquartered or the state where the borrower lives. In this case, Atlanta-based Monogram made loans to Heaton, a resident of Louisiana, which has relatively tough usury laws. Monogram preferred operating under Georgia laws.

For purposes of the Federal Deposit Insurance Act, a "bank" is an entity that makes loans and is "engaged in the business of receiving deposits." Monogram clearly makes loans, but it's not clear whether it's in the business of receiving deposits.

The FDIC--which has come down strongly in favor of Monogram--sees the suit as an infringement of its power to decide what a bank is, and is actively fighting Heaton. It has even asked the court to make the agency a co-defendant in the suit. The FDIC argues that although it didn't have a written policy on whether these single-purpose banks are indeed banks, its initial decision to insure Monogram in 1988 was based implicitly on a finding that Monogram was in fact a state-chartered bank.

The agency warned in a sworn document that if the court agreed with Heaton, it "may literally open the floodgates of litigation and deluge the institutions regulated by the FDIC with a torrent of similarly frivolous suits."Industry Impact Unclear
Some observers say it is difficult to determine if a ruling against Monogram would have an adverse impact on most of the other 19 credit card banks. Only Monogram and two others--Conseco Bank Inc. and InfiBank--have virtually no FDIC-insured deposits.

Only 1% of Monogram's and Conseco's deposits are insured, while 4% of InfiBank's are. The next-lowest level of insured deposits is 20% for Dial Bank. Coverage jumps as high as 99% for another GE unit, GE Capital Consumer Card Co.

The credit card banks were formed in the late 1980s, when non-financial corporations began using a clause in the Bank Holding Company Act that enabled them to set up non-bank banks. The Federal Reserve bristled at the trend, and in 1987 a law was enacted that banned such units.

It was then that Congress created a special type of "bank" for credit card issuers. These banks are limited in what they can do. They cannot, for example, accept deposits unless those deposits are used for collateral against loans. Credit card banks with large amounts of insured deposits are those that deal primarily with people who are poor credit risks and must collateralize their loans with cash deposits.

A question, then, is whether these banks are in the business of taking deposits.

When it comes to the FDIC's claim that the suit is frivolous, Louisiana Federal District Court Judge Carl J. Barbier thinks it's not. He said in a recent opinion that Heaton's argument makes sense from the "plain language" of the Federal Deposit Insurance Act.

The FDIC, itself, certainly has been taking the issue seriously and, despite claims that its legal resources are meager, it has asked the court to name it a defendant, putting itself in a costly and resource-hungry stance.

"The FDIC's jumping into legislation in favor of the entities it regulates is a really troubling development," says Kathleen Keest, assistant attorney general and deputy administrator of the Iowa consumer credit code.

Consumer advocates also criticize the way the FDIC acquiesced so readily in having the defendant in the case write the agency's opinion on the issue.

Initially Judge G. Thomas Porteous Jr., of the Louisiana Federal District Court, ruled in Monogram's favor based on the signed opinion letter submitted by the FDIC. On that basis he determined in October 1998 that Monogram was a bank in the business of taking deposits.

But the court later learned that there had been no standing formal opinion as to whether these units are "banks." Monogram's counsel had obtained the opinion from the FDIC during the course of the litigation itself. It was issued only after the litigation was underway.

Once Monogram realized it could be facing a tough challenge, it retained John Douglas, a former FDIC general counsel now in private practice in Atlanta, to "obtain a letter" from the FDIC on Monogram's status as a state bank under the Federal Deposit Insurance Act. (The quote is from Douglas' sworn deposition.)

According to court documents, apparently it took only one telephone call by Douglas to J. Michael Payne, a senior attorney at the agency's regional office in Atlanta, to put the wheels in motion.

In a sworn deposition, Douglas acknowledged that, after calling Payne on the morning of Sept. 17, 1998, Douglas himself drafted a letter, to be signed by the FDIC, concluding that Monogram was a state bank for Federal Deposit Insurance Act purposes. He then gave it to Payne to sign. Douglas' draft specifically indicated that Payne should put the letter on an FDIC letterhead.

Douglas also sent his draft opinion letter to Monogram's trial counsel, Anthony Rollo, for his approval. Once Monogram's lawyers had the letter phrased just as they wanted, the FDIC's Payne apparently had it retyped, signed it, and delivered it to Monogram. The company promptly submitted the letter to the court, and the judge alluded to it as a basis for his initial decision for Monogram on its status as a bank.

During the ensuing year, the parties engaged in contentious pretrial discovery, which revealed some of how the FDIC became involved in the case.

On Nov. 22, 1999, after being given additional evidence on how the FDIC had issued its "opinion letter," as well as a more extensive briefing on the central legal issue, another judge on the Louisiana district court reconsidered the earlier decision that favored Monogram.

Reversing Judge Porteous--a very rare occurrence in the same court--Judge Barbier said that case law published by the courts to date is "silent" on the issue of whether a credit card bank is a state bank.

Judge Barbier reasoned that "under the plain language" of the relevant portion of the Federal Deposit Insurance Act, while Monogram does receive deposits, it is not engaged in the "business of receiving deposits" because its only depositors appear to be two GE Capital affiliates.

In fact, the Georgia law under which Monogram obtained its credit card bank charter provides that Monogram may accept deposits only from its affiliates.

Monogram is appealing the decision. The FDIC plans to file a friend of the court brief with the Fifth Circuit Federal Court of Appeals supporting Monogram's position.

Such an approach to issuing an opinion letter "can give the appearance that the FDIC is not acting independently or in the public interest," says assistant AG Keest.

Critics say they are surprised that the FDIC's Payne so readily complied with Douglas' request on behalf of Monogram. Douglas himself conceded in court papers that he had never previously spoken with Payne. And Douglas further claimed in sworn testimony that he didn't deal with anyone else at the FDIC about obtaining the letter. Neither Douglas nor Payne returned phone calls seeking comment on the sequence of events.

Both Monogram and the FDIC maintain that it is "not uncommon or improper" for a bank's lawyer to write the initial draft of an opinion letter.

Putting aside questions concerning how the FDIC's opinion letter was initially prepared, the FDIC has resisted Heaton's attorneys' attempts to learn directly from the agency about how and why it became involved in the litigation.

After the initial decision favoring Monogram, Heaton's attorneys served a subpoena on Payne, seeking his testimony and relevant documents about the Monogram opinion letter. In response, the FDIC took an aggressive stance, choosing to file objections to the subpoena and categorically refusing to produce Payne to testify.

Heaton's counsel then had to file a motion with the court seeking to compel Payne to obey the subpoena, and the FDIC continued to resist.

Among other things, the FDIC--after inserting itself into the fray by issuing an opinion letter that the FDIC itself acknowledged had a litigation purpose--complained about "the burden that would be placed on the FDIC if it were regularly called upon to provide testimony in private litigation."

The FDIC argued that "Mr. Payne's letter regarding the status of Monogram is so patently correct that the FDIC reasonably concluded that it would be a waste of the Court's and the FDIC's limited resources to probe the issue any further."

Court Record Leaves Questions
This position on the legal merits was rebuked by the Louisiana district court in its recent decision finding that Monogram is not, after all, a bank.

But the court ultimately rejected Heaton's lawyers' efforts to enforce their subpoena against the FDIC on the technical ground that Heaton had filed her papers in the wrong federal court. So, the court record leaves many questions about the FDIC's involvement unanswered.

The FDIC has acknowledged that Payne submitted the draft opinion letter for review to someone in the FDIC's Washington, D.C., offices. But Gregory Taylor, an FDIC litigation counsel in Washington, who has been involved in the Monogram case since the Payne subpoena was issued, refuses to provide additional detail on the extent of the D.C. office's involvement "because the litigation is ongoing."

The FDIC's involvement in the Monogram case did not end with its resistance to the subpoena addressed to its employee. It recently chose to ask the court's permission to be named as a defendant alongside Monogram in the litigation.

When asked why the FDIC had sought to take on the burden of becoming a defendant, Taylor stated that "the FDIC had to become involved...when we saw what was happening" in terms of having the courts override its opinion about what is and what is not a bank.

FDIC counsel Taylor says the agency decides whether to intervene in a lawsuit on a "case-by-case" basis. If a case could have a large impact on the banking industry, or if a case affects the FDIC's rights and obligations as an insurer of banks, it may become involved.

Taylor says that the FDIC, as an "independent" government agency, is "not taking sides" in the case. "We're defending our interpretation of the statute and defending our decision to insure the institution" in the first place.

FDIC critics say the agency's "administrative determination" did not appear to involve any public input or proceedings. They add that the FDIC could have remained neutral by claiming that it hadn't made any formal determination on the matter.

Louis L. Plotkin, attorney for Heaton in the Monogram litigation, says "the FDIC's conduct in the case is disturbing. There is no evidence that the FDIC ever formally considered before this litigation whether a limited-purpose credit card bank is in the business of receiving deposits."

Should Monogram lose on appeal, the final move in the match may be for Congress to enact legislation that would specify that state credit card banks are deemed state banks in the business of receiving deposits for Federal Deposit Insurance Act purposes, thereby enabling them to export rates outside of their charter states.

But getting such legislation passed would not be easy. It would be strongly opposed not only by consumer groups but also by states that are as sensitive about their power as the FDIC is about its own.

Bank Regulators Accused
Consumer advocates and a number of state attorneys general are complaining that bank regulators are biased in favor of banks and that they discriminate against consumers.

"Federal banking regulatory agencies have been increasingly playing the role of cheerleaders, not regulators" of the institutions they should be scrutinizing, says Kathleen Keest, assistant attorney general and deputy administrator of the Iowa consumer credit code.

Louis L. Plotkin, as attorney for Patricia Heaton in her suit against Monogram Credit Card Bank of Georgia (see main story), is clearly biased. But he argues that "the FDIC's conduct in the [Heaton] case is disturbing." He says, "There is no evidence that the FDIC ever formally considered before this litigation whether a limited-purpose credit card bank is in the business of receiving deposits."

From all appearances, the FDIC's "administrative determination" in the Monogram case was merely a short letter drafted by Monogram's counsel, Plotkin continues, saying there was no public input or proceedings.

The Office of the Comptroller of the Currency comes in for special criticism. One consumer advocate points out that the Comptroller intervened as a plaintiff in a recent case in which the Utah affiliate of Bank One tried to avoid Iowa laws that bar surcharges on ATMs and require that owners of the machines place their names on them.

No agency "has been more aggressive than the OCC in its willingness to override state consumer protection laws," says Alvin Harrell, a banking law professor at the Oklahoma City School of Law.

The Eighth Circuit Federal Court of Appeals decided in Bank One's favor. But a dissenting judge charged that the ruling eviscerated Iowa ATM consumer protection laws, and that those laws include "valid, evenhanded consumer protections."

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