WASHINGTON The Federal Deposit Insurance Corp. issued a technical proposal Tuesday in an effort to neutralize a court case that threatens to interfere with key credit card operations across state lines.
The proposal came in response to a court case in Louisiana in which plaintiffs have argued that Monogram Credit Card Bank of Georgia did not have the right to export its interest rates and late fees because it was not technically a state-chartered bank.
Federal law defines a state bank as an institution engaged in the business of receiving deposits other than trust funds. The plaintiffs argue that Monogram does not meet the laws intent, because its parent company is its only depositor. Yet in a legal opinion last year, the agency said that any bank with one or more deposits totaling more than $500,000 qualifies as a state bank.
A federal court judge rejected Monograms claim that it is a state bank, and said that the FDIC counsels opinion, which did not carry the force of regulation, could not be used to clarify the law. The judge then remanded the case back to state court in January, where a decision has yet to be made on the banks status.
The FDIC on Tuesday issued a proposal that mimics its earlier legal opinion, as well as a formal request by the Conference of State Bank Supervisors.
The supervisors group argued that if the agency did not issue a regulation, individual courts might make their own interpretations of the law and jeopardize the status of state-chartered credit card banks.
Formalizing the FDICs interpretation reduces the likelihood of inconsistent interpretations about the status of state-chartered banks, wrote Neil Milner, president and chief executive officer of the supervisors group, in a written petition to the agency on Jan. 12. Inconsistent interpretations that state-chartered banks are not state banks would hurt the safety and soundness regulation of those banks.
Douglas Jones, deputy general counsel for the FDIC, agreed that the agency needed to issue a formal definition to avoid multiple interpretations by different courts.
This opens up a precedent with what institutions are eligible for insurance that could be different all over the country, he said. We should have a single definition. We shouldnt be inviting single people to come in and pick a definition.
But lawyers for the plaintiffs attempted to warn the FDIC away from the rulemaking process and accused the agency of a thinly disguised attempt to influence pending private civil litigation.
In a Jan. 23 letter to the agency, Louis L. Plotkin, who represents the plaintiffs, wrote: It would be an abuse of discretion and a profound conflict of interest for the agency to adopt this maligned opinion letter as a regulation, while the FDIC is actively litigating this issue in court. If the FDIC were to promulgate the regulation it could only be for one reason: to again assist Monogram in the litigation.
But Mr. Jones argued that the proposal goes beyond just this case, and attempts to get to the heart of the FDICs authority to define what constitutes a state bank.
This goes to the agencys inherent authority over deposit insurance, he said. We want to make sure we have a single definition out there that banks can rely on.
Mr. Jones said that the number for the minimum deposit level has evolved over time, and that the agency needed a place to start. The plan seeks comments on whether the limit should be changed.
The FDIC said there are currently 24 banks with exactly $500,000 of deposits, and 37 institutions that fall below that limit. The proposal asks whether these banks and start-ups should be exempted.
The industrys response to the proposal remains to be seen, but early reaction suggested that industry representatives had few problems with the definition, and did not foresee any outcry against it.
It is probably a good thing that they put it out there, especially now that banks are changing and evolving so much, said Robert Rowe, regulatory counsel for the Independent Community Bankers of America. It is a good thing for them to get feedback and comments on.
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