Exporting Interest and Fees

Since the late 1970s, banks chartered in a state by either state or federal authorities have been able to export their interest rates and fees to citizens of other states in which they are not chartered, even if banks chartered in that state would not be permitted to assess those charges. The sensible theory underlying this provision is that credit then becomes more available to consumers at competitive rates. A case now wending its long way through the courts is challenging, not this principle, but whether a bank is really a bank. The target of the suit is the Monogram Credit Card Bank, which is part of GE Card Services. Monogram is chartered in Georgia and is a major issuer of "private label cards" for retailers such as Banana Republic, Exxon and Home Depot.

As Paul Beckett explains in his article in the Wall Street Journal, the legal issue was first joined in December 1997. Two years earlier, Patricia Heaton had bought some video recorders and other gifts from Campo Appliances. To pay the $837.71 bill for the purchases she used her Campo credit card, which had been issued as a "private label" card by Monogram. Unfortunately, by the end of 1999, after making total payments of $476 on her account, Ms. Heaton owed Monogram $1,041.53, comprised of unpaid principal, interest charges at 21.84 percent and $297 in late fees. (She typically paid her bills in the middle of each month, regardless of when they were due.) At this point Monogram filed suit in small claims court in New Orleans to collect the balance owed. The litigation in the small claims court attracted the attention of two young lawyers and the attorney general of Louisiana. Over time, it has become a class action suit.

The litigation wound its way through various courts with a growing cluster of attorneys and participation by the FDIC in support of Monogram's position. Ultimately, the core issue is whether Monogram and similar card issuing banks are really banks. Georgia chartered Monogram as a credit-card bank. However, to export its rates and fees to consumers in other states, Monogram had to be a "bank". To be a bank under federal law, the institution has to "engage in the business of receiving deposits." Currently, Monogram has deposits only from corporate affiliates of GE Capital as specified under its 1988 charter. One issue being debated in court is whether these are "really" deposits.

This class action suit has very important implications for other credit card banks similar to Monogram. For example, other credit card banks sell to consumers in states such as Colorado and Indiana that have imposed fairly low rate ceilings, allegedly to "protect" consumers. Similar suits could be brought against other credit card banks providing private label cards to retailers in these and other states with similar statutes. Burt Rublin, one of the attorneys representing Monogram, warned the U.S. district court in 1999: "It would be a major, major explosion of litigation that would have liabilities in the billions of dollars."

Another potential class action suit relating to the interstate export of interest involves the former Chevy Chase bank in Maryland. Maryland had a cap of 24 percent on interest rates, but the bank moved to Virginia, which did not have an interest cap. Subsequently, the suit charges, Chevy Chase raised cardholders' rates to 27 percent and 28 percent. Chevy Chase eventually sold its card portfolio to Bank One Corp., Chicago. According to CardLine, Virginia Bland, the attorney for the Chevy Chase cardholders, will be seeking a class action against the bank after completing depositions.