4000 - Advisory Opinions
State restrictions on the establishment of Interstate De Novo Branches by Industrial Loan Companies
July 28, 2006
Julie L. Williams, Chief Counsel, OCC
Doug Jones, Acting General Counsel, FDIC
Scott Alvarez, General Counsel, Board
You have asked our opinion regarding certain state legislation intended to restrict interstate de novo branching by industrial loan companies and industrial banks (collectively, "ILCs"). Specifically, we understand that some states have proposed or enacted legislation that prohibits an out-of-state LLC, but not other types of banks, from establishing a de novo branch in their states. These restrictions have particular significance for those states that generally permit out-of-state banks to establish de novo branches in their states. With respect to such states, the question has been raised whether these state ILC restrictions, if enacted, would affect the ability of other out-of-state banks to establish de novo branches in those states.
The establishment of interstate de novo branches was first authorized under Federal law in 1994 when Congress enacted the Riegle Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle Neal").1 Riegle Neal was generally intended to enhance and expand interstate banking and branching. In accordance with that purpose, it added provisions to both the Federal Deposit Insurance Act (the "FDI Act") and the National Bank Act authorizing both state banks and national banks to establish and operate interstate de novo branches under certain conditions.2
Specifically, Riegle Neal added section 18(d)(4) of the FDI Act, 12 U.S.C. § 1828(d)(4) ("Section 1828(d)(4)") regarding state nonmember banks and 12 U.S.C. § 36(g) ("Section 36(g)") regarding national banks.3 Section 36(g) applies to state member banks by virtue of section 9 of the Federal Reserve Act.4 These sections generally provide that the appropriate Federal banking agency (i.e., the FDIC, for state nonmember banks; the Office of the Comptroller of the Currency, for national banks; and the Federal Reserve Board, for state member banks) may approve an application to establish and operate a de novo branch in a state (other than the bank's home state) in which the bank does not maintain a branch, if the host state has a law in effect that meets certain criteria.5
These criteria include the requirements that the host state have a law in effect that "(I) applies equally to all banks, and (II) expressly permits all out-of-state banks to establish de novo branches in such state."6 For purposes of this discussion, these criteria are collectively referred to as the "Host State Law Requirements." If a host state's law fails either of these requirements, the appropriate Federal banking agency would not be able to approve the establishment of a de novo branch in the host state by any out-of-state bank.7
For purposes of Section 1828(d)(4), the term "bank" includes any national bank and any state bank.8 Under the FDI Act, a "State bank" is defined to include "any bank, banking association, trust company, savings bank, industrial bank (or any similar depository institution which the Board of Directors finds to be operating substantially in the same manner as an industrial bank) or other banking institution which -- (A) is engaged in the business of receiving deposits, other than trust funds . . . and (B) is incorporated under the laws of any State or which is operating under the Code of Law for the District of Columbia (except a national bank)."9 Similarly, the term "bank" as used in Section 36(g) includes "trust companies, savings banks, or other such corporations or institutions carrying on the banking business under the authority of state law."10 Consequently, the term "bank" as used in both Section 36(g) and Section 1828(d)(4) includes ILCs.
State Restrictions on De Novo Branching by ILCs
As noted above, some states have enacted or proposed legislation that prohibits an out-of-state ILC, but not other types of banks, from establishing a de novo branch in their states. Viewing these state ILC restrictions in light of the Host State Law Requirements, it is apparent that, if enacted, these restrictions would cause a host state's law to fail those requirements. If a state enacted these restrictions, the state's de novo branching law would not apply equally to all banks because the state's law would exclude one type of bank, i.e., ILCs. Similarly, the state's de novo branching law would not expressly permit all out-of-state banks to establish de novo branches in such state because the state's law would not permit one category of out-of-state banks (i.e., out-of-state ILCs, generally, or in some state laws, Utah-chartered ILCs) to establish de novo branches in such state.
Consequently, in our view, a state that enacted this type of de novo branching restriction on ILCs would cause its interstate de novo branching law to fail the Host State Law Requirements, and the appropriate Federal banking agency would not be permitted to approve the establishment of de novo branches in that state by any out-of-state bank. This determination, however, does not affect the validity of any interstate de novo branches approved under Section 36(g), Section 1828(d)(4) or section 9 of the Federal Reserve Act prior to the enactment of such restrictions.
Another type of state law permits all out-of-state banks to establish de novo branches in the host state, but prohibits an out-of-state ILC (but not other types of banks) from establishing a branch on the premises of a commercial affiliate of the ILC.11 This type of state law does not apply equally to all banks and therefore fails the Host State Law Requirements. If, however, the state law expressly permits all out-of-state banks to establish de novo branches in the state, but also provides that neither banks chartered in the state nor out-of-state banks may establish or maintain a branch in the state on the premises of a commercial affiliate,12 the state law would apply equally to all banks and would appear to comply with the Host State Law Requirements. While this latter type of law does impose a "locational limitation" on where any bank (whether an out-of-state bank or an in-state bank) may establish a branch within the state, this limitation does not treat any class of banks differently than any other banks contrary to the requirements of the Riegle Neal Act.
We hope this response addresses your concerns.
1Pub. L. No. 103--328, 108 Stat. 2339 (1994). Go back to Text
2See id. § 103. Go back to Text
3Id. § 103(a), (b). Go back to Text
4See 12 U.S.C. § 321. Go back to Text
5Both Section 36(g) and Section 1828(d)(4) include definitions of the terms "de novo branch," "home state," and "host state." See 12 U.S.C. §§ 36(g)(3)(A), (B) and (C), 1828(d)(4)(C), (D) and (E). Go back to Text
612 U.S.C. §§ 36(g)(1)(A), 1828(d)(4)(A)(i). Go back to Text
7Approval of such an application is also subject to certain additional conditions and provisions dealing generally with host state filing requirements, community reinvestment, and the adequacy of capital and management. See U.S.C. §§ 36(g)(1)(B), 1828(d)(4)(B). Go back to Text
8See 12 U.S.C. § 1813(a)(1). Go back to Text
912 U.S.C. § 1813(a)(2). Go back to Text
1012 U.S.C. § 36(l). Go back to Text
11See, e.g., VA CODE ANN., § 6.1--232.3 (2006). Go back to Text
12See, e.g., MD CODE ANN., FIN. INST., §§ 5--1003(a) and (b) (2006). Go back to Text
Treatment of Auto Leases as Financial Assets under 12 C.F.R. §360.6
David N. Wall Assistant General Counsel
This letter responds to your email of October 1, 2010 requesting clarification of the treatment by the Federal Deposit Insurance Corporation (the "FDIC") of auto leases under 12 C.F.R. §360.6, Treatment of Financial Assets Transferred in Connection With a Securitization or Participation, as amended pursuant to the restatement thereof approved by the FDIC Board of Directors on September 27, 2010 (as so restated, the "Securitization Rule"). You are requesting that the FDIC confirm that auto leases are not excluded from the definition of "financial asset" solely because there may be a need to dispose of the underlying leased equipment in order to convert portions of the residuals into cash. You are also requesting that the FDIC confirm that obligations serviced by the cash flows of such leases are not excluded from the definition of "obligation" solely because of such need to dispose of underlying leased equipment.
The FDIC does not provide binding determinations except through regulations and orders. Without careful consideration of all of the particular facts, relevant documents, and other circumstances surrounding an individual situation, it is impossible to determine how a particular transaction may be treated under the Securitization Rule. Nonetheless, we can provide some general guidance as to our view of the proper interpretation of the Securitization Rule.
Under the Securitization Rule, "financial asset" is defined as "cash or a contract or instrument that conveys to one entity a contractual right to receive cash or another financial instrument from another entity." In drafting the Securitization Rule, the FDIC was aware that auto and other equipment leases were often included as financial assets underlying a securitization, and that in the case of such lease securitizations, the right to receive cash may consist in part of the realization of cash proceeds upon the disposition of the physical property underlying such leases. It is our view that the better interpretation of the Securitization Rule is that the term "financial asset" includes auto and other equipment leases and does not exclude such leases solely because there may be a need to dispose of the underlying leased equipment in order to convert portions of the residuals into cash. Consistent with this interpretation, it is our view that a debt or equity or mixed beneficial interest or security that would otherwise qualify as an "obligation" under the Securitization Rule should not be excluded from the term "obligation" solely because it is serviced by cash flows from leases in connection with which there may be a need to so dispose of the underlying leased equipment. Of course, as noted above, it is impossible for us to determine whether a specific transaction would be treated in this way under the relevant facts andthe Securitization Rule without careful consideration of all of circumstances for that transaction.We hope this adequately responds to your concerns.
Whether the FDI Act’s Prohibition on the Acceptance of Employee Benefit Plan Deposits by Less-than-Adequately-Capitalized Institutions Applies to Same-day Transfers
December 8, 2010
Daniel G. Lonergan, Counsel
This is in response to your recent inquiry seeking guidance as to the breadth of section 11(a)(1)(D) of the FDI Act, which sets forth a prohibition on the acceptance of “employee benefit plan deposits” by institutions that are less-than-adequately capitalized. 12 U.S.C. § 1821(a)(1)(D). Your inquiry presents two factual scenarios that implicate the section 1821(a)(1)(D)(ii) prohibition.
Under the first factual scenario presented, you inquire whether an institution that is, or becomes, less than adequately capitalized is permitted to accept employee benefit plan contributions into an omnibus asset management deposit account if, on the same business day, the funds are “swept out” from the account to an external sweep vehicle or other investment outside the bank. Under the second scenario, you ask whether an institution that administers employee benefit plan accounts through its trust or asset management department and becomes less than adequately capitalized may nevertheless continue to permit funds to flow through an omnibus deposit account used to process routine account transactions (e.g., trade settlements, receipts for maturing assets, interest and dividend receipts, participant loan payments, and retirement and other distributions of plan participants) provided that, on the same business day, the funds are distributed electronically or by check, or are swept out of the omnibus account to an investment vehicle outside the bank.
Section 1821(a)(1)(D) primarily addresses deposit insurance coverage for certain employee benefit plan deposits. It states that the Corporation “shall provide pass-through deposit insurance for the deposits of any employee benefit plan,” 12 U.S.C. § 1821(a)(1)(D) (emphasis added), expressly defines “pass-through deposit insurance,” and specifies the employee benefit plans covered. 12 U.S.C. § 1821(a)(1)(D)(iii)1 . Nevertheless, the statute additionally prohibits institutions that are not sufficiently well capitalized from accepting employee benefit plan deposits. Section 1821(a)(1)(D) specifically provides:
(i) Pass-through insurance The Corporation shall provide pass-through deposit insurance for the deposits of any employee benefit plan.
(ii) Prohibition on acceptance of benefit plan deposits An insured depository institution that is not well capitalized or adequately capitalized may not accept employee benefit plan deposits.
12 U.S.C. § 1821(a)(1)(D)(i)-(ii). It is thus clear that institutions less than adequately capitalized cannot accept employee benefit plan deposits.2 It is further evident that the statute has two distinct aims: (1) to minimize potential losses to the Deposit Insurance Fund by prohibiting institutions in weaker capital positions from accepting employee benefit plan deposits, as the pass-through coverage liability of the Fund for such deposits is significant; and (2) to provide pass-through coverage for employee benefit plan deposits accepted by institutions with higher capital, as well as accepted by an institution with insufficient capital through error or negligence when the institution’s capital position makes it impermissible to have done so. These conclusions have particular relevance to the two hypothetical situations presented in your inquiry.
As section 1821(a)(1)(D)(ii) expressly provides that an insured depository institution that is less than adequately capitalized may not “accept” employee benefit plan deposits, in both of the hypothetical situations presented the question arises whether the funds received by the institution have been “accepted” within the meaning of the section 1821(a)(1)(D)(ii) prohibition. The question is whether the arrangements to have the funds “swept out” or distributed before the close of the business day render the funds not “accepted,” and thus permit their receipt by an institution less than adequately capitalized.
Historically, section 1821 did not provide this express prohibition on the ability of less-than-adequately-capitalized institutions to accept employee benefit plan deposits. Rather, under the statute the ability of the deposits to garner pass-through deposit insurance coverage hinged on whether or not the institution, at the time the deposits were accepted, could accept brokered deposits. Thus, because an institution’s ability to accept brokered deposits was tied to the institution’s capital category at the time of acceptance, pass-through coverage for an employee benefit plan deposit was thus dependent upon an institution’s capital category. Stated differently, the statute formerly did not preclude an institution’s ability to accept employee benefit plan deposits based on its capital level. Instead, if the institution held employee benefit plan deposits, those deposits would receive the benefit of pass-through deposit insurance coverage only if, at the time they were accepted, the institution’s capital position enabled it to accept brokered deposits.3
Following enactment of the Federal Deposit Insurance Reform Act of 2005, Pub. L. 109-171, Title II, § 2103(b) (Feb. 8, 2006), section 1821 removed the express cross-reference to the FDI Act’s brokered deposit provisions (section 1831f), and therein provided that the only institutions permitted to accept employee benefit plan deposits are those that are well capitalized and adequately capitalized, among other requirements. As is reflected in the language of the statute and its legislative history, however, pass-through deposit insurance coverage is provided to employee benefit plan deposits in instances where the institution is authorized to accept them, as well as in instances when the institution is not permitted to do so. See House Report 109-362, Deficit Reduction Act of 2005, Section-by-Section Analysis of the Legislation, § 2103 (“The section provides pass-through coverage to certain employee benefit plans, even if the institution is not authorized to accept employee benefit plan deposits because it is not well-capitalized or adequately capitalized.”); Conference Report on S.1932, Deficit Reduction Act of 2005, Section-by-Section Analysis of the Legislation, § 2103. 4
Although the statute does not define the phrase “to accept” for purposes of the employee benefit plan deposit prohibition under 12 U.S.C. § 1821(a)(1)(D)(ii), the term “accept” has been employed in this section long before the recent 2006 amendment and was employed when the provision was formerly tied to the brokered deposit restrictions and other measures. Clarification has been provided in prior FDIC Advisory Opinions. Previously, staff has asserted that “receiving” funds, as well as “renewing” and “rolling-over” already-held funds, fall within the ambit of the term “accept” for purposes of this provision. See FDIC Advisory Opinion 92-96, Dec. 18, 1992, Douglas H. Jones, Deputy General Counsel (addressing the applicability of the then-recently-enacted FDIC Improvement Act’s provision linking the availability of pass-through deposit insurance for employee benefit plan deposits and the institution’s capital, staff opined that any deposits “accepted or received” after the enactment date of the statute were subject to the section 1821(a)(1)(D) prohibition. (emphasis added)); see also FDIC Advisory Opinion 93-7, Jan. 28, 1993, Claude A. Rollin, Counsel (finding a rollover or renewal of an already-held time deposit to constitute “acceptance”). The former opinion, though brief, answers a question as to the effective date of section 1821(a)(1)(D) provisions governing pass-through coverage, and logically finds “receipt” sufficient for “acceptance.”
In both the hypothetical scenarios outlined, employee benefit plan funds have clearly been “received” even if the intention of the parties is that the funds be swept or distributed before day’s end. Moreover, the funds to be “swept out” or possibly “distributed or swept out” before the close of business do constitute “deposits” of the receiving institution. See 12 U.S.C. § 1813(l)(3) (defining the term “deposit” to mean “money received or held by a bank or savings association or the credit given for money or its equivalent received or held by a bank or savings association, in the usual course of business for a special or specific purpose, regardless of the legal relationship thereby established”). Consequently, in both of the hypothetical scenarios outlined an institution that is less than adequately capitalized has impermissibly received employee benefit plan funds, and such funds constitute deposits. 5
There is an additional point of significance. While some might argue that the “receipt” of funds in the hypothetical scenarios does not constitute “long-term acceptance” of the funds in light of the pre-arranged sweep from the account, the statute imposes a flat prohibition, and neither the statute nor its legislative history indicates Congress intended any long-term duration or other requirement was intended by its use of the term “accept.” The fact remains that, should the institution fail prior to the occurrence of the sweep or distribution, the funds received by the institution will nevertheless receive pass-through deposit insurance coverage under section 1821(a)(1)(D)(i). In short, the Deposit Insurance Fund still must incur the deposit insurance liability notwithstanding the institution’s best intentions to have the funds swept from the institution before the close of business. Taken together, although the likelihood may be low that pre-arranged procedures to ensure the impermissibly received funds do not remain at the institution overnight will not be carried out, and the possibility of an institution’s failure may also be low, the funds would still receive pass-through deposit insurance.
As noted, one aim of the section 1821(a)(1)(D) statutory provision, which specifically attempts to prevent less-than-adequately capitalized institutions from taking in employee benefit plan deposits, is to avoid obligating the Deposit Insurance Fund to incur the cost of providing pass-through insurance at institutions with lower capital and thus at a heightened risk of failing. This Congressional aim can be thwarted under a contrary interpretation that such employee benefit plan funds -- although received by the institution when its capital is less than adequate -- are somehow not “accepted” due to the planned sweep and despite the fact that they constitute deposits. The statute’s use of the term “accept” is not so narrowly interpreted as to permit institutions to “temporarily” receive such deposits under circumstances that can result in exposure to the Deposit Insurance Fund. In instances where an institution impermissibly receives such deposits on account of its capital position, the statute nevertheless affords the plan’s employees with pass-through deposit insurance coverage. The institution’s customer and the employees under the benefit plan would not be adversely affected, as any administrative, procedural, or timing infirmity in the institution’s “planned” sweep or distribution would result in the Deposit Insurance Fund still incurring a pass-through insurance liability -- the very insurance liability section 1821(a)(1)(D)(ii) seeks to avoid.
Encouraging the hypothetical scenarios would thus be at cross-purposes with the statute’s aims to minimize such exposure to the Deposit Insurance Fund, as it would permit an institution with less than adequate capital to receive and hold such deposits. In such instances should an institution fail before the anticipated sweep or distribution is executed, the liability falls to the Fund since pass-through insurance coverage is still afforded. Moreover, while there is no assumption that an institution would not act in good faith or would fail to exercise care in any proposed “sweep” or other mechanism to make such receipt of funds “temporary,” the incentives for doing so are arguably somewhat lessened where the customer is not harmed should the institution utterly fail to exercise the sweep or other arrangement. In the hypothetical situations presented, an early-in-the-day failure, or any administrative, procedural, or timing infirmity or delay in the institution’s “planned” sweep or distribution would still result in the Deposit Insurance Fund incurring the very pass-through deposit insurance liability Congress sought to preclude.
This opinion is based upon the facts set forth in your inquiry and as understood by staff, and any differences between the facts and circumstances as described and understood could lead to a different conclusion. Please be advised that this legal opinion is not binding on the FDIC or its Board of Directors.
I hope this is helpful, and please let us know if we can be of further assistance.
1 “Pass-through deposit insurance” means that, with respect to an employee benefit plan, deposit insurance coverage is based on the interests of each participant in accordance with Corporation regulations. 12 U.S.C. § 1821(a)(1)(D)(iii)(III); 12 C.F.R. § 330.14(a). The deposit insurance coverage is referred to as “pass-through” coverage “because the insurance passes through the employee benefit plan administrator to each of the participants in the plan.” 71 Fed. Reg. 14629 (March 23, 2006). “Employee benefit plan” is also expressly defined. See 12 U.S.C. § 1821(a)(1)(D)(iii)(II), referencing § 1821(a)(5)(B)(ii); 12 C.F.R. § 330.14(f)(2).Go back to Text
2The terms “well capitalized” and “adequately capitalized” are defined in the statute, as well as in FDIC regulations. See 12 U.S.C. § 1821(a)(1)(D)(iii)(I), referencing 12 U.S.C. § 1831o(b)(1); 12 C.F.R. § 325.103(b). Go back to Text
3 Previously, there was an additional exception permitting pass-through coverage for employee benefit plan deposits notwithstanding this brokered-deposit qualification that was conditioned upon the institution’s ability to meet capital standards and whether written notification of pass-through coverage had been afforded to depositors. See 58 Fed. Reg. 29,952, 29,954 (May 25, 1993).Go back to Text
4The section 1821(a)(1)(D) provision addressing employee benefit plan deposits has notable history. Prior to 1992, funds deposited by an employee benefit plan were insured on a per-participant basis, provided the participant’s allocable ownership interest was non-contingent and specific recordkeeping requirements were met. Following the enactment of the Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. 102-242, Title III, § 311(b)(1) (Dec. 19, 1991), whether an employee benefit plan deposit was entitled to pass-through deposit insurance coverage depended upon the capital status of the insured depository institution at the time the deposit was accepted. Specifically, the FDIC was prohibited from providing per-participant or pass-through deposit insurance coverage for employee benefit plan deposits in institutions that, at the time the deposits were accepted, could “not accept brokered deposits under section 1831f” of the FDI Act. (Still, pass-through deposit coverage was permitted in specific circumstances where at the time the deposit was accepted the institution met applicable capital standards and the depositor had received a written statement from the institution that such deposits were eligible for pass-through insurance coverage.) With respect to the brokered deposit qualification, section 1831f permitted only well capitalized, and adequately capitalized institutions that had received permission from the FDIC to accept brokered deposits. Subsequent regulatory revisions imposed express disclosure requirements. See 60 Fed. Reg. 7701 (Feb. 9, 1995). Following enactment of the Federal Deposit Insurance Reform Act of 2005, Pub. L. 109-171, Title II, § 2103(b) (Feb. 8, 2006), section 1821 removed the express cross-reference to section 1831f but provided that only well capitalized and adequately capitalized institutions could accept employee benefit plan deposits, among other requirements. The statute allows employee benefit plan deposits to be eligible for pass-through deposit insurance coverage even when accepted by an insured institution prohibited from doing so due to its capital position. See also 71 Fed. Reg. 14,629, 630 (March 23, 2006); 71 Fed. Reg. 53,547 (Sept. 12, 2006). Go back to Text
5In another Advisory Opinion issued in 1993, staff weighed the “written notification” requirement contained in prior regulations issued to implement section 1821(a). See FDIC Advisory Opinion 93-68, Sept. 23, 1993, Joseph A. DiNuzzo, Senior Attorney. At that particular time, an institution that was unable to accept brokered deposits but otherwise met each applicable capital standard could provide a written notification to the depositor that employee benefit plan deposits were entitled to pass-through deposit insurance coverage. Id. (discussing then-12 C.F.R. § 330.12(b)). The regulation required that the notice be provided to the depositor “at the time the deposit is accepted.” As noted in this Opinion, the preamble to the regulation stated that the phrase “at the time the deposit is accepted” contemplated that the notice was to be provided “each time a deposit is made ‘which means each time additional funds are deposited in the insured institution.’” Id. (citing 58 Fed. Reg. 29,957 (May 25, 1993). This is not inconsistent with the 1992 staff conclusion that “accept” encompasses “receive.” Whether the phrase “accept” encompasses funds “received” and “deposited,” in neither case do such terms connote that the funds are not “accepted” unless there is an intent that the funds remain at the institution on a long-term basis, of for some minimum period of time. No prior opinions were located to support the proposition the term “accept” demands something more is required beyond the institution simply receiving such deposits. Moreover, the legislative history of section 1821(a)(1)(D) is devoid of any support for the view that “acceptance” never occurs unless the funds are retained by the institution overnight. Go back to Text
[End FDIC Advisory Opinions]